The Difference between CBDC and Crypto is...
As the awareness of the risks associated with central bank digital currencies (CBDCs) has grown, there is an increasing confusion between government-provided CBDCs and market-provided cryptocurrencies. While this confusion is understandable at first glance, it is crucial to recognize that CBDCs and cryptocurrencies represent contrasting concepts.
CBDC vs Crypto 101: To start, a central bank digital currency (CBDC) is a digital currency issued by the government and serves as a direct liability of the central bank. For instance, in the United States, a CBDC would be a digital version of the U.S. dollar. However, it is essential to note that a CBDC is not merely a different form of existing money; rather, it establishes a direct link between citizens and the federal government, essentially creating a digital tether.
Norbert Michel and I have extensively discussed how this fundamental shift poses threats to financial privacy, freedom, markets, and security, with minimal unique benefits gained from CBDC adoption.
On the contrary, a cryptocurrency is a digital currency provided by private entities in the market. Fundamentally, cryptocurrencies offer a means of digitally storing and exchanging value secured through cryptography, without reliance on government or third-party intermediaries.
To simplify the comparison, let's focus on Bitcoin, a decentralized, open, and permissionless cryptocurrency. Users are not required to seek permission from entities like the Federal Reserve, Congress, companies, or individuals to use Bitcoin. The freedom extends not only to usage but also to participation in maintaining the system through mining.
While a CBDC epitomizes centralized money provided by the government, Bitcoin stands as a prime example of decentralized money provided by the market.
Members of Congress, such as Representative Warren Davidson and Senator Ted Cruz, have highlighted the clear distinction between CBDCs and cryptocurrencies. Even the White House has acknowledged the irony in the centralized nature of a CBDC, considering the foundational principles of cryptocurrencies like Bitcoin.
The Clash Between CBDCs and Cryptocurrency: The rise of CBDCs is largely seen as a response to the growing popularity of cryptocurrencies, particularly triggered by events like the announcement of Facebook's Libra (later Diem) in 2019. The interest in CBDCs spiked following this announcement, indicating a shift in focus among policymakers and central banks.
It's worth noting that the interest in CBDCs hasn't only led to competition with cryptocurrencies but has also resulted in proposals and actions to ban cryptocurrencies in conjunction with launching CBDCs, as observed in China, India, Nigeria, and even proposed measures in the United States.
Cryptocurrencies Are Not Without Fault: While cryptocurrencies have their challenges, including a learning curve, price volatility, and potential fees, individuals should have the freedom to choose and participate in both the benefits and risks of cryptocurrencies. Policymakers have attempted to utilize cryptocurrencies for surveillance, similar to traditional financial systems.
The crucial difference lies in the freedom of choice that cryptocurrencies offer, contrasting with the government's increasingly restrictive control over money. Cryptocurrencies represent a new era in monetary freedom, whereas CBDCs appear to signify an effort to conclude this chapter.
Conclusion: Navigating through a sea of acronyms and terms can be confusing, especially in uncharted territories. However, it is essential to understand that cryptocurrencies and CBDCs are fundamentally different in design and should not be conflated. Recognizing this distinction is crucial for informed decision-making, particularly as Congress considers legislation, and members must maintain a clear understanding of the differences between cryptocurrencies and CBDCs.