How are blockchain-based CBDC and crypto different?

Both the cryptocurrencies and Central Bank Digital Currencies (CBDCs) have attracted the interest of millions across India. Despite their common position as “digital assets”, there are some significant differences between the two.

Former finance secretary SC Garg believes that CBDCs will be more like “dematerialized notes” as they have nothing to do with cryptocurrencies.

“The way cryptocurrencies have evolved in value, the world may not accept their use as currency. However, regulated digital coins like CBDC may be the future of crypto,” he said.

Mckinsey says that with the rapid increase in the circulation of stablecoins over the past couple of years, central banks have stepped up efforts to explore their own stable digital currencies.

CBDC, or the Indian e-rupee, is a digital token issued by the RBI and is linked to the value of the country’s fiat currency.

“The rise and development of cryptocurrencies and Blockchain technology has increased interest in cashless societies and digital currency. As a result, governments and central banks around the world are considering the use of state-backed digital currencies, says the Blockchain Council, a group of Blockchain experts.

CBDC’s primary purpose is to provide privacy, portability, ease, accessibility and financial security to companies and consumers.

“CBDCs also minimize the maintenance required for a complicated financial system, reduce cross-border transaction costs and provide lower cost choices to people who now use other money transfer methods,” the council says.

Digital currencies issued by central banks will also minimize the dangers associated with using digital currencies in their current form.

On the other hand, cryptocurrencies are very volatile and their value changes all the time.

Cryptocurrencies are classified as both assets and currency in terms of use cases.

Individuals may participate in investment markets to speculate on the price behavior of a cryptocurrency. They can also use special projects like Bitcoin as a store of value to protect against inflation and economic instability.

Bitcoin and Ethereum can be used by anyone to make transactions and payments. Today, more merchants and stores are accepting cryptocurrency payments than ever before, according to the council.

There are several contrasts between CBDCs and cryptocurrencies.

The CBDCs operate on permissioned (private) blockchains, while cryptocurrencies operate on permissionless (public) blockchains. The former is centralized, while the latter is not.

Anonymity is an advantage for cryptocurrency users. CBDC customers’ identities will be linked to an existing bank account as well as a corresponding amount of personal information.

A central bank determines the regulations for CBDC networks. The authority in crypto networks is given to the user base, which makes choices through consensus.

“CBDCs can only be used for payments and other monetary transactions. Cryptocurrencies can be used for both speculation and payment,” according to the council.