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In the wake of a global pandemic, much of the world’s transactions have become digital. An attempt is being made in this direction for government-issued fiat, in the form of central bank digital currency. This, however, is distinct from a cryptocurrency like say Bitcoin.
One of the most basic differences between the two being that of government issuance. If you were to, for instance, buy cryptocurrencies in India, it would not be through a government authority. Central bank digital currency on the other hand, is the official government-issued fiat in a digital format.
Both entities, though operating in a digital form, differ in their fundamental characteristics. To gain a better understanding of their nuanced differences, give this post a read!
What exactly is central bank digital currency?
Central bank digital currency or CBDC is a central authority issued fiat which is present in a digital form. It is regulated by government institutions, and performs functions similar to that of cash, coins etc. And much like these, it is also backed by suitable reserves. Its introduction provides users with another avenue of conducting transactions. It also comes along with the added security of government regulations.
CBDCs aim at increasing access for digital currencies in general. They would also reduce the cost of transactions to an extent for users.
While no country has concretely launched any central bank digital currency yet, its introduction is being contemplated worldwide. The wider monetary and policy repercussions of it are being discussed at large.
Cryptocurrencies vs. Central bank digital currency
The former, like Bitcoin for instance, operate in a more fluid and decentralized manner. Cryptocurrencies ‘democratize’’ the global monetary systems. If you have to buy Bitcoin, you would not go through centralized regulations that govern CBDCs. Their only commonality is the fact that both cryptocurrencies and CBDC’s operate through a digital medium.
Cryptocurrencies provide a higher level of privacy for its users. Meaning, if you buy cryptocurrencies in India, it would not go through central banking channels, which in turn gives higher privacy to the transactions.
There are also a larger number of options available within cryptocurrency for users. It provides a high level of fluidity as the third party is eliminated in the process of conducting transactions for users. This also enables more peer-to-peer transactions to be facilitated.
CBDCs on the other hand continue to operate in the manner that fiat currency does. There remains a third party through which transactions materialize – this is often the central bank or government institutions.
Assessing the pros and cons of CBDCs
Cryptocurrencies have been in functioning for a while now, and can provide you with knowledge on its position in the market. There is greater awareness about it, and its risks are constantly being evaluated by users. Central bank digital currency does not yet have the requisite policy or institutional structures in place for its usage.
It will be a period of time before you are able to use CBDCs with the same ease that you could perhaps today buy cryptocurrencies in India. Owing to them being government regulated, it could very well be years before they are in circulation as commonly as say Bitcoin is.
CBDCs however, in a long run, do offer some benefits. Their development could help create an alternate channel of transactions to be conducted along with greater access. It would result in a successful translation of a state regulated entity into a digital medium. Thus, the level of security it would offer would be then higher.
The downside to this however, being that owing to no policy on the matter having been contemplated yet, this could take a long time to materialize. Even then, considering CBDCs are nascent to the digital market whereas cryptocurrencies have become a common entity today.
Lastly, even with central bank digital currency being introduced, it would be a new avenue in financial systems altogether. It does not have any existing models to replicate either. Its success within the economic market can only be ensured through a process of trial and error of government policy. Which is what makes them susceptible to security concerns in the current market even more so than cryptocurrencies.
There is also a greater understanding of the larger repercussions of cryptocurrencies than there currently is on central bank digital currency. The markets seeking to buy Bitcoin is only going to grow exponentially, more so with the introduction of CBDCs. Exciting times ahead!
Frequently Asked Questions
What Is Crypto?
Crypto or a cryptocurrency is a digital currency protected by cryptography, making counterfeiting and double-spending nearly impossible. Blockchain technology is used to produce cryptocurrencies (a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are distinct in that a government does not issue them. The word "cryptocurrency" refers to the encryption methods employed to keep digital currencies and the network secure.
What Are The Best Cryptocurrencies To Invest In?
The best cryptocurrencies to invest in would be the ones you study and analyze in detail. Some of the most popular cryptocurrencies include Bitcoin, Ethereum, and many altcoins such as Tron, Ripple, Litecoin, etc.
Which Cryptocurrency Is Best To Invest In 2021?
Many altcoins are flourishing to invest in. Some cryptocurrencies with great potential are Ether, Ripple, Tron, and more. Investors are trying to diversify their portfolios and are flocking to the leading cryptocurrencies. Many growing businesses are already accepting cryptocurrency as acceptable payment methods.
Is Cryptocurrency Safe To Invest In?
Cryptocurrency investments are subject to market risks, but if sufficient security measures are not taken, trading accounts can be maliciously accessed. Investments come with risks and uncertainties, and we cannot claim that any digital currency investment is risk-free. Buying and selling cryptocurrencies can be risky even if the trader is knowledgeable about the market and treats their coins carefully.
What Is Virtual Currency?
Virtual currency is a type of uncontrolled digital currency that can only be used online. It is exclusively stored and transacted using designated software, mobile or computer applications, or unique digital wallets, and all transactions are conducted through secure, dedicated networks. Because digital currency is just currency issued by a bank in digital form, virtual currency is not the same as a digital currency. Virtual currency, unlike ordinary money, is based on a trust structure and cannot be issued by a central bank or other banking regulatory organization.
Is Mining Cryptocurrency Legal?
Cryptocurrency mining can be time-consuming, expensive, and sporadically profitable. Mining has an appeal for many cryptocurrency enthusiasts as miners are paid directly with crypto tokens for their efforts. The legality of cryptocurrency mining is dependent on where you live. In India, there is no restriction on crypto mining.
What Is The Safest Cryptocurrency To Invest In?
Bitcoin has had the highest market capitalization, has been around the longest, has the most experienced development team, and has enormous network impact and brand recognition. As a result, while trading cryptocurrencies, the rate of return on Bitcoin is commonly used as a benchmark. However, the risks associated with cryptocurrencies remain, and the safest cryptocurrency for you depends on your analysis.
Are Cryptocurrencies A Good Investment?
Cryptocurrency has the potential to make you extremely wealthy, and the potential to cause you to lose your money. Crypto assets, like any other investment, come with many risks and potential rewards. Fundamentally, cryptocurrency is an excellent investment, particularly if you want to gain direct exposure to the demand for digital currency.
Is crypto legal?
Crypto is legal in most countries, including India. While nations like the U.S. and many in Europe have regulatory frameworks, others like China have strict bans.
Is Crypto Legal In India?
Cryptocurrencies are legal in India, and anyone can purchase, sell, and exchange them. It is currently uncontrolled, as India lacks a regulatory structure to oversee its operations. Per the Ministry of Corporate Affairs, companies must now record their crypto trading/investments within the financial year. In cases where a person receiving the gains is an Indian tax resident, or the cryptocurrency is regarded as domiciled in India, cryptocurrency transactions have been taxable in India
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
