How secure are CBDCs? From security to policy, here are the risks associated with CBDC issuance

Central Bank Digital Currencies have taken the world by storm; the landscape of cryptocurrencies has evolved to an extent where central banks of various countries are now analyzing and researching ways to explore digital innovation.

So much so that the WEF published, what it’s called ‘The Central Bank Digital Currency Policy-Maker Toolkit‘, to assist central banks design and launch a digital currency.

Cryptocurrencies like Ethereum, XRP, and Bitcoin share different raison d’etre. Much like these, WEF’s toolkit also has proposed different kinds of CBDCs. One of them is setting up a retail CBDC – one that would “constitute the first digitized form of central bank money and liability the general public could own”.

While retail CBDC has been touted as the ‘next payment frontier’, there are certain risks associated with it. Addressing the same, WEF’s document emphasized on network failures, operational risks among other things. The document stated that it must be protected from physical disruption of systems or infrastructure.

“For all forms of CBDC, as payments are integral to the economy, the central bank and policy‑makers must seek to enable the greatest degree of system availability possible, implementing safeguards and contingency plans that reduce risks to system interruption. CBDC system availability and continuous 24/7 access should be designed to consider people living beyond the reach of the internet or who do not have regular internet access; this is essential for refugees and people living in remote settings.”

Additionally, WEF also stated that central banks must create precautions and robust cyber‑resilient policies to reduce risks from cyberattacks. In terms of financial inclusion, the new CBDC implementation should focus on the massive unbanked population. While creating new opportunities, old efficiencies should not pose a hindrance in terms of inclusion for vulnerable populations.

It further stated that a CBDC should be cost-effective for users to support the idea of financial inclusion. WEF’s document read,

“Costs related to telecommunications and mobile phones involved in CBDC must be transparent and low to support inclusion. CBDC custody should not rest fully within the mobile phone, so that a customer who loses his or her phone does not lose his or her CBDC holdings.”