Major differences between crypto and CBDCs in all aspects

Different countries have varying opinions on crypto. Some help its adoption grow, others try to regulate it, and there are governments who try to stop it. Even the biggest critics know the potential of digital assets for the economy and that’s why they proposed an alternative. That is the Central Bank Digital Currency (CBDC). 

CBDC is a type of virtual money issued by central banks, hence its name. Traditionally, centralised currencies come in banknotes or coins with the exception of credit, debit, and digital wallet payment systems. CBDC makes all of these transactions entirely digital, working the same way as cryptocurrencies but on a blockchain centralised by the country’s central bank.

When presented with CBDCs vs crypto discussions, traders and investors tend to lean on the latter. Both assets are blockchain-based virtual money with the main differences being how the network is managed. Crypto was designed to replace traditional banking methods so users can regain full control over their savings. Central banks wish to meet users half-way through CBDC. 

However, how are they different from each other? There are a few fundamental differences to point out but it’s better to understand both sides in their entirety to answer that question.

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Definition of cryptocurrency and uses in finance

Crypto are, by definition, virtual money operating in a network using cryptography powered by miners. It has a consensus mechanism determining in which order transactions are validated and who will be compensated for its success. Although fundamentally simple, the way blockchain networks are used in various industries are different, giving it plenty of uses.

Use of blockchain technology

Blockchains are most commonly known for finance with the likes of Ethereum (ETH) growing as one of the biggest investment opportunities. Not only is its utility token valuable in the market, it’s also in demand because of all the projects made on its platform. That includes social media, video game development, and data transfer.

Such utilities are not present in CBDCs because its entire purpose is to make fiat assets available for citizens of a country. That means it won’t stop crypto’s ever growing expansion as an investment opportunity in various industries outside of finance.  

Asset and its network is mostly decentralised

Crypto is largely defined by decentralisation. Nobody owns the network and every transaction made on it is handled by an autonomous mechanism. Tether (USDT) is considered centralised because one entity, iFinex Inc., controls the majority of the network’s assets. It’s still reliant on a proof-of-reserves (PoR) consensus mechanism that handles all transactions. 

CBDCs are designed to work similarly to crypto but they won’t need to be blockchain-based or rely on consensus mechanisms. All assets are also issued by a single entity who has full control over the development and management of its system. Thus, the way CBDCS will work varies greatly per country that issues it, with each one giving a unique twist to how it all works. 

Use of Central Bank digital Currency in finance and banking

CBDC crypto uses are theoretically as wide as the country’s fiat currencies can go. The only issue that this idea needs to overcome is adoption. A majority of countries worldwide rely on private payment providers and central banks aim to use CBDC to become independent from them. 

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Database architectures used for CBDC

Central banks aim to use similar distributed ledger technology (DLT) to crypto. The intention was to make use of peer-to-peer (P2P) payment platforms to provide CBDC more accessibility for both retail and wholesale use. 

• Retail CBDC means that the virtual asset is accessible to individuals and private sectors. It can also benefit from marginalised private sector involvement for various services to make liquidity of the CBDC flow better.
• Wholesale CBDC is a more limited architecture for the virtual asset. This means that banks can only transfer and receive the money from each other while it’s distributed to users in fiat.
• Hybrid CBDC offers the best of both worlds. It can be used in interbank relations settlements while also being available for retail uses. Hybrid CBDC is primarily the ideal version but difficult to implement because of system limitations for a high number of users.

Blockchain is primarily the main DLT that central banks are looking into because of its P2P compatibility for retail CBDC. Wholesale CBDC, on the other hand, runs on a network exclusive to banks similar to how Ripple (XRP) has its own unique DLT. 

Pros and cons of CBDC

CBDC is fundamentally defined by its centralisation under a country’s central bank. This provides several benefits including: 

• Full support for most commerce and business transactions
• Protection provided by the government
• Regulated use for all kinds of trade
• Recoverable assets in case of loss or theft
• More rigid policies on its use and limitations

While the pros of CBDC are appealing, there are also a few flaws worth considering. Some of which are in the context of the finance industry as a whole and others are when compared to crypto. These cons are:

• Modern technology is not capable of supporting a sudden surge of users
• Lack of cryptography makes it prone to cyber attacks
• Cross-border transactions is impossible and will require fiat to fiat conversion
• Reliance on a centralised network makes it unusable during system failure
• Has a potential to monopolise cash distribution in the country
   

Summary of differences 

The major differences between CBDC vs crypto is the nature of its assets. Both operate on a DLT and the latter can be centralised depending on the nature of the network. The intent for both virtual money is to make finance more accessible to users and improve liquidity. However, CBDC has the benefits and limitations of a central bank while crypto is user-dependent. 

The way CBDC is being developed is also at a slower pace because its implementations are slowed by bureaucracy. Crypto can be developed by one team, adopted by various entities like Gamdom and other e-commerce, and then governed by its population. That isn’t to say that one is better than the other. Both assets will have their own strengths that can benefit everyone. 

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