Cryptocurrencies vs Central Bank Digital Currencies: what’s the difference and what do they have in common?

by Jonathan Adams

What the future holds for independent, decentralised cryptocurrencies like Bitcoin remains to be seen. These P2P, blockchain technology-powered digital currencies have been around since 2009 when Bitcoin was launched and several more including Ethereum, Ripple’s XRP and the Binance crypto exchange’s BNB have since also established themselves.

There have been several waves of heightened public interest in cryptocurrencies as an alternative to traditional fiat currencies issued by central banks. The most recent boom was during the Covid-19 pandemic period when the price of Bitcoin surpassed $65,000.

Bitcoin/USD historical price chart

chart bitcoin


Despite the value of Bitcoin more than halving after that historical high (it trades at $26.4k as of September 2023), and the wider market experiencing what has been dubbed a “crypto winter” cryptocurrencies show no sign of going away.

Concerted efforts continue to be made to convince the SEC to approve a U.S.-listed spot Bitcoin ETF. Even mainstream financial giants like Blackrock and Fidelity have joined the ranks of the several ETF proposals currently under consideration.

Even a new rejection would be seen as a setback to the mainstreaming of cryptocurrencies and integration into traditional financial markets but by no means defeat. With the largest asset management company in the world now pushing for a spot Bitcoin ETF, the SEC may well finally relent.

If not immediately (and many now think there is a reasonable chance at least some of the 7 proposed ETFs currently under consideration could get the green light), there is a feeling of inevitability that public demand will eventually prevail. However, it’s certainly not guaranteed – the regulator has resisted numerous previous proposals over the years and is generally pushing back against cryptocurrencies with several cases open against major companies like the exchanges Binance and Coinbase.

But whether as an integrated part of financial markets and daily life, or as a semi-shadow economy as has been the case until now, cryptocurrencies look extremely unlikely to disappear altogether.

That poses a challenge for governments, regulators and crime prevention agencies. It’s fair to say that given a choice, the centralised power structures that run the modern world, including financial markets, would probably rather cryptocurrencies vanish as a phenomenon.

They also understand that is now practically impossible – the genie is out of the bottle.

What central banks, regulators and governments do want is to maintain as much control of financial markets as possible, arguing that the anonymity cryptocurrencies provide are a recipe for criminal activity like money laundering and market manipulation.

One strategy in that direction is to make fiat currencies themselves more competitive and suited to the rapidly advancing digital economy and wider world. Leveraging the blockchain technology that arrived with the advent of cryptocurrencies is one way to do that – allowing for cheaper, faster transfers that don’t require settlement or any other intermediaries.

The digital, usually but not necessarily blockchain-powered, versions of fiat currencies central banks around the world are investigating issuing, and some already have, are termed CBDCs – Central Bank Digital Currencies.

They differ from P2P, decentralised, private market cryptocurrencies in several important ways.

A brief explanation of cryptocurrencies

Cryptocurrencies fall into two main categories.

The first is cryptocurrencies like Bitcoin that were launched as a direct alternative to fiat currencies and the inherent drawbacks crypto proponents see in them – debasement as a result of money printing, the need for intermediaries like banks, interbank systems like SWIFT and government control.

These cryptocurrencies are intended to be used for the same kind of transactions as we use fiat currencies for – grocery shopping, paying for a visit to the dentist etc.

The other category of cryptocurrencies is ‘utility tokens’. They are only intended to be ‘spent’ to pay for the computing power (gas in crypto terminology) of a blockchain platform with a practical use case – like the Ethereum smart contract platform that can be used to build blockchain-based applications (dApps). Ether and Ripple’s (a payments settlement system) XRP.

Cryptocurrencies in the second category still have a fluid exchange value like the first, based on supply and demand. However, they are not intended to be used in everyday financial transactions.

Cryptocurrencies are powered by public P2P blockchains whose operation neither requires nor permits any centralised third-party authority. The rules, such as the pace at which new cryptocurrency is minted, total possible supply and how the network is financially incentivised to lend its computing power, are preprogrammed and immutable – as are transactions recorded in the blockchain’s digital ledger.

Cryptocurrency drawbacks

Drawbacks to cryptocurrencies are that they allow for varying levels of anonymity, which makes it almost impossible to police for money laundering activities or the financing of criminal activity.

During their history so far, the value of cryptocurrencies has also demonstrated extreme volatility and there is reasonable evidence of significant market manipulation. Security is also a major issue with cryptocurrency wallets and accounts regularly hacked and the space has suffered from a series of collapses and frauds that have hurt retail holders cryptos.


CBDCs promise the digital efficiency of blockchain transactions but the, as governments, banks and regulators see it (as well as many individuals) stability and safety of fiat currencies. Unlike stable coins like Tether, which are cryptocurrencies pegged to a fiat currency and backed by reserved held by a private company, CBDCs are fiat currency.

They are still backed by the state in the form of its central bank. The only way funds held via CBDCs differ from the cash balance held in a digital account like a current account with a bank is they are held on a blockchain – and transactions are also made on the blockchain without the need for third-party settlement.

CBDCs operate on a private, centralised blockchain – not a public, distributed blockchain like cryptocurrencies.

This leads to another key difference between CBDCs and digital bank balances. The latter can be withdrawn as cash but CBCDs would have to be exchanged for cash. That, critics say, increases the centralisation of power – central banks, governments, and whoever else they chose to give access to would be able to view a complete history of an individual or legal entity’s financial transactions.

A handful of Asian central banks have already launched CBCDs, though they have so far only been made available to institutional holders like banks. China has the e-CNY, India the e-rupee and Cambodia the Bakong. In Singapore, the Monetary Authority of Singapore (MAS) launched Project Orchid, which explores the possibility of a retail CBDC for individuals.

Cryptocurrencies and CBDCs are diametrically opposed to each other

Ultimately, the only real similarity between cryptocurrencies and CBDCs is that they are powered by blockchain technology and exist only on their blockchain.

But philosophically and practically, they represent starkly contrasting qualities. Cryptocurrencies are decentralised alternatives to the fiat system that offer relative anonymity and allow for no third-party interference. They set finance apart from centralised power as a completely independent, immutable rules-based p2p network.

CBDCs offer the same technological advantages, competing with cryptocurrencies in the lack of friction they provide in a digital economy, but double down on the centralised nature of the fiat system. They provide the security of state backing and insurance against theft or fraud. But also presume the state has the best interests of its citizens at heart.

The most likely scenario to play out throughout the foreseeable future is that CBDCs will exist side-by-side. They will compete with each other to the extent that governments and regulators allow cryptocurrencies to be accepted, or tolerated, as part of the broader financial system. Or to sit adjacent to the traditional fiat-based system.

If governments and regulators continue to push back against cryptocurrencies, they will compete with CBDCs as a shadow economy.

Time will tell if libertarian instincts are right and cryptocurrencies will ultimately lead to the downfall of centralised financial systems vulnerable to vested interests and the influence of established power structures. But to push their case, cryptocurrencies will first have to demonstrate more convincingly that they offer a better alternative – one not beset by the risk of theft, fraud or the failure of private companies to the financial cost of their clients.

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