Cryptocurrency vs CBDC
No Comments
Cryptocurrency vs CBDC
Subject: Economy
Why in the news?
Deputy Governor of the RBI called cryptos worse than a Ponzi scheme and argued against “legitimizing” them. Yet, the RBI announced that it will float a Central Bank Digital Currency (CBDC).
Differences:
| Basis | Cryptocurrency | Central Bank Digital Currency |
| Meaning | Digital token issued by a private institution or firm. | Central bank digital currencies are digital tokens, similar to cryptocurrency but issued by a central bank. |
| Legality | Not a fiat currency as not backed by the government. | A central bank digital currency is the digital form of a country’s fiat currency. |
| Technology | Based on cryptography and blockchain technology i.e a public ledger needs every user consent for transaction. | Central bank digital currencies are designed to be similar to cryptocurrencies, but they may not require blockchain technology or consensus mechanisms. |
| Intrinsic value | No intrinsic value but used for transaction due to acceptability, scarcity and anonymity. | They are pegged to the value of that country’s fiat currency. |
| Regulation | Cryptocurrencies are unregulated and decentralized thus, involving anonymous transactions. | As a centralized form of currency, they may not anonymize transactions as some cryptocurrencies do. |
| Effect on monetary policy | Complicates monetary policy transmission for being a parallel unregulated currency | CBDCs promote financial inclusion and simplify the implementation of monetary and fiscal policy. |
| Value | Cryptocurrencies are highly volatile, with their value constantly fluctuating. | CBDCs, backed by a government and controlled by a central bank, would provide households, consumers, and businesses with a stable means of exchanging digital currency. |
| Acceptability | Their value is dictated by investor sentiments, usage, and user interest. | Legal backing |
| Spending | Double spending as software on a computer can be used repeatedly.
| Fiat currency has the property that once spent, it cannot be spent again except through forgery, be- cause it is no more with the spender. |
Fiat Currency-Fiat money is a government-issued currency that is not backed by a physical commodity like gold or silver. It is considered a form of legal tender that can be used to exchange goods and services.