The central bank of Canada has released a report to discuss the risks attached to central bank digital currency. It also poses a possible involvement of a third party, such as an exchange.
The research paper published by The Bank of Canada proposes certain security risks linked with the issuance of a CBDC. First, it is uncertain that “how balances are aggregated and stored.” Second, it still unknown, how transactions will be processed via a state digital currency. Third, various entities, such as banks, e-wallets, and cryptocurrency exchanges would compete with each other for users.
“These risks arise from how balances are aggregated and stored, how CBDC is used for transactions, and how various solutions such as e-wallets, crypto exchanges and banks compete to attract users,” the report added.
Due to the anonymity of CBDC, it can pose a great threat of money laundering as users can rapidly move “capital on anonymous balances.”
Holders of digital currency can lose their private keys as they store their holdings in anonymous addresses. The hacking and theft attacks can occur in case of “code vulnerabilities in e-wallets.”
Regulated cryptocurrency exchanges can play an effective role as a third party. But the governments can feel hesitation to deal with third parties in the whole process.
The central bank of Canada is not new in the cryptocurrency sector. It has begun its operations on the development of CBDC in February 2020. However, it stated it would only launch digital currency if cash’s exposure to the public becomes less.
Central Banks’ Increasing Interest over CBDC
Canada is not the first country to announce the development of state digital currency. According to a report, more than 70 central banks are working on CBDC in one way or the other. The central bank of Estonia is the latest one to launch a research program over digital currency. However, two years back the same bank stated it would not need any digital currency.
But China has a leading position in this development as the Chinese central bank launched the extensive work over digital yuan many years back.