Central Bank Digital Currencies (CBDCs) have continued to gain momentum since they became a thing in the financial world. One peculiarity about these virtual currencies is that they are issued, controlled and regulated by a country’s central bank. Central Bank Digital Currencies (CBDCs), if not properly understood, can be mistaken or compared to cryptocurrencies which are independent currencies devoid of any country’s government involvement or regulation.
While cryptocurrencies and Central Bank Digital Currencies (CBDCs) share a lot of similarities, the two are completely different from one another and are created for completely different purposes.
Before we dive into the differences between Central Bank Digital Currencies (CBDCs) and cryptocurrencies, let’s examine some of the similarities that they share.
Similarities between Cryptocurrencies and Central Bank Digital Currencies (CBDCs)
Some similarities that cryptocurrencies and Central Bank Digital Currencies (CBDCs) share in common include;
- They are both virtual or digital-based currencies
What is a virtual or digital currency? According to Investopedia,a digital or virtual currency is a digital representation of value available in electronic form. It is stored and transacted through designated software, mobile or computer applications. Transactions that involve these currencies are done through secure and dedicated networks over the internet.
Cryptocurrencies and CBDCs are both digital currencies; they are both digital representations of value and are operated over the internet using safe and dedicated networks.
- Both cryptocurrencies and CBDCs are blockchain-based
Simply put, a blockchain is a system of recording information in a way that makes what has been recorded immutable, impossible to hack or tamper with. Essentially, a blockchain is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Blockchains are what digital currencies run or operate on.
Both cryptocurrencies like Bitcoin and CBDCs like the imminent e-Naira operate on a blockchain. In fact, without a blockchain, they both cannot exist at all.
- They both promote transparency
Due to their nature of being unhackable, unchangeable, and impossible to tamper with, cryptocurrencies and CBDCs promote transparency. Unlike fiat money which is physical and can be faked, the nature of digital currencies makes them easy to monitor transactions, and if stolen they can easily be traced to where they were transferred to.
- Cryptocurrencies and CBDCs are not susceptible to damage
Physical money is prone to damage that arises from not storing them properly, the natural course of wear and tear, etc. Digital currencies are held in a digital wallets and are completely free from any form of damage, making them the most cost-effective method of issuing and storing money.
Both cryptocurrencies offer safer ways of transacting and storing wealth, making holding them goals. They also promote cashless systems and with them, people can go around without having to carry physical cash while being able to make payments for goods and services seamlessly.
What are the differences between Cryptocurrencies and Central Bank Digital Currencies?
After examining the similarities that cryptocurrencies share with CBDCs, it may be a little hard to be able to spot any difference between them but the following are some of the differences between cryptocurrencies and CBDCs;
- Central bank backing
Around the world, there have been series of laws and actions banning the use of cryptocurrencies in such countries while these same countries are developing CBDCs. In China, for instance, cryptocurrencies like Bitcoin is banned but the country is on the verge of issuing its central backed digital currency. This is one difference between cryptocurrencies and CBDCs…
Central Bank Digital Currencies are designed, issued and controlled by a country’s central bank. Cryptocurrencies on the other hand are designed and issued by private organizations. It is pertinent to know that CBDCs came from the desire to regulate digital currencies and in extension, the digital economy of countries.
- The nature of the currencies
Cryptocurrencies are decentralized (designed to be unregulated) and completely controlled by owners, CBDCs are a digital extension of a country’s fiat currency and are issued on a centralized blockchain network. CBDCs are issued and regulated by a country’s central bank and unlike cryptocurrencies, they operate on government laws, policies and government-operated blockchain systems.
- Volatility and value
A distinguishing feature of cryptocurrencies is volatility and instability in price value which are caused or influenced by quite a number of factors. Central Bank Digital Currencies (CBDCs) are completely different from cryptocurrencies on this basis. Because they are a digital representation of a country’s already existing fiat money, they do not suffer from price volatility. They are relatively stable and their value is tied to the value of a country’s fiat currency. For example, the value of the imminent e-Naira will be tied to the value of the Naira and its value will only be affected by changes in the value of the Naira.
- Purpose of creation
Another striking difference between cryptocurrencies and Central Bank Digital Currencies (CBDCs) is their purpose of creation. Cryptocurrencies were created as an investment scheme where investors can gain profit on their investments. On the other hand, CBDCs are created with the nation in mind. They are usually created to narrow the financial inclusion gap in the country, make cross-border payments and foreign remittances processes faster, safer and more efficient, etc.,
In other words, cryptocurrencies are profit-oriented while CBDCs are developed to help achieve the financial goals of a country.
- Anonymity and privacy
Cryptocurrencies offer anonymity and ‘privacy’ as a result of their decentralized nature. CBDCs are centralized and do not offer users any form of anonymity; this means that the central bank has the privilege of knowing who uses the CBDCs and how much of the CBDC that they own or hold.
Although cryptocurrencies and CBDCs share quite a lot in common, they are completely different and should not be mistaken for one another. Their usage, purpose, functions, mode of operation, etc., differ from one another.
Nigeria is launching its Central Bank Digital Currency called the e-Naira soon. To find out more about the e-Naira and CBDCs, you can click here.