Bank of Canada report highlights risks with central bank digital currencies

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Anonymous central bank digital currencies (CBDCs) could actually pose significant security risks, both for central banks and for those using the currency, according to findings recently published by the Bank of Canada.

The Canadian central bank said the “particular” risks of central bank digital currencies pose challenges for issuers planning to launch a digital currency, with their report raising a number of concerns about the technology.

The bank said that users of CBDC tokens would be likely to “economize” on security, because they may not feel the full extent of any losses arising from use of the token. It said users were likely to lose tokens or access to them, either by losing their private keys, or through hacks and thefts. They also point to the prospect of bugs in wallets and exchange services, which could also lead to losses for CBDC users.

While CBDCs themselves are developed on secure protocols, these issues nevertheless persist for users of digital currencies in the future. While the bank argued rules around liability similar to losing cash or funds from a bank account could apply and offset these risks for issuers, it would also act as an incentive for users to take security seriously.

The solution proposed by the Bank of Canada is that CBDCs could be held in “approved intermediaries” only, which could resolve the liability issues facing most CBDC users.

The report also highlights the volumes of digital currency likely to be held in anonymous accounts, which could account for a large portion of the total funds. This would likely lead to “trade offs” between convenience and security, according to the bank, which would need to be addressed before CBDCs could be fully embraced by the mainstream finance world.

The report comes at a time when more central banks around the world are investigating CBDCs.