CBDC vs Cryptocurrency: what's the difference?
CBDC and cryptocurrency are both forms of digital currency, meaning they’re often lumped together. However, they’re actually completely different things.
This can understandably become confusing. So, let’s clear things up and look at the differences between the two.
What is a CBDC?
Due to the significant rise in popularity of crypto, banks worldwide have started creating their own form of digital asset. These are known as CBDCs, which stands for “Central Bank Digital Currencies”. CBDCs represent a digital form of a fiat currency. Unlike cryptocurrency, they are centralised and regulated by a country’s government. As well as being regulated, CBDCs are also backed by monetary reserves, such as gold or foreign currency.
CBDCs offer less-costly transactions and higher security. They also boost financial inclusion, as a bank account is not required to hold them. Their main disadvantage, however, is that they allow governments to gain more insight into how people spend their money. As a result, this could potentially deprive users of their privacy.
What is cryptocurrency?
Cryptocurrency is a digital asset which is secured by cryptography, making it extremely difficult to forge or double-spend. Unlike a CBDC, cryptocurrency is completely decentralised and not regulated by any government body.
Cryptocurrency has significant advantages, including quick and simple transactions, easier international exchanges and the potential to give financial access to those who may not already own a bank account. Disadvantages include its extreme price volatility, which often increases and decreases in short periods of time. There are also potential issues with cybersecurity to consider.
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What are the key differences between CBDC and cryptocurrency?
The primary difference between a CBDC and cryptocurrency is that CBDCs are centralised, whereas cryptocurrency is not. While a CBDC is regulated by an authority (e.g. a central bank or government), cryptocurrency is governed by the community. For instance, CBDCs rely on a central authority to deal with any problems, such as freezing or cancelling transactions. As cryptocurrency is decentralised, transactions cannot be cancelled or altered once they have passed.
Cryptocurrency is also more transparent than CBDCs in that everyone can see all transactions made and received on the blockchain. On the other hand, CBDC transactions aren’t public, and the user cannot choose their wallet address.
Which countries use CBDC?
The Bahamas launched its own CBDC – Sand Dollar – in 2020. It is issued by the Central Bank of The Bahamas and has the same value as the traditional Bahamian dollar. Following the Hurricane Dorian disaster the previous year, the country struggled with a $3.4 billion loss after the hurricane destroyed its physical bank branches. Therefore, an alternative was needed.
Fast forward to today, and Sand Dollar has seen great success, including being ranked at first place in terms of progress by PWC’s Global CBDC Index.
There’s also China’s Digital Currency Electronic Payment (DCEP), or digital yuan. It was developed by The People’s Bank of China (PBOC) and aims to replace some of the cash in circulation. In terms of adoption, it is currently being tested in several cities, such as Shenzhen, Chengdu and Suzhou. It’ll also act as a way for central Chinese banks to digitalise physical money in circulation, as well as legal tender with no interest paid.
Other countries also testing the waters with CBDC include Sweden, France, The Philippines, Japan, Turkey and Switzerland.