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Cryptocurrency • Finance

The Future of Digital Money: CBDCs versus Decentralized Cryptocurrencies

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With the use of cash for everyday purchases declining and electronic payments the norm for many, Central Bank Digital Currencies (CBDCs) are emerging as a viable alternative to paper money. 

In a recent study, Pew Research Center reported that 41% of US adults do not use cash for typical weekly purchases, a 12% increase from 2018. 

There are around 23,000 cryptocurrencies in operation around the world today with a total market value of US$1.1 trillion, according to CoinMarketCap. Currently, CBDC is only available to use in 11 countries currently, but 130 countries, including all of the world’s major economies, are exploring its adoption. 

As the future of digital currencies emerges, this article explores what it could mean for consumers, financial systems, and the global economy. 

How are CBDCs and cryptocurrencies different?

Central Bank Digital Currencies are a digital form of a country’s official money. While both are electronic currency, the former is officially recognized, and, like paper money, is legal tender. 

The concept of Central Bank Digital Currencies is inspired by cryptocurrencies and blockchain technology. Whereas cryptocurrencies are mostly decentralized and cannot be regulated by one single governing body, CBDC is overseen by a central bank. 

Cryptos like Bitcoin and ethereum are not a substitute for cash because they bypass conventional monetary systems. CBDCs use the same distributed ledger technology but, unlike crypto, it is stored and shared across a network of computers.

A central bank would be the single point of control over how the digital currency is issued, and how transactions on the network are managed. 

Regulation and central bank money

Cryptocurrencies are governed on blockchains by consensus. A consensus mechanism validates entries into a distributed database and keeps them secure. Cryptocurrencies are unregulated, whereas CBDCs are typically designed to comply with regulatory requirements, including anti-money laundering and know-your-customer regulations. 

Crypto transactions can be anonymous, but with CBDC, central banks and even governments can trace each transaction as it enters the system, with the identities of users more easily traceable and identifiable.

The emergence of digital currency

CBDCs have both a retail and wholesale digital version. The retail type, for consumers and businesses, would be publicly available for anyone to make digital payments. Wholesale CBDC, on the other hand, would primarily be used by central banks and financial institutions for interbank transactions, international settlements, and securities. 

Ultimately, the potential of CBDC is for physical currency to be replaced by a digital form, or operate alongside it as legal tender. Crypto, on the other hand, is more generally associated with peer-to-peer transactions, and investments based on their value when stored. 

Having said all that, the distinction is not always clear cut. The emergence of digital money, and the move away from cash, could see CBDC, crypto, and other forms of digital assets work in tandem, as part of the digital payments ecosystem. 

Is stable coin the same as a CBDC?

Stable coins are a crypto currency but the value is tied to another asset class, gold or fiat currency, to keep it ‘stable.’ For example, the popular fiat-backed stable coins are tied to sovereign currencies like the U.S. dollar. 

One of the big drawbacks of cryptocurrencies is their volatility. Cryptocurrency prices fluctuate wildly and tend to be unpredictable. This makes them unsuitable for daily use for most people, who like to know the ongoing value of their money for livelihood and financial security reasons. 

Unlike crypto, the value of assets like fiat currency and gold, tend to be stable. While they do fluctuate over time, it’s nothing in comparison to the dramatic peaks and troughs of cryptocurrencies.

Diamond Hands Crypto FAQ

In effect, though stable coins are virtual, tokenized digital currency, their value is guaranteed by the reserve asset, and can be cashed out to the amount of the asset. 

So with CBDC pegged to the reserve currency, what’s the difference?

Regulation – With stable coin no central regulatory authority is in charge. Whereas, central banks regulate digital currency.

Exchange value – Stable coins don’t have an exchange value with other currencies, even the fiat currency that backs them. CBDCs can be converted to fiat currency and have a general exchange value.

Taxation – Stable coins have no set taxation, while CBDCs will come with the  tax policies of the issuing country.

Security – Security is lower compared to central bank digital currencies, which have security features implemented by regulation.

Asset backing – Stablecoins are backed by private assets, CBDCs are backed by central banks’ sovereign currency. 

What’s the case for digital currencies?

It depends who you ask. The fact that so many jurisdictions are exploring

digital currencies would tempt you to think the case is pretty clear cut. In giving central banks more financial relevance to compete with alternative assets like crypto and the growing power of Big Tech, CBDC is a welcome foothold for the authorities.

The transparency of having all transactions on a single ledger could help governments tackle money laundering and other aspects of financial crime. It would help them create greater financial inclusion for the poorest and those without access to banking facilities.

One of the main benefits of CBDC is the potential for improving financial stability. Giving enhanced regulatory and monetary policy powers to central banks, it is argued, would create a more stable and secure financial system. 

The decentralized nature of CBDC

In terms of the consumer benefit, critics claim that greater transparency will give the authorities disproportionate powers to surveil and control how people spend. The programmability of CBDC could lead to instances where governments limit the use of the digital currency, dictate what can be bought, or even stop transactions. 

