Bank Of Canada Raises Concerns Surrounding Central Bank Digital Currencies

The Bank of Canada — the nation’s central bank — outlined the risks associated with issuing a central bank digital currency in a new report released on Monday, October 5.

The report emphasized that an anonymous and token-based CBDC would pose various security risks which would need to be considered when and if the nation decides to design a CBDC. The assessment of risks comes as central banks globally are exploring the concept of a tokenized version of fiat. China has led the charge with its digital yuan which is in pilot testing in Suzou, Xiong’an, Chengdu and Shenzhen and European Central Bank President Christine Lagarde said during a recent conference that the body was researching a digital Euro.

One of the main concerns presented by report authors was that digital assets allow users to aggregate balances in anonymous addresses meaning many more asset storage locations than is possible with cash or in traditional finance. The bank expressed concern that storing digital assets comes with a slew of security risks and because users would likely be insured in some way against theft they would not be as careful as necessary.

Elaborating on digital asset storage concerns, the bank compared and contrasted different storage methods including self-custodying, e-wallets and utlizing centralized exchanges.

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In an effort to combat risks associated with a central bank digital currency, the report suggested building several features into the design of a potential CBDC. These features include limiting balances and transfers, modifying liability rules and directing security protocols chosen by the suppliers of aggregation solutions.

The report went on to say that if the Bank of Canada were to issue a CBDC, it would likely be token-based and spur the emergence of a CBDC industry filled with companies competing to ease the transition to central bank issued digital currencies. If this were to happen, examining the various means for storing and securing digital assets would prove essential.

Report authors ended by floating the idea of introducing liability rules for CBDCs, but acknowledged that enforcing these rules would be murky as it can be difficult to determine who is responsible for the loss of funds.

By Emily Mason