CBDC-R Vs. Cryptocurrencies: Unravelling the Differences

CBDC-R Vs. Cryptocurrencies: Unravelling the Differences


Though cryptocurrencies have gained popularity in the last decade, their history dates back to the 1980s when it was known as cyber currencies. With the launch of central bank digital currencies-Retail (CBDC-R), there has been a lot of confusion between cryptocurrencies and CBDC-R, with the assumption that they are similar.  

Cryptocurrencies are digital currencies or digital assets where transactions are encrypted for safety. All the transactions get recorded on the blockchain and cannot be undone once they are recorded. Cryptocurrencies operate without any centralised authority.

Differences in Control and Regulation Between CBDC-R and Cryptocurrencies

CBDC-R and Cryptocurrencies differ in the following ways:

1. Lack of centralised control in the case of cryptocurrencies

CBDC-R: It is a digital currency that is backed by the central bank. The central bank issues and controls the CBDC-R. CBDC-R are considered legal tender, i.e. they are recognised and accepted by the government for every transaction. 

Cryptocurrencies: They are neither issued nor controlled by a centralised authority. They make use of decentralised blockchain technology. In many jurisdictions, cryptocurrencies might not be considered legal tender. 

2. Privacy Features of CBDC-R and its Potential Impact on User Data

CBDC-R: Since they are regulated by the central bank, the priority might be on regulatory compliance, transaction monitoring, and identity verification, thereby providing selective privacy. 

Cryptocurrencies: Different types of cryptocurrencies offer different levels of anonymity and privacy features. They are decentralised and use advanced cryptographic techniques which offer more data privacy.

3. Anonymity Considerations in CBDC-R Transactions Compared to Cryptocurrencies

CBDC-R:  They offer limited anonymity because the central banks regulate them. Monitoring of transactions and identity verification are essential for regulatory purposes. 

Cryptocurrencies: Privacy-centric cryptocurrencies aim at offering higher anonymity levels by using various cryptographic methods and decentralised blockchain technology.  This makes it tough to penetrate through the transaction details as well as user identities.

4. Speed and Efficiency of Transactions in CBDC-R Systems

CBDC-R: As they are backed by the central bank, their systems can provide swift and organised payment solutions.

Cryptocurrencies: They offer different transaction speeds which depend on the blockchain network as well as technological advancements. 

Federal Bank has launched Federal Bank Digital Rupee and has made it easier for its customers to join the ecosystem. Check out the Federal Bank Digital Rupee section to learn more.

5. Comparing Transaction Fees in CBDC-R Vs. Cryptocurrencies

CBDC-R: The transaction fee structure of CBDC-R is influenced by the regulatory body, i.e. the central bank. Overall, they might offer a lower transaction fee structure in contrast to cryptocurrencies. This would make them a reliable and cost-effective payment option for daily transactions.

Cryptocurrencies: The transaction fees might vary based on the benefits provided to users to match their specific requirements and preferences. Validators or miners in charge of transaction processing on the blockchain determine the fee structure.

6. Stability of Value in CBDC-R Due to Central Bank Backing

CBDC-R: The main advantage of CBDC-R is the stability of value. CBDC-R are issued, managed, and controlled by the central bank. The stability of value makes them a reliable payment option for businesses and individuals. Users can be assured that their holdings will not be affected by extreme price fluctuations.

Cryptocurrencies: The value of cryptocurrencies is affected by speculative trading and market fluctuations. They do not offer the stability of value like CBDC-R.

7. Volatility Challenges Faced by Cryptocurrencies

CBDC-R: Since they are issued and regulated by the central bank, they are relatively stable in value and not volatile. However, they might face challenges in security, privacy, and centralisation concerns.

Cryptocurrencies: They are highly volatile and are subject to price fluctuations, and expose the investors to investment risk and liquidity risk. The high volatility makes them quite unstable in comparison to CBDC-R.

Conclusion

The cryptocurrency market offers the potential for high returns but is also accompanied by risks that make people cautious. However, there are a lot of developments taking place in the regulatory areas and market infrastructure that would address volatility and create a more secure environment. These efforts can help mitigate challenges and build trust in the digital asset class. Visit Federal Bank's Digital Rupee section to get all the information on how to get access to it.