Cryptocurrency vs CBDC vs Digital Currency: What’s the Difference?

After months of anticipation, the Reserve Bank of India released a digital currency concept note on Friday. He said he intends to plan pilot launches of a central bank-backed digital currency (CBDC) or e-Rupee for specific use cases.

There has been a lot of buzz surrounding the concept of cryptocurrencies, CBDCs and digital currencies. A central bank digital currency can be described as the digital form of a country’s fiat currency, while a cryptocurrency is also a digital currency, which is an alternative form of payment with unique encryption algorithms. Simply put, a CBDC is simply digital fiat, while cryptocurrencies are digital assets on a decentralized network.

The RBI also said that it will soon launch the pilot launch of the digital rupee for specific use cases.

Here is how cryptocurrency, CBDC, and digital currency differ from each other:

digital rupee

The Reserve Bank of India has defined CBDC as legal tender issued by a central bank in digital form. It is the same as a fiat currency and is exchangeable on a one-to-one basis with fiat currency. Named Digital Rupee, or e-Rupee, the digital currency will be the same as a sovereign currency and will be aligned with their monetary policy.

According to RBI, the digital rupee system will boost India’s digital economy, improve financial inclusion and make monetary and payment systems more efficient.

Also Read: RBI Releases Digital Currency Concept Paper; dit will release e-rupee driver soon for specific use cases

Other possible characteristics of e-Rupee are that the digital currency must be accepted as means of payment, legal tender and safe store of value by all citizens, businesses and government agencies. It can be freely converted into cash and cash from commercial banks.

The digital rupee will be fungible legal tender, which means holders or consumers will be able to use it without having a bank account.

RBI expects its coinage and transactional expenses to decrease significantly with the introduction of the CBDC.

CBDC

CBDCs are a digital version of government-backed fiat currency, which uses blockchain technology to verify and store transaction data. But the main difference is that they work on a centralized network, which is an authorized network.

CBDCs will operate seamlessly where transactions will not have to go through multiple banks, like UPI. The CBDC transaction can happen almost instantly on a digital ledger. For those who are unbanked, CBDCs would provide a way to transfer money digitally, which is not currently possible with UPI or wallet.

Also read: Center finalizing position on cryptocurrencies as FATF talks loom

Globally, many countries, such as China, Ghana, Jamaica, and some European countries, are exploring their CBDC products. Some have even launched their digital currencies.

Nine countries have fully launched their CBDCs. Eight of the nine countries are located in the Caribbean. The Bahamian Sand Dollar was the world’s first CBDC, which launched in 2019.

Cryptocurrencies

Cryptocurrencies, like Bitcoin and Dogecoin, are stored on a decentralized blockchain network, where transactions can take place, authenticated, and recorded in the public ledger without any third-party interference or central authority monitoring the transaction.
The basic difference between a cryptocurrency and digital currency is that cryptocurrencies use a decentralized network.

Whereas CBDCs, although using blockchain technology, are entirely centralized. A central bank oversees and facilitates transactions with the help of other third-party organizations. Basically, cryptocurrencies are private money, while CBDCs are government-backed forms of money. Therefore, CBDC is promoted as a safe form of money.