The Bank of Canada recently delivered a report on the risks and benefits of a central bank digital currency.
In its October 5 report, The Bank of Canada wrote that digital currency (CBDC) based on anonymous tokens would pose a particular security risk. These risks, it continued, arise from how funds are gathered and stored, how CBDC uses transactions, and how different solutions such as e-wallets, cryptocurrency exchanges, and banks compete for user acquisition.
Global Adoption of CBDCs
Over the past couple of years, CBDCs have been the main topic of discussion with central banks, making plans to incorporate them into their future economy. Some countries, like China, are spearheading the change to digital currencies, with its digital yuan. A recent survey involving 66 central banks by the Bank for International Settlements shows that more than 80% taking a shot at central bank digital currencies (CBDCs).
Chinese specialists are currently testing its digital yuan across Hong Kong’s Greater Bay Area, said to take place over the coming weeks.
Moreover, it became known on August 5 that a select gathering of state-run business banks inside China had been directing a modern scale inward trial of digital currency wallet planned particularly for the aforementioned digital currency. The banks evaluate the wallet as a method for encouraging the enormous scope of money related exchanges alongside regular payments using China’s central bank digital currency.
Risks Associated with CBDCs
The Bank of Canada‘s report recorded risks in multiple areas, including asset storage. Token holders can make an immense number of wallets in the digital asset world, achieved through spreading their funds in various portions across those wallets. It prompts more asset storage locations than would be plausible in traditional finance.
Risks also emerge from the platforms potentially providing solutions around CBDCs. Accordingly, possible explanations include caps on wallet holdings incorporated with the CBDC and parameters for the associated central bank’s involved media.
“If the Bank of Canada issues a digital currency to the central bank, it is likely to be token-based,” the report said, referring to the safe, albeit clumsy, use of a private key in the equation. “To guarantee that the CBDC is a sheltered and successful technique for payment, the bank must ponder how it will be collected and utilized, and the outer variables it will have.”
The report explains the advantages and disadvantages of personal portfolios and vaults versus the ability to store assets as exchanges centrally, mentions risks and other measures associated with a potential CBDC currency, as well as possible rules and guidelines for this asset class.
Europe also recently released the CBDC news as the European Central Bank showed interest in this asset type.