BIS Unveiled Digital Currency Risks
The Bank for International Settlements (BIS), recognized as the central bankers’ hub, has meticulously outlined the substantial risks entwined with the adoption of digital versions of national currencies. This comprehensive report stands as the most exhaustive assessment to date, delving into diverse challenges associated with central bank digital currencies (CBDCs).
A central concern revolves around the vulnerability of CBDCs to cyber threats, encompassing digital bank heists and other cyber incursions. The BIS underscores that these risks carry broad implications, potentially reshaping the operational dynamics of central banks. The report underscores the urgency of addressing these challenges as evidenced by the rapid increase in the number of global banks actively developing CBDCs, reaching 130 by mid-2023.
Beyond Cybersecurity: Technological and Environmental Frontiers
The challenges extend beyond cyber threats to encompass issues such as the technological capabilities required for providing digital cash and the environmental impact of the substantial energy needs associated with CBDCs. Additionally, concerns are raised about the potential dangers posed by outsourcing work.
A dire scenario presented in the report envisions a cyber breach resulting in the theft of funds from a central bank’s digital vault, highlighting the critical importance of cybersecurity in CBDC implementation. The report notes that central banks are navigating uncharted waters, necessitating modifications to their business models and risk profiles with the issuance of CBDCs.
The BIS report emphasizes the distinctive cyber risks faced by CBDCs utilizing novel technologies like distributed ledger technology (DLT). It underscores the absence of a widely accepted cybersecurity framework for such technologies, adding complexity to the risk landscape.
Furthermore, the report points out the dearth of substantial real-world data on key threats to CBDCs, irrespective of the technology employed. This knowledge gap underscores the need for a cautious approach and comprehensive risk management strategies as central banks globally explore and implement CBDCs. Notably, countries like the Bahamas and Nigeria have already launched CBDCs, with China trialing a prototype digital yuan and the European Central Bank embarking on two years of advanced-stage exploratory work.
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