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Bank Of Canada Highlights Flaws Of CBDC’s In A Note On ‘Security And Convenience’

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A staff analytical note by the Bank of Canada reveals risks involved in launching a national digital currency, or CBDC as it is widely known. The note lists “how [digital currency] balances are aggregated, their transactional use and the competition between suppliers of aggregation solutions” as the main issue facing a CBDC.

Bank of Canada suggests that the government mitigate some of these issues by regulating the exchanges that hold the CBDCs for the public and formulate laws governing what transpires in case of loss of the tokens.

Over the last few months, there has been speculation that the Bank of Canada is looking to launch a national central bank digital currency (CBDC). While the bank dismissed the claims earlier this year, the supervisory note sent out this Tuesday shows BoC’S interest in a CBDC.

The note explains three main issues that CBDC’s could face, including the anonymity aspect present in digital currencies, security management of the tokens, and competition between custodians of the CBDC’s.

While seasoned cryptocurrency users will be cautious of leaving their private keys in the hands of third-party institutions, most users will not have the right ability to store their own tokens. Security management of these keys will be left to third-party institutions – a risk in itself.

This could lead to externalities such as an increased number of hacks on these exchanges. The statement reads,

“Because hackers cannot identify the sizes of individual accounts, an account provider with larger total balances will provide more incentives to hackers, leading to additional risk for all account holders using that account provider.”

While losing access to your self-custodial e-wallet could lock you out of all your funds with no way to recover them. However, with an account provider such as exchanging your keys, you can recover your password, limiting the loss. The Bank of Canada suggests laws be set in place to “limit the losses account providers can pass on to users.” According to the note, central banks could mitigate some of the security issues by

“designing the CBDC to limit balances, transfers, and transactions, modify liability rules, and direct the security protocols chosen by the suppliers of aggregation solutions.”

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