gold bitcoin with the flag of Colombia

Colombia central bank eyes limited CBDC holdings to counter financial risks

Colombia’s banking regulator is pushing for limited central bank digital currency (CBDC) holdings for users despite its indecision to launch a digital version of its legal tender.

The Banco de la Republica said it has begun exploring the potential risks to the country’s financial system associated with the launch of a CBDC. In its report, titled “Expected Macroeconomic Effects of Issuing a Retail CBDC,” the central bank noted that proceeding with a retail offering poses limited risks.

“The introduction of the CBDC could be an attractive alternative for some risk-averse holders of other cash-like instruments,” the report read.

However, it pointed out the minimal risks, including security breaches from bad actors and privacy violations of users. The banking regulators also stated that rolling out a CBDC could affect how investors interact with other asset classes, including commercial papers and government bonds.

To mitigate the risks of security breaches and privacy, the central bank proposes setting holding and spending limits for retail CBDCs.

“By imposing CBDC holding limits to end users, this, and other types of situations—the tradeoff between privacy and security—could be easily controlled,” read the report.

It added that the central bank will advance cautiously with CBDC developments, saying it will only proceed with a full-scale launch when it has “enough desirable features to generate a core group of users.”

Critics have warned that imposing holding and spending limits on CBDCs may make them a tool for increased government control and surveillance.

Despite the concerns raised, several countries are mulling the prospects of proceeding with guardrails on CBDC holdings. European Union’s central bank executive Ulrich Bindseil pushed for a digital holding limit of €3,000 ($3,260). At the same time, U.K. stakeholders suggest similar figures for limits noting that a high holding limit “could destabilize the banking sector.”

They hinge their arguments on the claim that users may easily convert their bank holdings to CBDCs at the push of a button, leading to bank disintermediation. Proponents of CBDC limits argue that rolling the state-backed digital currencies without limits would affect commercial banks’ ability to issue customer loans and may trigger bank runs nationwide.

Bracing for CBDCs

Financial systems worldwide are already bracing for CBDCs, with a recent report noting that nearly 20 nations will launch their offerings before the end of 2023. It added that developing nations would form the vanguard of countries predicted to launch their CBDCs as they seek to improve financial inclusion metrics.

The Bank for International Settlements (BIS) and the International Monetary Fund (IMF) have pledged technical support for central banks looking to develop their CBDCs. The BIS has launched a series of joint CBDC experiments for cross-border transactions, while the IMF has published a CBDC handbook to guide global banking regulators.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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