Central Bank Digital Currencies are a new form of electronic money that, unlike well-known cryptocurrencies, are issued by central banks of certain countries.
These central bank-issued digital currencies are simply digital tokens, similar to cryptocurrency, pegged to the value of a country’s currency. But they are not a form of cryptocurrency.
CBDCs are not cryptocurrencies
Although the idea for CBDCs came from cryptocurrencies, they are two very different types of digital currencies. The key difference between CBDCs and cryptocurrency is centralisation.
Centralisation is simply the control of an activity under a single authority. A cryptocurrency is a decentralised digital currency, meaning there’s no central party that controls it.
CBDCs are most similar to Stablecoins, which are cryptocurrencies that are pegged to fiat money and attempt to maintain the same value. The main difference is that the world’s governments issue CBDCs.
So what is the difference between cryptocurrencies and CBDCs?
CBDC is managed on a digital ledger (which can be a block chain or not), expediting and increasing the security of payments between banks, institutions, and individuals.
Cryptocurrency also provides much greater privacy than CBDCs. Transactions are sent and received through wallet addresses, and it’s possible to retain some degree of anonymity.
Certain types of cryptocurrency are even thought to be untraceable. With a CBDC, the central bank will have a record of users and their transactions.