What are CBDCs

While paper money is environmentally, and even hygienically problematic for some, it nevertheless offers huge freedom in how it’s used. The privacy concerns that surround CBDC are substantial. Their adoption would give the authorities a mandate to tighten up control of taxation, for example. 

On the plus side, having a single currency that is held in digital wallets, and is widely accepted, would make life easier for consumers. With CBDC, transactions could be quicker, more seamless, and less open to fraud. 

Digital currency benefits and pitfalls?

The adoption of Central Bank Digital Currencies creates a number of potential pros and cons. It would be a seismic shift for financial systems, banks, and consumers alike, and the adoption issues don’t end there. 

CBDC would change how commercial banks operate. As we know, cryptocurrency and other digital assets operate outside the traditional banking system. In order to buy and sell them, you have an account with a cryptocurrency exchange or broker. 

Traditionally, it is not possible to hold crypto in a bank account, and while the crypto market is gaining adoption by banks and financial institutions, it is not accepted as legal tender in retail settings. Given their volatility, the main function of crypto is for investment and asset trading purposes. 

Digital financial transactions

If CBDC were widely accepted, they could replace traditional cash deposits held in a bank account. With a digital currency issued by a central bank and held in an e-wallet, the role of financial intermediaries would be diminished. This could have huge consequences for how other financial products are purchased, credit facilities, pensions, insurance, and investment. 

The Crypto Tax Trap 2 Scenarios

Even if a digital currency were to function in tandem with cash, as seems likely, it would threaten the traditional banking model. Central banks would have greater influence over the way digital financial services are provided to consumers and businesses, and could, technically, even replace commercial banks. 

Financial system constraints

As central banks don’t have the expertise or technical setup, that seems unlikely. That would mean that they would enlist commercial banks to drive adoption and provide financial services. That would necessitate integration with existing banking and payment systems, and the huge complexity it would involve. 

Indeed, the technical and infrastructure challenges of CBDC are slowing the pace of adoption, with governments keen to ensure the stability of any future model. 

If CBDCs and physical cash were to emerge with a new system of interoperability, what would it mean for cryptocurrencies? Some observers argue it could spell trouble for them. 

Could CBDC threaten the existence of cryptocurrencies? 

CBDCs are not a direct replacement for digital assets, but their large-scale adoption, and endorsement by the authorities, could weaken the value of cryptos. The inherent stability of CBDC, versus the massive price volatility of crypto is evident.

It’s fair to say that after an initial wave of enthusiasm, when it challenged the paradigm of state-supported currencies, and its value soared, crypto has hit a far rockier road. 

The potential for criminal activity afforded by their anonymity, and the destabilizing effect they have had on traditional financial systems, is forcing the authorities to respond. 

There is good reason to believe that  cryptocurrencies will be more tightly controlled with stringent regulation, and even prohibition. Other concerns include the environmental impact of cryptocurrencies and its negative impact on climate change:

  • Bitcoin mining consumes energy from carbon-powered plants that produce greenhouse gasses.
  • It’s estimated that Bitcoin is responsible for up to 73 million tons of carbon dioxide each year. 
  • The proof of work consensus that validates crypto transactions requires the power of thousands of energy-intense mining computers. 
What is the Purpose of CBDCs

The incentives for central banks and governments to create a digital currency that competes with crypto, at least in the public mind, are numerous. It’s not realistic to believe crypto will disappear, but its popularity could be overshadowed by CBDC.

Digital currency dilemmas and the design of CBDC

Several countries are making good progress in adopting their own digital currencies. In China, a digital yuan pilot has reached 260 million people, while Russia will beta test its digital ruble this year. In global financial terms, the U.S. is moving forward, despite technical and political issues, with a wholesale version.

Outside of those major powers, who are engaged in something akin to a battle over first mover advantage, the precise nature of CBDC is far from decided. 

For The European Central Bank, and the financial reserve of Canada, the United Kingdom, Australia and Japan, there is a wide degree of divergence over the usefulness of a retail CBDC for consumers, and over the architecture and security protocols needed. 

Privacy concerns, at least in democratic countries, are forcing a rethink, while hybrid models that would operate alongside the physical currency have been suggested. Lastly, the nature of public-private partnership and the practicalities of a central bank digital currency are still up for debate.


Digital currency and cryptocurrency enjoy some similarities. They share versions of the same technology, they are both alternatives to cash in some way, and they are both virtual, tokenized, digital forms of money. But what they offer, for central banks at least, makes them polar opposites.  

The centralized, regulated nature of CBDC is in sharp contrast to the volatile and untraceable features of crypto. As the use of physical money dwindles, both offer some potential in a global digital money economy. 

They could co-exist, blockchain technology could evolve to create some kind of shared digital value system. As governments across the globe come to terms with the eventual design of CBDC, it’s sure to have lasting effects on the monetary system. 

Key decisions have yet to be made about how cash, digital assets, and CBDC could co-exist. At a time when crypto is on the radar of global regulators, and its benefits are being diluted, we could see CBDCs detract from its appeal. 

Just as crypto took central banks out of the equation, we could see them regain ground with a more controlled, stable, and inclusive digital currency. What it all costs in terms of privacy, financial freedoms, and state control, remains to be seen. 

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