The Bank of Canada has recently issued a staff analytical note that has shed some light on the various risks associated with the issuance of central bank digital currencies (CBDCs). The note primarily discusses the various risks associated with the use of a hypothetical token-based CBDC.
Drafted by University of Illinois professor Charles Khan and Bank of Canada staffer Francisco Rivadeneyra, the paper states:
“The safety of CBDC will…depend on the competition between providers of aggregation solutions and the interaction of individual security protocols chosen by each supplier.”
While this isn’t an official report that describes the bank’s stance towards CBDCs, it starts off by discussing the risk of losing one’s private keys, which in turn means the loss of the entire cryptocurrency holding.
In the case of Banks, if someone gets locked out, the bank can grant access to the users if they can prove their ownership with the proper documents.
Dependency on Third-parties
The authors of the paper believe this would be a significant factor when it comes to CBDC adoption, and those with little knowledge about digital currencies would eventually turn to third-party services to handle their digital assets.
On this matter, the author notes that crypto holders could use a wallet service, but if the service fails or the password is lost, it could lead to loss of funds.
When it comes to regulated exchanges, it does operate in a similar fashion to that of banks and is a much more convenient way to store cryptocurrencies. But, unlike banks, exchanges fail to provide deposit insurance.
In this case, the CBDC would be issued by the Canadian government, and hence the authorities need to determine how to regulate intermediaries.
The authors believe that exchanges might back out in case of theft as they “might have a competitive incentive to absorb some of the losses.” This also raises the possibility of regulations that “limit the losses account providers can pass on to users.”
Hence, the authors argue that the central bank should be “limiting balances or transfers, modifying liability rules, or imposing security protocols on storage providers.”
The paper also presents the idea of a “CBDC that is universally accessible but that can be stored only at approved intermediaries.”
Meanwhile, the Bank of Canada continues to work on the development of its CBDC, but just as a contingency plan. The bank said back in February that a CBDC would only be issued if the demand for physical cash is drastically reduced or if companies and businesses turn towards cryptocurrencies to handle payments.