Central Bank Digital Currency: Assessing the Risks and Dispelling the Myths (2024)

FAQs

What are the risks of central bank digital currency? ›

A UK House of Lords economic affairs committee report concluded that a CBDC poses two main security risks: first, that individual accounts could be compromised through cybersecurity weaknesses; and, second, that a centralised CBDC ledger could be a target for attack from “hostile state and non-state actors”.

But a CBDC is always a liability of the Federal Reserve, America's central bank (that's where the CB comes from). That means the Fed has the responsibility to do with it what ever is required. In other words, whenever you use a dollar of CBDC, there's a direct connection between you and the Fed. Not a good idea.

U.S. President Joe Biden ordered officials to look into a digital dollar in 2022 but it has become a divisive political issue with Biden's Republican rival in this year's U.S. election race, Donald Trump, vowing not to allow it.

The looming specter of CBDCs isn't just about digital innovation; it's about surveillance, loss of privacy, and an iron grip on financial transactions. With 130 countries, representing 98% of the global GDP, sniffing around CBDCs and a projected global value hitting $213 billion by 2030, the stakes couldn't be higher.

Will a U.S. CBDC replace cash or paper currency? The Federal Reserve is committed to ensuring the continued safety and availability of cash and is considering a CBDC as a means to expand safe payment options, not to reduce or replace them.

Cryptocurrencies might not have the risks that come with using central intermediaries, but that doesn't mean they're completely free from security issues. As a crypto owner, you could lose the private key that lets you access your coins—and with it, all your holdings.

A U.S. CBDC could affect the financial structure of the U.S. and alter the duties and responsibilities of the private sector and the central bank. The safety and stability of the financial system could be compromised during the conversion process from another form of money to a CBDC.

The impact of a CBDC is much lower after taking into account that households enjoy the complementarity between deposits and other financial products within the same bank, which gives banks a competitive advantage over the CBDC.

In each case where data exist to assess the situation, the public demand for CBDCs has been extremely low. Experience suggests that CBDCs do not offer tangible benefits which existing alternatives cannot already deliver. One might speculate that future CBDCs will fail for similar reasons.

More than half of all bank branches no longer handle cash. Seven out of ten consumers say they can manage without cash, while half of all merchants expect to stop accepting cash by 2025 (Arvidsson, Hedman, and Segendorf 2018).

What happens if the US dollar goes digital? ›

The concern is that financial privacy will be lost with a digital dollar. The government would be able to watch how people spend their money, close their bank accounts, or even just take the money. In other words, the worry is that a digital dollar would be one more way for the government to control us and our money.

If it's been a long time since you pulled out actual dollars and coins to pay for something — here's a conversation for you. It might seem like cash is slowly becoming obsolete. But, Brett Scott says it's a false narrative that we're all pining for a cashless society.

A CBDC is virtual money backed and issued by a central bank. As money and payments have become more digital, the world's central banks have realized that they need to provide a public option—or let the future of money pass them by. Hover over a country to see its status. Click on a country to learn more.

Cons of CBDC

One of the disadvantages of CBDCs is the potential for privacy risks. Digital currencies are vulnerable to cyberattacks, which can result in the loss of funds or sensitive information. The impact of CBDCs on privacy is vast, as they can be used to track individuals' financial activities.

ABA President and CEO Rob Nichols said, “ABA has long believed that a CBDC would pose significant risks to our financial system that would outweigh any potential benefits, including undermining the critical role that banks play in extending credit and powering the economy.

Risk of bank runs and system instability: If there is a sudden surge in demand for CBDCs, it could cause a bank run and potentially destabilize the financial system.

The ABA estimates that even with a CBDC framework that caps deposit accounts at $5,000 per customer, or “end user”, would result in $720 billion in deposits leaving the banking system. That would severely impact banks as drivers of the economy.

In the context of developing nations, several concerns arise, namely, digital illiteracy, heightened vulnerability to cyber-attacks, data breaches, and the evolving role of financial institutions within a fully established Central Bank Digital Currency (CBDC) system, as stated by Ozili (2022b).