Concept of cryptocurrency

A cryptocurrency is a digital or virtual currency that is created and issued by private market participants, rather than central authorities or incumbent financial institutions (e.g., banks). A cryptocurrency, crypto-currency, or crypto is designed to function as a medium of exchange through a computer network that is not run by any central authority, such as a government or a bank. The network uses cryptography for security. A virtual currency refers to an electronic representation of value that does not take a physical form. It is a type of digital currency that principally provides a means of payment (among other functions) for goods and services over the internet, or broadly on an online platform, while utilizing encryption technology. The currency is used by an unspecified large number of individual and businesses/ entities and can also be converted (in either direction) to legal tender, such as dollars and euros at dedicated exchanges.

Concept of CBDC

Central bank digital currency (CBDC) is a kind of digital money issued by a central bank, but is not cryptocurrency and would not replace cash and other types of money under direct control of a central bank. CBDCs are, however, a specific type of virtual currency, and as such carry potential benefits for financial inclusion. Governments and central banks need to be transparent about their release of such currencies, including the potential advantages and risks involved- an essential element for public trust in CBDCs.

Differences

As a virtual currency, a cryptocurrency has the traditional features of money, and is designed to ensure security to all parties involved in an exchange, by multiple means such as public key cryptography and hash functions. Transactions that are made via virtual currency are recorded, with public accessibility, in units known as blocks, forming the broader network called a blockchain. The blockchain technology is instrumental for running different types of virtual currencies. Virtual currencies can be used the purpose of paying consideration for the purchase or leasing of goods or the receipt of such items or certain services between counterparties. The currency is transferred by means of an electronic data processing system.

The main difference between a central bank digital currency and a cryptocurrency is that a CBDC is – as its name implies – issued by a central bank. This means it is also a “direct liability” of the central bank. CBDCs are direct liabilities of the central bank, just as paper cash is, This makes CBDCs a safer form of digital money than commercial bank-issued digital money. A CBDC has a connection with the resources of a central bank, such as legal tender in circulation and the broader money supply under its direct control. Legal tender represents the legal status of fiat money (fiat currency) as an acceptable form and standard for payment of obligations. The U.S. dollar is considered to be both fiat money and legal tender, as it is accepted for settlement of private and public debts. In this sense, legal tender is any currency that a government declares to be have a legal status as a means of payment. Governments usually issue a fiat currency and then declare it legal tender by recognizing it as the standard for debt repayment. For a cryptocurrency, the value depends on general acceptance within the network community and beyond, and factors such supply and demand play a crucial role in determining its performance.

CBDC as a form of virtual currency

As a form of digital money (and virtual currency), CBDC, and though issued by a central bank, does not replace cash but complements it. In a CBDC space, the digital code for each virtual currency unit is held in a digital wallet and transferred seamlessly by the wallet-holder to other people’s digital wallets. A CBDC differs from virtual currencies and the broader category of cryptocurrency as it is issued by a central bank, rather than a private market participants as the case with coins like Bitcoin and Ether. The currency (CBDC) is backed by the issuing government, ensuring stability of its value. In a stark contrast with private virtual currencies, CBDCs raise concerns related to privacy of users. Governments have to promote and enforce the use of privacy-enhancing technology and ensure consumer protection in order to gain public trust in such currencies.