CBDC risks outweigh rewards, experts say

A centralized and government-controlled single point of financial information raises concerns not only about security, but also with privacy

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Central bank digital currencies could potentially allow for more efficient payments down the line.

But a new report from RBC Wealth Management says the risks to privacy and security outweigh any reward. 

As more governments begin exploring CBDCs — the Bank for International Settlements says 93% of central banks are pursuing such efforts — analysts and economists have raised questions about the costs of some of these theoretical benefits. 

The US, in particular, needs to be especially cautious when developing a CBDC, given the dollar’s status as the global reserve currency, according to RBC analyst Atul Bhatia.

“We think having a single point of failure for dollar payments in a world that uses the greenback for all manner of trade is, in a nutshell, a terrible idea,” Bhatia wrote in a report published this week. “In one move, we think the US would create an unparalleled target for hackers and thieves, not to mention terrorists or geopolitical rivals.” 

Bhatia added that a centralized, government-controlled point of financial information raises privacy concerns as well as security ones.

“In the US, federal officials already have broad access to individual financial data via subpoena powers, but combining all financial information in one spot is a step-change higher in potential informational abuses,” Bhatia said. 

CBDC proponents argue that criticisms over theoretical CBDC models and structures are unfounded because the project is, in the US at least, just that: theoretical. 

“A [US] CBDC does not exist yet, so how are you saying that [the surveillance is invasive],” Mark Young, chief risk officer and data adviser at ConsenSys, said at the Milken Institute Future of Digital Assets Symposium earlier this year. “The onus is on us to design what we want and to design something that demonstrates democracy.” 

As other countries push ahead with their pilot programs and launches, such as the Bahamas and China, American regulators possess an opportunity to learn from other efforts and create better models. 

Read more: Russia to commence digital ruble pilot testing with 13 banks

“I think because of that, as we’re seeing each country develop from a technical standpoint, each of their CBDCs, understanding how to build privacy into the different layers, or not, is really important because I think that is what will give them a competitive edge,” Jennifer Lassiter, executive director of the Digital Dollar Project, said at the Milken event. 

Plus, certain tech innovations could help enhance privacy, the Digital Dollar Project noted in a June 2023 report. Researchers suggest that the Federal Reserve and other agencies could use mixing services or tumblers to create a more private experience. 

“These advantages should be weighed against potential compliance and law enforcement trade-offs, such as the ability of tumblers and mixers to prevent the network from preserving funds provenance when necessary for critical bank practices like sanctions investigations,” the Digital Dollar Project report added. 

In terms of what to expect in the US, Bhatia predicts the Fed will opt for an “incremental” approach, noting that the central bank will prioritize limiting risks to the payments infrastructure.


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