There are numerous governments that have expressed their support for Central Bank Digital Currencies (CBDCs) and it almost appears as if every country is jumping on this train. However, there are some nations that are still holding out and have also shared their concerns about the viability of these digital currencies. Canada is one such country that has discussed the risks surrounding CBDCs. Earlier this week, a report was published in which it was highlighted by the Bank of Canada that there are some security risks associated with CBDCs. Therefore, it would be ill-advised to move forward with developing them without coming up with solutions for resolving these risks.
The name of the report was ‘Security and Convenience of a Central Bank Digital Currency’ and it shed some light on the benefits, along with perceived risks, of a CBDC. The Bank of Canada explained in the report that the security risks associated with CBDCs could be a major issue, particularly when it comes to storage. According to the report, the risks arise from how CBDCs are used for executing transactions, how balances are stored and aggregated, and how different solutions, such as crypto exchanges, e-wallets, and banks compete for attracting users.
While the official stance of the Bank is not stated in the report, it discusses some of the issues that the agency identified in the case of traditional cryptocurrencies. If these issues are left unchecked, they could easily affect CBDCs, along with their functionality. The Bank explained that firstly, people had been vulnerable to losing their digital assets. When it comes to traditional banks, if you lose your online banking details, you can visit the bank physically, but it is just not possible to retrieve lost digital assets. The bank also stated that various crypto wallets can be created by CBDC holders and they can spread their funds in them in varying allotments.
In this way, digital asset storage locations could surpass what’s possible in traditional finance. Furthermore, the Bank also said that some custom solutions could be developed by platforms around CBDCs. To deal with these issues, the most appropriate option would be to set caps on CBDC holdings in wallets, along with Central Bank imposing specific restrictions on companies that would partner with them for CBDC projects. The report said that if the Bank of Canada introduced a CBDC, it would most probably be token-based. In order to make it an efficient and safe mode of payment, the Bank needs to figure out how it will be used and aggregated and what externalities would occur.
Canada is not the only country to have expressed their concerns regarding issuing a CBDC. Some reports last month confirmed that the Reserve Bank of Australia (RBA) had also taken a cautious line towards CBDCs. According to the reports, the RBA doesn’t believe that the country has a strong enough policy for issuing a CBDC. In addition, the need for a CBDC has been rendered moot because their new payment platform has become a success.