There have been a number of questions on the Crypto vs CBDC debate in the financial industry. Let’s answer these questions with a comparison of cryptocurrencies and central bank digital currencies comparison
Central bank digital currencies are presently one of the most revolutionary interventions in the global financial ecosystem. CBDCs have been gaining the attention of the financial services industry as well as the media in large numbers. The People’s Bank of China announced the imminent replacement of cash being circulated presently with new digital currency. Similarly, there are many propositions of The European Central Bank for integrating CBDC into their financial ecosystem.
At the same time, the request for proposals from Banque de France to investigate the possibilities for implementing digital currency also indicates the popularity of CBDCs. Therefore, many central banks are confused with the Crypto vs CBDC debate and its implications on the broader financial landscape. The following discussion attempts to find an explanation for the cryptocurrencies vs central bank digital currencies comparison.
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Existing State of Cryptocurrencies and Central Bank Digital Currencies
Prior to diving right into the comparison between blockchain-based CBDC and other cryptocurrencies, let us reflect on the existing state. Central banks are presently engaged in intense competition for releasing their central bank digital currencies (CBDCs) first. Most important of all, it is reasonable to consider the impact of the COVID-19 pandemic and associated challenges on the global economy.
China has taken a quite active stand in terms of central bank digital currencies with aggressive initiatives for launching its own digital currency, i.e., a digital Yuan. At the same time, the European Central Bank and the Federal Reserve are engaging in research collaborations to evaluate the positive and negative impacts of implementing CBDC. So, where does the crypto vs CBDC comparison arrives in the discussion?
As a matter of fact, the rapid maturity of the cryptocurrency market has been a significant factor in the motivation of central banks to introduce digital currencies with sovereign backing. Presently, Ethereum has found applications in hosting a completely new landscape of decentralized finance rather than just existing as an unused base layer blockchain.
In addition, the most common mention in debates on cryptocurrencies vs central bank digital currencies, i.e., Bitcoin, has come a long way beyond the identity of a bubble pump and dump scheme. As the pioneer in cryptocurrency, Bitcoin is presently used across a broad range of retail use cases. Most important of all, Bitcoin has found applications as an institutional hedge, thereby establishing its significance in the modern financial ecosystem.
Although the maturity of cryptocurrencies continues to gain momentum, central banks identified a real threat in Facebook’s announcement of their own cryptocurrency, i.e., Libra. Central banks definitely considered Bitcoin as a threat, albeit without any serious issues with only 5% of adoption all over the world.
On the contrary, the crypto vs CBDC debate comes forward with the arrival of Facebook in the world of finance. With an already existing user base of more than 2 billion, Facebook’s Libra can enjoy exceptionally higher adoption. Subsequently, the introduction of Libra could bring formidable shifts in the monetary landscape worldwide.
The Fundamental Conflict
So, a comparison of cryptocurrencies vs central bank digital currencies appears as a reasonable proposition for central banks. The general public might also try to identify the differences between the two emerging breakthroughs in a global financial ecosystem. The most striking aspect in the comparison between cryptocurrencies and CBDCs refers to the philosophical difference.
The basic aspects related to CBDC are actually conflicting with the philosophy of cryptocurrencies. It is important to note that Bitcoin was brought into existence to avoid conventional control over central banks. Bitcoin showcased the impact of cryptocurrencies on debasing monetary policy related to the Federal Reserve in response to the global financial crisis of 2008.
In addition, Bitcoin and cryptocurrencies are aimed at offering an approach for escaping banks and hedging against losing spending power in cash. So, you can note how CBDC turns in favor of control by central banks, the most prominent element that is restricted in cryptocurrencies. CBDC aims at preserving the oligopoly of the global banking system, while cryptocurrencies focus on democratizing financial systems.
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Don’t Think of CBDC as Cryptocurrency!
Now that you know about the basic tenet of crypto vs CBDC conflict, it is reasonable to clarify a notable doubt pertaining to CBDCs. Central bank digital currencies are generally assumed as other variants of cryptocurrencies. As mentioned above, central bank digital currencies have central banks at the core of every CBDC transaction. CBDCs can be available for use in the token or account-based variants.
In the case of using CBDCs as tokens, the token goes directly to the concerned central bank. CBDC would basically serve as an additional payment mechanism. Another theme that comes up frequently in the cryptocurrencies vs central bank digital currencies comparison is the classification of CBDC. Just like Bitcoin in the initial days, CBDC is also subject to many assumptions regarding its lifespan in the global financial landscape.
Many people are wondering about whether CBDC will be immediately available with cash-like liquidity or with a lifespan of ten years. Although these questions remain unanswered, banks must perceive CBDC as an alternative payment scheme. Most important of all, it is important to know that CBDCs are not cryptocurrencies.
Differences between Blockchain-based CBDCs and Cryptocurrencies: Crypto vs CBDC
Readers must have received clarity that CBDCs are not anywhere similar to cryptocurrencies. However, what if blockchain comes into CBDCs? New blockchain-based CBDCs are also making headlines alongside cryptocurrencies. Blockchain-based CBDCs and other cryptos such as Bitcoin and stablecoins are collectively referred to as asset-backed crypto assets and present very confusing propositions.
Therefore, it is essential to understand the cryptocurrencies vs central bank digital currencies comparison with blockchain in the picture for ensuring wider adoption. While CBDCs are painted in a negative light owing to the control of central banks, cryptocurrencies also have certain setbacks.
There is no doubt regarding the capabilities of cryptocurrencies for revolutionizing the modern financial markets and related transactions. On the other hand, price volatility is a prominent concern that restricts the wider adoption and use of cryptocurrencies. So, the blockchain and crypto-asset community has continuously evolved with new options and alternatives available with the support of external assets.
