As you surely know by now, the cryptocurrency story all started with Bitcoin back in 2008. The worldʼs best-known crypto was created by Satoshi Nakamoto, an anonymous cryptographer who open-sourced Bitcoin upon release.
In the ensuing years, thousands of decentralized cryptocurrencies have come online. Ethereum is, perhaps, most famous amongst those who arrived in Bitcoinʼs wake. As a blockchain platform which enables the creation of decentralized currencies, Ethereum renewed interest in the digital asset class.
However, it isnʼt only retail-level users who have found themselves enamoured with cryptographically-secured digital cash. Central banks the world over are signalling their intentions to join the digital currency race. Their resolve to develop and issue central bank digital currency (CBDC) has only strengthened in light of Facebookʼs Libra project coming to the fore earlier this year.
To the casual observer, the difference between a central bank-issued digital currency and a decentralized cryptocurrency is slight. Letʼs take a moment to parse through the ins and outs of each so that you can quickly tell them apart.
Central Bank Issued Digital Currency Explained
Central banks have been concerned about the unchecked growth of cryptocurrencies for years. Since blockchain networks are decentralized, there isnʼt much a central bank can do to stop those currencies from circulating.
In lieu of stopping cryptocurrencies altogether, central banks have almost uniformly agreed that a better approach is to issue digital currencies of their own.
A central bank-issued digital currency is basically an electronic version of a nationʼs fiat cash. CBDC is fungible, meaning units of the currency are interchangeable with one another and retain the same value. Fiat cash is the same – if you lose a dollar bill, and I give you one of mine, you now have a dollar again.
Each monetary unit of CBDC is backed by another asset, such as gold, in a reserve controlled by the central bank. Backing value at a 1R1 ratio with a reserve asset keeps the CBDC value stable, predictable, and accountable.
Central bank-issued digital currency will make sending the fiat currency people are accustomed to much easier, faster, and cheaper. In due time you may be sending the US dollar much in the same way you currently send BTC.
While that is an appealing prospect, central bank-issued digital currencies are a surveillance stateʼs dream. Cold, hard cash is extremely difficult to trace – but digital cash on a centralized ledger is not.
The introduction of central bank-issued digital currency is a welcome sign for incumbent financial institutions such as banks. Digital currencies pave the way for a smoother experience with less friction than old fiat currency.
Are Decentralized Cryptocurrencies Less Valuable Than CBDC?
If central bank digital currencies are backed by asset-locked value in reserve, then does that make decentralized cryptos like Bitcoin worthless? The question stems from the notion that since Bitcoin isnʼt supported by assets in reserve, it must not have real value.
However, decentralized cryptocurrencies do have value backing them in the form of network labor. To sustain a decentralized network and keep cryptocurrencies not only in circulation but also safe, an immense amount of hardware, electricity, and computation goes into running a blockchain.
Additionally, decentralized currencies can easily be pegged to a broad array of assets. Security tokens represent anything from shares in real estate portfolios to dividends from a companyʼs net profit. Stablecoins, on the other hand, are attached to unfluctuating assets like fiat currencies.
Decentralized cryptocurrencies are loved for the financial autonomy they impart on HODLers. For many, the allure of the cryptocurrency economy is it exists outside the grasp of authorities.
The downside is, however, that cryptocurrencies are extremely volatile and prone to uneven regulation around the world. Because cryptocurrency is a global asset class, the overzealous regulations of one country reverberate strongly everywhere else.
ComplyChain Solutions Team with contributions made by Coinzene