Cryptocurrencies and Central Bank Digital Currency (CBDC) have caught the interest of millions of people across India. However, despite their common position as “digital assets”, there are important distinctions between the two.
Former Finance Secretary SC Garg believes the CBDC will be more like “dematerialized banknotes” because 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 the CBDC could be the future of crypto,” he said.
Mckinsey says that with the rapid increase in stablecoin circulation over the past two years, central banks have stepped up their efforts to explore their own stable digital currencies.
The CBDC, or Indian e-rupee, is a digital token issued by the RBI and is tied to the value of the country’s fiat currency.
“The emergence and development of cryptocurrencies and Blockchain technology have increased the interest in cashless societies and digital currency. As a result, governments and central banks around the world are considering the use of digital currencies supported by the government,” says the Blockchain Council, a group of Blockchain experts.
The primary purpose of CBDCs is to provide privacy, portability, convenience, accessibility, and financial security to businesses and consumers.
“CBDCs also minimize the maintenance required for a complicated financial system, reduce cross-border transaction costs, and provide lower-cost choices for people who now use other methods of transferring money,” the council says.
Digital currencies issued by central banks would also minimize the dangers associated with using digital currencies in their current form.
On the other hand, cryptocurrencies are very volatile, with their value changing all the time.
Individuals can participate in investment markets to speculate on the price behavior of a cryptocurrency. They can also use particular 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.
CBDCs operate on permissioned (private) blockchains, while cryptocurrencies operate on permissionless (public) blockchains. The first is centralized, while the second is not.
Anonymity is an advantage for cryptocurrency users. The identity of CBDC customers will be linked to an existing bank account as well as a similar amount of personal information.
A central bank determines the regulation of CBDC networks. Authority in cryptonets is given to the user base, which makes choices by 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.