CBDC Security and Convenience: a Major Challenge

Digital currency covers more than Central Bank Digital Currencies (CBDCs), it extends to all the digital solutions from Bitcoin to Diem. Digital currencies store balances in anonymous electronic addresses.

The Bank of Canada Staff Working Paper 2021-6, ‘Eggs in One Basket: Security and Convenience of Digital Currencies’, investigates the trade-off individuals and companies make between safety and convenience when aggregating balances in addresses, digital wallets and banks. The conclusions have implications for the design of CBCDs.

Individuals face the risk of theft of large accounts and the cost of safeguarding lots of small accounts and their passwords.

Banks, wallet providers and payment service providers have different objectives and face different trade-offs, and so their welfare affects are different in line with their structures and interdependencies, particularly around password aggregation programmes.

When it comes to criminals, hackers focus on banks and exchanges while thieves aim to steal private keys and account passwords from customers. The extent of the losses incurred is based on the technological choices of banks and the efforts of the customers to stay safe.

Research shows that if customers and companies have shared liability, in general customers take too little care. They tend towards aggregation and therefore use wallets, re-use addresses and rely on password aggregation programmes.

This has important implications for CBDCs. The paper concludes that the liability for CBDCs needs to be as for a banknote so that people are careful. It goes on to say that enforcement of this could be difficult.

In addition, if any individual or firm can hold digital tokens, then customers may well use aggregated balances in accounts held at intermediaries, eg. exchanges. As a result, deposits may be held in unregulated entities which could be out of reach of the domestic authorities.

The conclusion is that the design of the CBDC needs to be for it to be universally accessible but not able to be held with some firms.