Digital currencies might share some traits with cryptocurrencies, but the two aren't exactly that similar. The key advantages and disadvantages of both will depend on how either of them are applied. Given the increasing number of people falling victim to crypto scams, it's worth knowing how exactly a digital currency fits into this ongoing proliferation of digital money.
Cryptocurrencies utilize blockchain technology and cryptography, generating digital assets that are typically used as a medium of exchange. Its decentralized nature makes it more transparent and independent of any central finance system, with most transactions being recorded on a digital ledger that the public can access. However, this type of digital money lacks regulation, making way for meme-inspired coins, which can lure investors without providing any precautionary measures.
This is where digital currencies come in. A form of digital money that may or may not utilize blockchain technology, digital currencies are quite the opposite of cryptocurrencies, since they're mainly centralized and regulated by official financial sectors or government bodies. One such example is a digital currency backed by a central banking system, known as a Central Bank Digital Currency, or CBDC. According to CNBC, this type of monetary system comes with numerous benefits, including quick transactions of government reimbursements, taxes and stimulus checks, as well as providing financial services to citizens without bank accounts. With many countries considering a switch to a digital currency, it's only a matter of time before people are faced with the question, are CBDCs a better alternative to cryptocurrency? The answer is, it depends.
Pros And Cons Of Digital Currency And Cryptocurrency
Unlike cryptocurrency, which usually has a value that's often speculative and extremely volatile, CBDCs have a value that equates to the issuing country's fiat currency. This not only bolsters its fiat equivalent, but it also grants stability. As foreign exchange currencies change gradually, wherein a digital dollar's value will always reflect its fiat counterpart, cryptocurrencies can abruptly lose a chunk of their value in a short period of time. While this might sound like stablecoins, digital monies with a value that's also tied to their fiat currency equivalent, digital currency supplies and transactions are all regulated by official centralized banking systems. In contrast, the supply and dependability of stablecoins rely solely on the entities issuing them, this includes risky exchange platforms which may not always guarantee investors protection from any lost money.
Being regulated does mean citizens utilizing such digital currencies will be giving financial control back to the issuing government, which can monitor expenditures and make transactions less transparent. Transactions with cryptocurrencies, on the other hand, forgo the need for a centralized banking 'middle man,' operating on an automated system that's not hampered by human error or possible manipulation. Then again, this also leaves citizens vulnerable to scams and other criminal activities, not to mention the energy consumption issues related to crypto mining. Furthermore, the use cases of spending with cryptocurrency will rely on merchants that accept it, which won't include obligatory government transactions, either. Both digital currency and cryptocurrency have their strong points, but the key factor here is whether citizens prefer a centralized or decentralized financial system.
Source: CNBC