A government-issued digital currency, known as a Central Bank Digital Currency (CBDC), is tied to a country's domestic currency, for example, the Chinese yuan. In essence, a digital yuan issued equals the value of an actual yuan or $1 fiat currency. The government wholly regulates the issuance, sanction, and distribution of CBDCs, which are considered the liability of the central bank, not any private commercial banks. Unlike cryptocurrencies, CBDCs are more secure in their value.
Although CBDCs and cryptocurrencies are both forms of virtual currency that use blockchain technology to store and verify transactions, they have several key differences. Firstly, CBDCs are centralized, with the flow of funds and transactions managed by a central government. In contrast, cryptocurrencies are decentralized, with no central authority governing or regulating them. Secondly, CBDCs are issued by a national bank, while cryptocurrencies are issued by decentralized networks. Thirdly, anonymity is possible with cryptocurrencies, as users are not required to disclose their personal information. Conversely, CBDCs are issued by banks, which retain all user information. Finally, CBDCs are run by a permissioned blockchain network, which restricts access to a limited number of gatekeepers, whereas cryptocurrencies use a permissionless network, which allows anyone to interact with the network.
CBDCs offer several potential benefits, including enhanced payment methods and monetary policies, simpler international payments, better control of criminal activities, reduced transaction costs via central banks, convenient and secure transfers for users, greater stability, and more straightforward digital payment systems. Additionally, CBDCs are less volatile than cryptocurrencies.
In addition to the advantages, there are some disadvantages associated with CBDCs, including potential cybersecurity risks, the impact on current monetary policies, and possible operational disruptions. Additionally, since CBDCs are still in the developmental phase, there may be unforeseen issues as policies and procedures are being established.