A Central Bank Digital Currency (CBDC) can most easily be understood as a digital form of cash. It can be issued by the central bank, accessible to the general public, and used to settle transactions between firms and households. The unit of account would be the national currency, and it could be exchanged at parity (i.e. one for one) with other forms of money, such as physical currency or electronic deposits with well-regulated financial institutions.
What are the main differences between cryptocurrencies and CBDCs ? In other words, whatm akes a CBDC(central bank digital currency), money?
A central bank has the ability to ensure that a digital currency it issues exhibits the three main features of money. That is :
1) A CBDC could function as a widely accepted means of payment, store of value and unit of account. Because it is issued by a central bank, a CBDC would have legal tender status, making it widely accepted as a means of payment.
2) A CBDC would also be an equivalent store of value to other forms of money, since it could be exchanged for an equal value of physical cash or electronic deposits.
3) Finally, the unit of account for CBDC issued by the Reserve Bank could be the Australian dollar for example. This means it could be used to measure the value of goods and service.
Surveys conducted by the Bank for International Settlements indicate that CBDCs are an active area of research for nearly all central banks. Despite this, only a few central banks have actually issued digital currencies. To date no high income country has issued a CBDC. The Reserve Bank remains cautious about whether issuing a CBDC (Central Bank Digital Currency ) would be in the public interest. Primarily, this is because many of the benefits of CBDCs have largely already been realised by existing technologies.
In the other hand, Cryptocurrency refers to a type of digital asset that uses distributed ledger, or blockchain, technology to enable a secure transaction.
A cryptocurrency like bitcoin can be thought of as a decentralized autonomous organization (DAO), an open-source peer-to-peer digital network that enforces the rules it is set up with. In this DAO setting, the money supply is set by an algorithmic rule, and the integrity of the network replaces the need to trust the integrity of human participants.
References
Understanding Cryptocurrencies (Wolfgang Karl Hardle, Campbell R. Harvey, Raphael C. G. Reule)
Reserve Bank of Australia : Digital Currencies (pdf)