Enterprises and central banks have valid reasons for focusing their attention on the comparison between blockchain-based CBDCs and cryptocurrencies. Furthermore, individuals could also update their understanding of the continuously expanding asset-backed crypto space. Let us start reflecting on the differences between blockchain-based CBDCs and other cryptocurrencies.
Private Money and Government-Backed Money
One of the first differences in crypto vs CBDC comparison points out the nature of cryptocurrencies such as stablecoins. In the most basic sense, central bank digital currencies are specific variants of private money. Some people can argue about the link between stablecoins and external assets. However, cryptocurrencies such as stablecoin offer a clear representation of the existing state of debate between government-issued currency and private money.
The pegging of stablecoin on a one-to-one basis to fiat currency such as the USD is also a favorable factor for cryptocurrencies. On the other hand, A private organization or entity rather than a governmental agency issues stablecoins and other cryptocurrencies. Blockchain-based CBDCs gain an upper hand in this aspect of cryptocurrencies vs central bank digital currencies comparison.
CBDCs have offered a flexible platform for combining the current processes for issuing fiat currencies with blockchain technology. Basically, you can consider CBDCs as an improvement over the current fiat alternatives. On the contrary, cryptocurrencies such as stablecoin are actually a competing variant of privately issued money.
With respect to this context, it is important to consider the evolution of cryptocurrencies as an important factor in understanding the development of blockchain-based CBDCs. The natural development of cryptocurrencies from decentralized alternatives such as Bitcoin towards stablecoins and then CBDCs can support in capturing maximum benefits of blockchain technology.
The second point of comparison between cryptocurrencies vs central bank digital currencies refers to the details. Many people have harbored a prominent misconception regarding stablecoins. They assume that all options among stablecoins are operating in the same model. Without diving into technical complexities, one could anticipate the variations in redeeming and exchange functionalities with stablecoins.
Such setbacks could restrict the possibility for adoption of stablecoins as a reliable and recognized medium of exchange. Take the instance of stablecoins backed by gold for understanding the issues that come with cryptocurrencies. Should you exchange stablecoins for physical gold coins or bullion? Or, can you exchange stablecoins for a specific type of representation for gold, like a gold exchange-traded fund or ETF? These questions present notable doubts regarding the usability of cryptocurrencies.
The other player in crypto vs CBDC comparison, i.e., CBDC, offers a direct representation of currently active fiat currency. The basic precedents of CBDC imply the need for treating, managing, and accounting for CBDC, just like currency limits. However, many blockchain-based CBDC projects are presently underway throughout the world. So, it is quite soon to predict the uniformity in operations of different CBDCs worldwide.
Difference in Fundamental Goals
The cryptocurrencies vs central bank digital currencies debate also have another prominent implication for the larger financial ecosystem. A simple comparison of the objectives underlying blockchain-based CBDCs and other cryptocurrencies can also explain their differences clearly. Stablecoins are definitely one of the revolutionary interventions that can shape the evolution of fiat currency.
However, the design of stablecoins is basically offering an alternative for fiat currency options. Bitcoin could be a prominent mention in headlines frequently on the grounds of its price volatility. On the contrary, people assume Bitcoin as an inflation hedge or a certain type of safeguard against devaluations in currency. The integration of blockchain and crypto-assets in stablecoins can generally lead to similarities with decentralized crypto.
Crypto vs CBDC comparison would suggest here that CBDCs are a direct representation of fiat currency. Blockchain-based CBDCs will arrive as replacements of fiat currency with the same pitfalls in existing alternatives. In this case, one could notice a complete deviation from the actual goal of Bitcoin. Rather than offering a decentralized and distributed form of money, blockchain-based CBDCs would serve as crypto with centralized control. On the contrary, this particular assumption would possibly foster mass utilization of blockchain-based CBDCs.
Data Privacy and Security
Another point of comparison in the cryptocurrencies vs central bank digital currencies debate is financial independence and privacy. In comparison to cryptocurrencies, a CBDC would less likely emphasize privacy and data. The crypto space is undoubtedly independent with a peer-to-peer model while the central banks oblige to specific regulations.
The peer-to-peer setting with cryptocurrencies enables users to decide the amount and type of data they want to share. On the contrary, transactions with CBDC would land up massive chunks of data automatically with tax agencies or regulatory authorities. Many people would favor blockchain-based CBDCs by pointing out legal activities.
As long as you don’t do anything illegal, there is no reason to worry about using blockchain-based CBDCs. However, the reasons for focusing on privacy in the crypto vs CBDC debate are not just about criminal activity. Privacy is undoubtedly a notable requirement for law-abiding citizens to have safeguards against malicious agents.
While speaking of data privacy, it is reasonable to bring the topic of security in the cryptocurrencies vs central bank digital currencies comparison. Security is not a prominent concern for cryptocurrencies as they have proved effective from all sides in the security of transactions and information.
On the other hand, blockchain-based CBDCs have not overcome issues such as setbacks in blockchains and exchange security. Furthermore, blockchain-based CBDCs experience issues with self-custody and a larger surface for cyber attacks. Centralized points of failure with CBDCs can provide more opportunities for hackers to attack government agencies and countries.
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Therefore, it is clear that the Crypto vs CBDC debate has been running in the wrong direction all along. We can consider blockchain-based CBDCs as the evolved forms of cryptocurrencies while offering a better element of trust. The backing of a central bank and assurance of similar functionality as government-backed currency make blockchain-based CBDCs appealing.
However, it is also important to consider the setbacks evident in CBDCs, when compared to other cryptocurrencies. So far, blockchain-based CBDCs lag behind in terms of data privacy and security with the centralized control of banks. On the contrary, it is reasonable to expect new developments in the blockchain and crypto community for strengthening CBDCs. Enroll now in the CBDC Course and learn more!