CBDC vs. Crypto: What’s the Difference?

Nicholas Anthony

As more people have become aware of the risks of central bank digital currencies (CBDCs), more people have become confused between CBDCs provided by the government and cryptocurrencies provided by the market. It’s understandable that the two ideas may be confusing at first glance, but the reality is that CBDCs and cryptocurrencies are near opposites.

CBDC vs Crypto 101

To begin, what is a central bank digital currency, or CBDC? As the name suggests, it would be a digital currency provided by the government. It is a direct liability of the central bank. In the United States, a CBDC would be a digital form of the U.S. dollar. But make no mistake, a CBDC is not “just a different form of money.” A CBDC would fundamentally differ from existing money because it would establish a direct line between citizens and the federal government—a sort of digital tether.

Norbert Michel and I have explained at length how this fundamental change would endanger financial privacy, freedom, markets, and security. And all of which would occur with little to no unique benefit gained by the adoption of a CBDC.

On the other hand, a cryptocurrency is a digital currency provided by private actors in the market. At its core, cryptocurrency offers a way to digitally store and exchange value in a manner secured through cryptography rather than the government or third parties.

To simplify the discussion, let’s focus on Bitcoin considering it is decentralized, open, and permissionless. Put simply, you don’t need the permission of the Federal Reserve, Congress, any company, or any individual to use Bitcoin. You’re free to choose whether you’d like to use it and how you’d like to use it. And in the same sense, there’s no group or individual to freeze or seize your funds. However, this freedom goes beyond using Bitcoin for spending or saving. You’re also free to step in to help maintain the inner workings of the system (a process known as mining).

Where a CBDC is the epitome of centralized money provided by the government, Bitcoin is the best modern example of decentralized money provided by the market (Table 1).

Members of Congress have already recognized that the distinction between CBDCs and cryptocurrencies is clear. Representative Warren Davidson (R‑OH) recently noted on the news that,

A lot of times people conflate something like Bitcoin or crypto with central bank digital currency[, but] it’s the exact opposite. Bitcoin doesn’t have a central authority at its heart—there’s no one to grant you permission. … There’s no central authority able to filter it or cancel it.

Likewise, at the Bitcoin Policy Summit in Washington D.C., Senator Ted Cruz (R‑TX) said,

We see China moving forward with the intention of using a CBDC to destroy all the value of Bitcoin—to destroy anonymity [and] to destroy decentralization. Their objective is precisely the opposite of a decentralized ledger system. They want a centralized ledger that the government has complete visibility into and complete control over.

In fact, despite leading the charge for a CBDC, even the White House recently recognized that the centralized nature of a CBDC “is somewhat ironic, given that this is different from an oft‐​cited founding principle of crypto assets like Bitcoin, whose purported aim was to create decentralized money without any trusted central authority.” In other words, it is ironic that in a time when people are figuring out how to decentralize money and technology writ large, governments are trying to centralize money more than ever before.

The Clash Between CBDCs and Cryptocurrency

It is also important to recognize that the rise of CBDCs has largely been a retaliation to cryptocurrencies. There were discussions of CBDCs for years, but these discussions really did not amount to much until the Facebook debacle. That is, CBDCs were pretty much an afterthought in the United States until Facebook announced its intention to create its own stablecoin: Libra (later rebranded as Diem). Although Libra never came to fruition, its announcement sent policymakers, legislatures, and central banks into a panic. In fact, Google trends data clearly shows that the interest in CBDCs skyrocketed shortly after the Libra announcement in the summer of 2019 (Figure 1).

It has been nearly four years since Facebook discussed the idea of introducing a cryptocurrency, but policymakers still regularly cite the occurrence in fear of what could have happened.

The rise of cryptocurrencies, however, did not just spur a rise in interest around CBDCs among policymakers. Not content with the idea of merely competing with cryptocurrencies, policymakers have also proposed (and often succeeded) in banning cryptocurrencies in tandem with launching CBDCs. China, India, and Nigeria offer clear examples of this trend. Even in the United States, Representative Jesús “Chuy” Garcia (D‑IL)—who would later cosponsor a bill to introduce a CBDC—proposed banning tech companies from creating cryptocurrencies. Later, Daleep Singh, former economic advisor to President Joe Biden, told Congress that a CBDC would be the single best step to crowd out cryptocurrencies.

Cryptocurrencies Are Not Without Fault

Now, to be clear, cryptocurrencies have their problems. Depending on the particular cryptocurrency and its associated blockchain, there can be a steep learning curve, mild to extreme price volatility, fees, and the like. In fact, policymakers like Senators Elizabeth Warren (D‑MA) and Roger Marshall (R‑KS) have even been actively trying to weaponize cryptocurrencies as a surveillance tool—like the U.S. government has previously done with the traditional financial system. And like the traditional financial system, not all cryptocurrencies are as decentralized as Bitcoin.

The important difference to take away is that people should be free to choose if they take part in both the benefits and the risks of cryptocurrency. In stark contrast to the government’s ever tightening and ever more restrictive monopoly on money, cryptocurrencies mark a new chapter in monetary freedom. CBDCs, on the other hand, appear to be an attempt to bring that chapter to a close.

Conclusion

It is easy to get lost when navigating a sea of acronyms and terms—especially when one is navigating uncharted waters. However, cryptocurrencies and CBDCs are effectively complete opposites in their design and should not be confused. In fact, recognizing this distinction is probably why Americans are more likely to oppose CBDCs after learning what they are and can do. As Congress contemplates legislation, it is critical that its members keep the distinctions between cryptocurrencies and CBDCs clear.