How Are Central Bank Digital Currencies Different From Cryptocurrencies? – Screen Rant
Many countries around the world are developing Central Bank Digital Currencies, but they are very different than cryptocurrencies. Here’s how.
Central Bank Digital Currencies, or CBDCs, are digital fiat currencies similar to cryptocurrencies but far more centralized. Central banks are the issuers of fiat currencies (i.e., dollars, euros, pounds) and have to rely on commercial banks to store their money in their digital form. However, cryptocurrencies and blockchain technology have unlocked a new paradigm where currency and digital assets can be held and used independently of banks. People can be their own banks by creating a crypto wallet.
There is a massive difference between the dollars in a bank account versus cryptocurrencies on a blockchain. A bank account uses a private ledger of accounts and balances to service its customers, while a blockchain network uses a public ledger that anyone can check. There has existed a demand for dollars on the blockchain for almost as long as Bitcoin has existed, which is why dollar-backed stablecoins were created. Blockchain technology allows users to perform complex financial operations that are otherwise extremely difficult or outright impossible through the traditional financial system, which has given rise to the multi-billion dollar industry of decentralized finance, or 'DeFi.' The powerful abilities granted by blockchain have garnered the attention of governments worldwide, but they aren't interested in adopting cryptocurrencies they can't control.
Investopedia explains that CBDCs are a purely digital form of a nation's currency. The biggest difference between a CBDC and a regular digital currency is its dependence on commercial banks. Right now, people need to hold a bank account to use a debit card or make automated payments using digital currency, but a CBDC would allow people to do the same thing from a universal account that is accessible via smartphones and other devices. The most attractive feature of a CBDC that differentiates it from digital currencies is its ability to travel across borders in seconds instead of days and to be programmed for use in apps without bank involvement. Most importantly, the central bank that issues a CBDC has absolute control over its monetary policy and can create or destroy CBDC tokens at will, leading many in cryptocurrency to consider CBDCs a potentially negative technology. While CBDCs are not the same as cryptocurrencies, they are built from the same technology. CBDCs will most likely use their own blockchain networks run by the central banks that issue them, but nothing is stopping central banks from creating their own blockchain bridges to transfer CBDCs from their native network to any public blockchain network.
While CBDCs and stablecoins are both valued the same, they are radically different from each other. A CBDC is a fiat currency built and issued by a central bank directly on a blockchain. In contrast, a stablecoin is a traditional fiat currency deposited with a private company in return for an equivalent amount of the company's stablecoins. There is also no possibility of a CBDC collapsing in value, unlike some stablecoins known to collapse.
CBDCs are still developing, but governments are highly interested in them as the next technological generation of fiat currencies. For example, it is likely that within the next five years, the U.S. dollar will have its own CBDC and be usable without a bank account. Just like how users can store cryptocurrencies in a hardware crypto wallet, CBDCs may be stored on a user's phone and other devices, as well as in commercial banks. While ordinary users may not see any immediate benefits to using CBDCs, they will open new monetary policies that are impossible with digital currencies, both for better and for worse.
Next: U.S. Digital Currency Takes A Step Forward, Here's What It Could Look Like
Phoenix is a blockchain enthusiast, aspiring smart contract developer, and a student of computer science. Joining Screen Rant’s Tech team in 2022 and leveraging his own technical understanding of the subjects, he reports on the most interesting events and advancements of the fast-paced world of the blockchain industry, Web3, and the emerging Metaverse.