Comparing Cryptocurrencies and Retail CBDCs: Key Differences
As digital currencies become more prevalent, the rise of retail central bank digital currencies (CBDCs) has added a new dimension to the digital currency landscape. In this blog article, we explore the key differences between these two forms of digital currencies and answer the often-asked question of whether CBDCs are cryptocurrencies and how they compare to cash.
The Bank for International Settlement (BIS), a major proponent of CBDC and opponent of all things crypto, illustrated the differences and overlaps between the different forms of money in their famous Money Flower”.
For the less visual reader here is a table to summarize some of the key differences between digital currencies and R>CBDCs:
What are Cryptocurrencies?
Cryptocurrencies are decentralized digital “currencies” that are not controlled by any single entity or government. They rely on blockchain, a decentralized ledger technology (DLT) that records transactions on a chain of data blocks (Blockchain) and maintains the integrity of the network. Cryptocurrencies have gained significant popularity among tech-savvy individuals and retail and wholesale investors as a more flexible and decentralized alternative to traditional currency.
What are Retail CBDCs?
Retail CBDCs are digital currencies issued and backed by the central bank, making them centralized and a liability of the central bank to its users. Retail CBDCs can be used for making micro payments and are considered the digital version of central bank printed banknotes. They are authorized by government decree or legislation and are a more secure and stable form of digital currency than stablecoins or cryptocurrencies, which are issued by private entities and banks.
What are the Key Differences between Cryptocurrencies and Retail CBDCs?
- Creditworthiness and Perceived Integrity of Issuers:
One of the key differences between cryptocurrencies and retail CBDCs is the perceived creditworthiness and integrity of their issuers. While cryptocurrencies are decentralized and not backed by any central authority or government, retail CBDCs are issued and backed by the central bank, which is often viewed as a trusted and stable institution. This means that retail CBDCs are typically considered to be more secure and less volatile than cryptocurrencies, which are subject to market fluctuations based on supply and demand. - Level of Centralization:
Another key difference between cryptocurrencies and retail CBDCs is the level of centralization involved in their creation and management. Cryptocurrencies are typically designed to be decentralized, meaning they are not controlled by any single entity or government. This gives users more autonomy, privacy and control over their transactions, but also makes cryptocurrencies more difficult to regulate and monitor. In contrast, retail CBDCs are typically centralized, meaning they are issued and governed by the central bank. This gives the central bank more control over the currency’s supply, distribution, and use, but also means that it can potentially monitor and restrict certain transactions and leads to a loss of privacy and individuals control over their money. - Operational Network:
Cryptocurrencies typically operate on a decentralized network, while retail CBDCs can be designed to work on a centralized or decentralized network, depending on the defined use cases, country-specific requirements, and design decisions made by the central bank. For example, a CBDC may be designed to operate on a centralized network for high-value transactions but use a decentralized network for small retail transactions and micropayments. R>CBDC can also operate in an off-line mode. This flexibility allows retail CBDCs to be tailored to the specific needs of different markets and economies. - Governance:
Cryptocurrencies are typically governed by their respective communities, which may include developers, miners, investors, and other stakeholders. In contrast, retail CBDCs are issued and governed by the central bank, which has more control over the currency’s development and evolution. This means that users have less say in the decision-making process, but also means that the currency is likely to be more stable and consistent over time. - Risk Management Compliance:
Another key difference between cryptocurrencies and retail CBDCs is their level of compliance with existing regulatory frameworks and laws. Retail CBDCs are designed to be compliant with existing regulations, such as anti-money laundering (AML) and know-your-customer (KYC) laws. This makes them less likely to be used for illicit activities, such as money laundering and terrorist financing. Cryptocurrencies, on the other hand, are not subject to the same level of regulatory oversight, which has led to concerns about their potential use in illegal activities. - Legal and Regulatory Status:
Retail CBDCs are authorized by government decree or legislation, making them a more trustworthy and secure form of digital currency. Cryptocurrencies, on the other hand, are not backed by any government or central authority, and their legal status varies widely across different countries and jurisdictions. Some countries have banned cryptocurrencies altogether, while others have embraced them and even established regulatory frameworks to govern their use.
Here is a comparison of CBDC and Cryptocurrency with other payment instruments.
Overall, the key differences between cryptocurrencies and retail CBDCs reflect the different approaches to digital currency adoption and regulation. While cryptocurrencies offer a more decentralized and flexible approach to digital payments, retail CBDCs offer a more secure and stable form of digital currency backed by the central bank of a country. As digital currencies continue to evolve, it is likely that we will see a range of different approaches and innovations emerge to meet the needs of different markets and economies.
