How often do you still pay with cash? Many Louisianians are used to paying for even small items with credit and debit cards or transferring money to their friends and family with apps such as Paypal and Venmo.

These types of electronic payments rely on third parties such as bank accounts to process transactions, which can come with expensive fees. However, innovative electronic payment technology, known as digital or cryptocurrency, can have the properties of both physical cash and Venmo, with the ability to send it anywhere.

In 2009, Bitcoin entered the financial scene as a digital currency. Bitcoin users can buy, sell, and spend their Bitcoin without banks, governments, or other intermediary third parties—much like paying in cash. This peer-to-peer model has rapidly gained popularity, with digital currencies like Bitcoin now having hundreds of millions of users across the world.

Not all governments are fond of the idea of people being able to transact freely. Governments are examining how they could use the same technology that created Bitcoin to offer their own digital currency, a central bank digital currency (CBDC.) In 2022, the Biden Administration ordered a report on what a digital dollar, administered by the Federal Reserve, would look like for the United States economy.

Understanding the differences between market-based Bitcoin and government-based CBDC is crucial to encouraging innovation in financial technology and promoting the freedom to exchange.

Because of Bitcoin’s design, its transactions cannot be censored by the government. Like cash, one can use Bitcoin however he or she wants, and no government can step in to stop the transaction. One of the driving forces behind Bitcoin’s creation was a desire to separate the politics of the state from the reliability of a currency. Users are guaranteed a private and independent transaction.

A CBDC cannot and will not make the same promise—financial privacy is close to impossible in a government-generated digital currency and regulations are par for the course. A CBDC is like keeping all your money in a bank account that is constantly monitored and run by the government.

The world of cryptocurrency is rapidly developing and often complicated. Distinguishing between Bitcoin and CBDCs is a helpful step to realize the full benefits of this technology. The difference between the two can be understood through a few simple questions. Do I want the government to monitor and control what I buy? And, when I buy it, do I want to spend my money in a free and private manner?

While there are tradeoffs with a variety of cryptocurrencies, the existence of private digital currency provides more of a bulwark against government oversteps and excessive bureaucracy than any centralized digital currency could ever offer.