Are Central Bank Digital Currencies (CBDCs) Modeled the Same Way as Cryptocurrencies?

Godfrey  |  Feb 5, 2021

The global financial ecosystem is at an inflection point with the advent of cryptocurrencies that are threatening the sovereignty of central banks. The threats take the form of increasing adoption of these cryptocurrencies, also known as virtual or digital currencies, for monetary transactions. This creates a boycott for the existing monetary system in various nations.

To combat the growing involvement and usage of digital currencies, many nations are now beginning to explore the option to roll out a type of virtual currency generally referred to as Central Bank Digital Currency (CBDC). While the debut of these CBDCs may help wade off the obsolescence, cryptocurrencies are billed to plunge fiat currencies into, they have a lot of differences when compared to Bitcoin and the other altcoins in the crypto space.

The Highlighted Differences in CBDCs and Cryptocurrencies

The underlying design that sparked interest in cryptocurrencies includes decentralization, privacy, and security. These same features constitute the point of difference between CBDCs and digital currencies they are trying to outpace.

Decentralization and Centralization

Cryptocurrencies are designed using a decentralized model that seeks to take power away from government-backed regulators. CBDCs on the other hand will always remain under central bank control even though there will be a shift away from paper-based fiat money to the digital version.

The decentralized system of cryptocurrencies works with the transactions on the platform being validated by a distributed network of independent miners in different parts of the world. CBDCs will however maintain a central server that will still be controlled by a central bank or monetary authority.

Privacy and Security

The fact that digital currencies are built using blockchain technology with an enhanced level of security makes them private and secure. Some unique groups of cryptocurrencies are known as privacy coins as they add an extra layer of secure shield walls to their designs.

The privacy features may be absent in CBDCs as federal authorities will aim to prevent anonymity to be able to enforce anti-money laundering laws. The differences in privacy and anonymity is a big difference between existing digital currencies and CBDCs that are billed to be rolled out.

Cryptocurrency networks are still mainly prone to attacks as seen when the Ethereum Classic network was attacked back in August last year. However, the vulnerabilities of the CBDCs will be more pronounced in that a centralized server will be more of an easy target than a decentralized one. The hackers may just need a fair amount of motivation to tamper with the network as they have always done with the crypto networks.

CBDCs May Quell Threats from Projects Like Facebook’s Diem

Despite the obvious differences between existing digital currencies and the array of proposed CBDCs, most government authorities working on this project are banking on their virtual fiat currency to allay the threat of the Facebook-backed Diem Project (formerly Libra).

With each currency most relevant in a defined geographical region, currencies like that from Facebook will easily attract people from its over 3 billion users from its family of apps. Central banks, even though they can manage the brooding threats from Bitcoin and other altcoins, will do all they can to prevent Facebook’s Diem, a feat they are doing through the roll-out of CBDCs.

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