These Are the 3 Biggest Differences Between a Cryptocurrency and a CBDC

6 months, 3 weeks ago - March 14, 2022
Central Bank Digital Currencies (CBDCs)
Central Bank Digital Currencies (CBDCs)
There are fundamental differences between BTC and central bank-developed tokens – chiefly, the fact that most CBDCs are still in the R&D phase.

Central Bank Digital Currencies (CBDCs) have become a pressing concern for governments all over the world. Every central bank you care to mention, from Jamaica to Japan, is either talking about them, desperately trying to create them or currently trying to launch them.

The subcontinent’s central Reserve Bank of India could roll out its digital rupee as early as this year.

Meanwhile, in the world’s most populous country, the pace of progress is even faster. China, which is already piloting its digital RMB in 11 major cities – including the capital Beijing, as well as the economic powerhouses Shanghai and Shenzhen – has already begun onboarding its biggest commercial banks and tech firms to the new token.

Even the United States, the world’s biggest economy is mulling a digital greenback launch – with some in the sector calling an American CBDC “inevitable.”

Some say that the advent of crypto has forced central banks’ hands – pushing them to create their own answer to digital tokens like Bitcoin and Ethereum. But what are the biggest difference between CBDCs and coins like BTC?

CBDCs don’t have to use blockchains

Many central banks are building their pilot tokens on existing public blockchain protocols. For instance, South Korea is now testing its digital KRW prototype on the Klaytn blockchain (which uses the native Klay token). The latter was developed by a subsidiary of the domestic internet giant Kakao. Australia’s central bank is also looking at an Ethereum-powered solution.

The masterminds behind other leading CBDC projects, such as Sweden’s e-krona initiative, also say they will make use of blockchain and distributed ledger technology.

But unlike crypto – which is by its very nature decentralized – CBDCs don’t have to use blockchain. Case in point: the digital RMB. China’s leadership has championed blockchain technology but has decided to effectively eschew it in the creation of the e-CNY, currently being showcased to the planet at the Winter Olympics.

In theory, there are a plethora of ways a central bank could create a digital currency, and blockchain technology is just one of a number of tools bankers have at their disposal. The same cannot be said for crypto. Because, as any savvy crypto investor knows, a cryptocurrency without a blockchain is, ultimately, a scam.

CBDCs are the epitome of centralization, cryptos are the polar opposite

The above is a perfect example of the next biggest difference between coins like BTC and CBDCs. The central People’s Bank of China (PBoC) doesn’t need to use blockchain technology for its token because transparency and decentralization are not its main aims in creating its coin.

Some critics (including Washington-based senators) say that, in fact, the PBoC is creating its e-CNY in a bid to increase centralization.

Governments, Beijing included, hate cash because it is the de facto currency of the black market. They also hate the fact that tech firms currently have a stranglehold on payment platforms because big IT companies operate across borders and can grow extremely powerful.

Skeptics would argue that CBDCs, if successful, would let them kill two birds with one stone. By making a centralized digital currency that has no elements of anonymity built into it, they could (theoretically) do away with black markets, freeze criminals’ funds, and wrestle back control of payments from IT companies.

Centralization would essentially reposition central banks, currently at the fringes of daily economic activity, as the central, controlling bodies at the heart of domestic finance. Crypto, its advocates claim, seeks to do the exact opposite.

CBDCs are (still) largely theoretical and exist only in the planning stage

Crypto has an enormous head start over CBDCs. Although crypto pay incentives have never really taken off, crypto ownership has shot up in recent years. People may not want to spend BTC and altcoins, but they certainly seem keen to buy them.

You are no longer an outlier if you tell people you own Bitcoin, ETH, or altcoins. In fact, many mainstream financial advisors now tell their clients to keep a small amount of their portfolio in crypto – advice even some city treasuries are taking to heart.

By contrast, CBDCs aren’t even in their infancy yet. Except for a select few countries such as the Bahamas and Cambodia, CBDC rollouts are still years off, experts have told FXEmpire.

China’s progress is impressive, but the PBoC is still claiming to be in the “R&D phase” of its digital yuan project. Other nations, such as Israel, are claiming breakthroughs, but the truth of the matter is nobody really knows if, when, and how CBDCs will start launching, or how aggressively central banks will promote them.

In the meantime, crypto keeps on growing. And as central banks now have their hands full battling inflation – another factor that appears to be driving up crypto adoption in multiple regions – crypto advocates agree that CBDCs face an uphill battle in their quest to pass, and surpass, crypto.

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