cryptocoingossip

The main motive behind Bitcoin creation is the 2008 financial crisis.

In the crisis, big players were easily escaped leaving the general public to face the impact.

Not just the 2008 crisis, almost all the crises had a bad impact on the life of the general public, not on the big capitalists.

The main reason for this inequality is central authorities controlling money flow, such as central banks. So Bitcoin and cryptocurrencies are aimed at offering an approach for escaping banks and hedging against losing spending power in cash.

The general public accepted the cryptos resulting in rapid growth in the implementation, and the overall market of cryptocurrencies started to threaten the existence of authoritative figures controlling money.

In search of alternatives to cryptocurrencies, central banks approached with their own digital money called Central Bank Digital Currency (CBDC).

What Is the Central Bank Digital Currency(CBDC)?

CBDCs are fiat currencies like Dollar, Pound, Yen, but are in the virtual form.

This virtual money is controlled and monitored by the nation’s monetary authority or central bank.

Now, you can argue that we’re all already transacting real money electronically via Bank transfer, Digital wallets or Card payments, so how is this CBDC different?

Look, most digital payments are essentially checks – instructions for a bank to pay “real” money from your account. Also, there are multiple actors involved to intact the transaction, clearing payments and administering millions of individual accounts. But on the other hand, CBDC is cutting all the middlemen involved in a transaction enabling transactions directly from person to person or from customer to vendor like a coin.

To be precise a CBDC is an electronic record or digital token of a country’s official currency, and they are backed by the full faith and credit of the issuing government.

How Does CBDC work?

Both crypto and CBDC depend on networked electronic resources.

In the case of cryptos like Bitcoin, Ethereum these electronic resources are decentralized and anonymized; but in the case of CBDC, a central database ultimately controlled by a central bank issues the currency with a unique serial number to identify it.

Even central banks also peg the electronic currency to their existing national currency.

Ultimately CBDCs goal is to provide users with the secure, convenient, regulated, reserve-backed circulation of the traditional banking system virtually.

And they are designed to function as a unit of account, store of value, and medium of exchange for daily transactions.

CBDC vs Cryptocurrency.

Creation.

The creation of cryptocurrency is done through blockchain. If the cryptocurrency blockchain follows Proof-Of-Work (POW) consensus then new cryptos are created with the help of miners, or if a cryptocurrency blockchain follows a different consensus, then the creation of cryptocurrency follows that consensus rule to create a new crypto asset.

Even stablecoins is a form of cryptocurrency that is pegged to another asset – a popular example is Tether, which is pegged to the US dollar one-to-one and backed by dollar reserves.

But a CBDCs creation is dependent upon central authority, so CBDCs would likely run on different technological platforms (although the use of blockchain is not impossible).

Security.

Cryptocurrencies like Bitcoin have their security flaws like 51% attack, double spending, so the other, however, security flaws are not yet exposed on the cryptocurrency blockchain but in a crypto ecosystem where the third party providing crypto services like exchanges tend to have security vulnerabilities that are exposed by hackers finally resulting loss of funds.

In CBDCs, there are no specific security flaws encountered to this date because there is no CBDC active, and every project is in pilot mode.

Privacy.

Cryptocurrencies give high preference to the privacy and anonymity of an individual even though with all the transaction data available to the public, with cryptography, it is hard or impossible to point out any individual activity on the network.

But on the other hand, ultimate control of CBDC is in the hands of the government. So it is easy to track individual transaction details and identify any malicious activities they’re involved in.

Many argue that CBDC is better because as long as you don’t do anything illegal, there is no reason to worry about CBDC. However, for some citizens, privacy is undoubtedly a notable requirement for law-abiding citizens to have safeguards against malicious agents.

Implication.

Using or adding cryptocurrencies to any financial activity is an easy task; especially in this DeFi trend, all the financial activities are managed on the blockchain with the help of cryptos.

CBDCs are just in the development phase. No one knows the actual advantages and disadvantages of CBDCs. Even Governments – particularly in democratic countries – will have to involve the public and the financial sector in any plans for CBDCs, and it could take years before digital money becomes a regular part of the monetary system.

These are all the broader differences between CBDC and Cryptocurrency. The smaller differences like speed, cost are not pointed out because there is no CBDC active yet.

Want to know more about CBDCs…?

Then here are the types of CBDCs.

Types of CBDC.

There are two types of CBDC.

#1. Wholesale CBDC.

Wholesale CBDC works within the banks. You can think of it as a type of traditional central bank reserve that uses the existing tier of banking and financial institutions to conduct and settle the transactions.

In layman terms, a Wholesale CBDC transaction is the interbank payment. It involves the transfer of money or assets between two banks.

There is always counterparty risk involved in the interbank payment. A blockchain-based CBDC counters the issue by enabling the setting of conditions, so a transfer won’t occur if these conditions are not satisfied.

#2. Retail CBDC.

On the contrary to the Wholesale CBDC, Retail CBDC eliminated intermediary banks, involving the transfer of government-backed digital currency directly to consumers.

They eliminate the intermediary risk or the risk that banking institutions might become illiquid and sink depositor funds.

Conclusion.

Central Bank Digital Currencies still do not exist.

Many countries showed interest, and some developed their own CBDC but yet to be released.

In those countries, China is way ahead and developed its own CBDC “Digital Yen”, which started to be tested in many cities including, Shenzhen, Chengdu and Suzhou. Distribution of Digital Yen conducted via a so-called two-tier system. That means the People’s Bank of China (PBOC) will distribute the digital yuan to commercial banks. Commercial banks will be responsible for getting the currency into the hands of consumers.

Also, Japan is developing their own Digital Yen, which plans to become clearer in late 2022.

Along with China and Japan, Russia also announced the creation of CryptoRuble back in 2017 by Vladimir Putin.

Even recent news stated that the US federal reserve will soon release the paper on CBDC.