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Millions of people are interested in cryptocurrencies and central bank digital currencies (CBDCs) worldwide. Although they both fall under the "digital assets" category, there are several significant differences between them. We will begin this article by explaining what each digital currency is before comparing the two, highlighting the key differences.
How do cryptocurrencies affect the current state of fintech?
A digital currency, or cryptocurrency, is an alternative payment method developed using encryption. By utilising encryption technology, cryptocurrencies can act as both a medium of exchange and a virtual accounting system. You need a cryptocurrency wallet to use cryptocurrencies. These wallets can be software that is downloaded to your PC, mobile device, or the cloud. Your encryption keys, which verify your identity and connect to your cryptocurrency, are kept in the wallets.
Most cryptocurrencies run successfully without the support of a government or central bank. The operation of cryptocurrencies is supported by decentralised technology called blockchain, as opposed to relying on assurances from the government. Cryptocurrencies are not a collection of bills or coins. Instead, they rely solely on the internet to survive. Think of them as virtual tokens, the worth of which is determined by the forces of the market established by those looking to buy or sell them, much like the forex markets work. The practice of "mine" involves using computer processing power to solve challenging mathematical problems to earn coins and create a cryptocurrency. Users can also buy the currencies from brokers, store them in encrypted wallets, and use them to make purchases.
What are CBDCs?
Central bank digital currency (CBDC) is money a country's central bank can issue. Because it isn't actual money like notes and coins, it is called digital (or electronic) money. It appears on a computer or other such device as a quantity. There are more methods to pay for products than there once were. Hence the UK and many other nations are considering a CBDC. People prefer to pay electronically more frequently than with cash or coins. The USA, China, and the EU are among the countries (and groups of countries) looking into the concept of a CBDC.
A government-issued currency known as fiat money is not backed by a tangible good like gold or silver. Instead, it is regarded as a type of accepted legal money for the exchange of goods and services. Banknotes and coins served as the traditional forms of fiat money. Still, technological advancements have made it possible for governments and financial institutions to replace the physical form of fiat money with a credit-based system in which balances and transactions are recorded digitally. Digital currencies and cashless societies are becoming increasingly popular due to the development and adoption of cryptocurrencies and blockchain technology. These currencies, like fiat money, would have the complete trust and support of the government that issued them when and if they were adopted.
What is the benefit of generating CBDCs if they are conceptually equal to regular notes? Of course, the argument is that these would be genuinely digital forms of payment. They could trade instantly and move quickly and smoothly across boundaries. CBDC payments might be promptly processed through central bank infrastructure, significantly lowering transaction costs. Governments can more directly control money flow by using CBDCs.
Differences Between the Two
Regulations - The regulations for CBDCs will be determined by the issuing authority, such as central banks, but for crypto networks, the users govern the network by voting on consensus proposals.
Anonymity - Your details and the transaction will be attached to your CBDC assets. However, only the sender, receiver, and bank can access transactional details. This distinguishes CBDC from cryptocurrency. As is common knowledge, information about cryptocurrency transactions can be viewed by anybody, but it does not include personal information like the user's real name.
Technology - They utilise different kinds of blockchains. Whereas cryptocurrencies use a permissionless open network, CBDCs use a private permission blockchain network.
Usage - CBDCs are restricted to usage in payments and other financial exchanges. Bitcoin and other cryptocurrencies can be used for both trading and payment.
Conclusion
As cryptocurrency has been around for longer and is probably more understood than CBDCs, the public opinion of cryptocurrency is far more favourable than CBDCs. Yet, there is a perception that CBDCs are inevitable. A CBDC will eventually become a legal entity, in my opinion, considering the crucial role it can play in the cryptocurrency ecosystem. While Western governments appear preoccupied with the issue, China is on a clear road to implementing CBDC. What effect this will have on the cryptocurrency market is still being determined.
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