Bank of Canada calls central bank digital currencies risky, especially storage

Is risk in the eye of the beholder?

Canada's central bank, the Bank of Canada, recently put out a report on the risks and benefits of a central bank digital currency. 

"An anonymous token-based central bank digital currency (CBDC) would pose particular security risks," the Bank of Canada wrote in its Oct. 5 report. "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."

Over the past year or so, discussions have picked up and various governments have begun digitizing their currencies in the form of a CBDC. China has made a number of headlines for its digital yuan CBDC. 

The Bank of Canada's report listed risks in multiple areas, including asset storage. In the digital asset world, tokenholders can make a huge number of wallets, spreading their funds in different allotments across those wallets. This leads to more asset storage locations than would be plausible in traditional finance.

Risks also arise from the platforms potentially providing solutions around CBDCs. In response, possible solutions include caps on wallet holdings built into the CBDC, as well as parameters for involved platforms set by the associated central bank.

"If the Bank of Canada were to issue a CBDC, it would likely be token-based," the report said, noting the presence of secure, albeit clunky, private-key use in the equation. "To ensure that CBDC is a safe and efficient means of payment, the Bank needs to carefully consider how CBDC will be aggregated and used, and what externalities will arise from it."

The report explained the pros and cons of personal wallets and storage versus centralized asset storage opportunities, such as exchanges, while also mentioning other risks and measures associated with a potential CBDC, as well as possible rules and guidelines around such an asset class.  

Europe also recently headlined CBDC news as the European Central Bank expressed interest in the asset type.