What exactly is cryptocurrency?
Cryptocurrencies are digital or virtual currencies that employ encryption techniques to manage unit creation and verify payment transfers. These currencies run separately from the central bank.
What exactly is central bank digital currency (CBDC)?
CDBCs are digital currencies issued by central banks that are connected to the official currency of the country. The RBI introduced the digital rupee, which is convertible into fiat money. They are comparable to stablecoins.
Differences between CDBC and cryptocurrencies
1. Regulatory Structure
The banks are in charge of creating, issuing, and controlling the circulation of CBDC. As a result, the CBDC regulatory system is the same as the old currency regulatory framework.
No government or central authority can control cryptocurrencies as they are decentralized. Even though some countries have implemented bitcoin laws, the legislative framework for cryptocurrencies is still in its infancy and differs in each region.
2. Authority and control
CBDC and cryptocurrency differ in their level of control and authority. For example, CBDC, a digital version of the Indian Rupee, is backed by the RBI.
Cryptocurrencies like Bitcoin operate independently of government or central authority.
3. Transparency
Here is another example by the RBI, The CBDC established by them is intended to function inside a fully transparent structure, with every transaction recorded on a secure and irreversible blockchain ledger. This makes all transactions available to the appropriate authorities, increasing accountability and lowering the danger of financial fraud or money laundering.
Since cryptocurrency transactions are typically anonymous and difficult to trace, there is fear about possible abuse for unlawful activities such as terrorist funding and money laundering.
4. Stability
CBDC is intended to be steady, which means that its value will not fluctuate dramatically as it does in the cryptocurrency market. The CBDC’s value will be fixed to the Indian rupee, allowing it a stable digital currency. The central bank maintains this stability by controlling the availability of CBDC, which may be changed to preserve its value.
Cryptocurrencies are very unstable, with values shifting fast due to their decentralized structure and lack of a single authority managing supply, resulting in severe price fluctuations in hours or days.
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What are the pros of cryptocurrency?
1. Anonymity
It is one of the most appealing aspects of cryptocurrencies. Transactions can be done without disclosing the identities of the involved parties. When privacy is important, such as with political support or sensitive commercial dealings, anonymity can be advantageous. Anonymity can be used for unlawful purposes like money laundering as well. Nonetheless, for many individuals and businesses, the anonymity given by cryptocurrencies is a huge benefit.
2. No Need for a Middleman
Cryptocurrency transactions are peer-to-peer, which eliminates the interference for a third party to validate or authorize them, thereby reducing transaction fees and allowing more control over funds. This direct and rapid nature is particularly beneficial for cross-border transactions.
3. Worldwide Access
Because digital currencies are borderless, they are available to anybody, wherever they are. Individuals, unlike established financial institutions, can use cryptocurrencies in nations where there are no solid financial systems or access to traditional banks. It is useful for people who cannot get access or who live in countries with unstable economies.
4. Quick Transactions
Bank and wire transfers might take days in traditional systems, but Bitcoin transactions can be done in minutes. This is possible since cryptocurrencies rely on blockchain technology, which allows for “atomic” transactions, or payments that clear and settle instantly.
What are the benefits of CBDC?
1. Faster Payment Option
Traditional payment methods are frequently sluggish and necessitate the use of many middlemen, leading to delayed transactions and higher expenses. CBDC, on the other hand, can enhance payment speed by enabling immediate transactions that lack middlemen. This implies that payments may be handled in seconds, making payment processing quicker and more efficient.
2. Affordable International Transfers
Due to the participation of several middlemen and hefty transaction costs, cross-border transfers are frequently costly and inefficient. By allowing direct transfers between persons or companies without the need for middlemen, CBDC can cut transfer costs and boost efficiency.
3. Availability around the clock
Traditional banking hours restrict banking services to set periods of the day, which can be challenging for many individuals. CBDC, on the other hand, may enable 24-hour transaction availability, allowing consumers and companies to make payments at any time. CBDC may make payment systems open 24 hours a day, seven days a week, giving users more flexibility.
4. Payments to the government are well-organized
CBDC can improve the organization and effectiveness of government payments by increasing their efficiency and transparency. It can allow quick and more transparent government payments by tracking payments in real time and eliminating the need for middlemen.
Conclusion
CBDCs and cryptocurrencies exist separately, and they may coexist in the future. As a result, consumers must grasp the differences between these concepts and their functions.
