Bitcoin and CBDCs captured the attention of mainstream participants as the cryptocurrency industry evolves. Yet, despite their similar status as ‘digital assets’, there are some major differences in the way they are issued and controlled.
A Central Bank Digital Currency (CBDC) refers to the virtual or digital asset form of a fiat (paper) currency such as USD, EUR or GBP.
They are issued and regulated by a nation’s monetary authority or central bank and are currently being explored by a number of countries worldwide in a bid to ‘digitalise’ the current monetary ecosystem.
Bitcoin is a decentralised digital asset that can be transferred and sent worldwide on a peer-to-peer basis without the need for an intermediary or central authority.
The asset is distributed, traded and stored using a decentralised ledger system known as a blockchain.
Bitcoin is the 1st iteration of a cryptocurrency and remains the largest crypto asset by market capitalization today.
The Key difference between the two is that Bitcoin is a cryptocurrency and a CBDC is not.
Cryptocurrencies like Bitcoin are stored on a decentralised blockchain network whilst a CBDC asset will be issued and stored using a more centralised method.
This means that Bitcoin remains decentralised in nature and cannot be controlled by a single authority. Contrastingly, a CBDC asset can be regulated and controlled by the issuing authority such as a bank or the Fed, ECB, BoE, BoJ, PBoC or others.
This raises the issue of anonymity and privacy when using each asset.
When using Bitcoin, you use a wallet address that has no personal information or identifiers attached to it, meaning you can send Bitcoin to others in an anonymously.
CBDCs are expected to be a replacement for cash and centrally distributed, meaning your details will be ‘attached’ to your CBDC asset and be subject to oversight and regulation from the issuer.
The value of the assets and the circulating supply are also different.
CBDCs are expected to be ‘pegged’ to the value of the underlying asset, much like stablecoins such as Tether (USDT) and USD Coin (USDC), and have a supply based on demand and use cases for the asset.
In contrast, Bitcoin has a fixed supply of only 21-M, hence why the value of the asset remains much greater than the $1 valuation of a stablecoin.
In the future, it is expected that CBDCs may utilize blockchain technologies to help distribute and manage their assets.
But, the underlying issues of decentralization and anonymity attached to the asset will remain, leading many investors to choose a more private, decentralized asset such as Bitcoin as a ‘store of value’.
Have a prosperous, happy holiday week, Keep the Faith!