China’s keenness towards the development of Central Bank Digital Currencies [CBDC] started a fire among other countries. While several countries still remain in the sidelines as spectators of the evolution of the financial sector, a few others have stepped up and have been exploring the subject. After exhibiting interest towards CBDCs Canada seems to have weighed out the good and the bad on the issuance of CBDCs.
A Potential Security Risk In The Making?
Recently, the Bank of Canada shared a report titled, “Security and convenience of central bank digital currency” highlighting the possible security issues that users could face due to CBDCs. The report formulated by Charles M. Khan and Francisco Rivadeneyra pointed out that the risks could vary from the use of central bank-issued currency for transactions to the storage of these assets. Elaborating on the risks the report read,
“Digital currencies allow users to aggregate balances in anonymous addresses on a scale not possible with cash. This creates trade-offs between security and convenience that do not exist for cash and traditional bank accounts.”
Since the central bank-issued currency would be token-based, it would most likely be secured by private keys. The use of private keys is not new to the crypto-verse, however, this would be an entirely new topic for several individuals. The use of private keys is extremely essential as it would permit the individual to engage in transactions of a certain address. However, the loss of these keys could further result in the loss of the balance in that particular account.
Stressing on the same, the report read,
“Managing private keys can be inconvenient for individuals, and this could stimulate demand for convenience solutions for managing keys and carrying out transactions. In response to this demand, a CBDC ecosystem will likely emerge, with public and private components.”
Khan and Rivadeneyra seemed to have solutions to these problems. The duo suggested that the users could make use of e-wallets and account providers instead of entirely relying on private keys. While e-wallets could help users manage multiple private keys, account providers or crypto exchanges could help recover balances of the users. Both of the aforementioned solutions could come in handy during the loss of private keys.
Additionally, highlighting the implications with regard to coming up with liability rules for the loss of CBDC the report suggested,
“If central banks establish liability rules for the loss of CBDC similar to those that exist for bank notes and traditional bank accounts, users will have the incentive to exert a greater level of care when managing their balances of CBDC. “
However, this approach is touted to be complicated. The issuance of CBDC seems like a huge leap towards financial advancement. Yet, formulating a CBDC that is accepted globally and can be stored at approved intermediaries is a task that is yet to be probed.