Risks and benefits of digital transformation of central banks

Kevin Brain, CEO of Kroll, discusses the risks and benefits of CBDC. The project must be thought out to the smallest detail in order to avoid a future disaster.

In cryptocurrencies lays the foundations of digital currencies, centralized and decentralized. Central banks around the world have recognized the value of blockchain and are devoting resources to assess the viability of a digital alternative to fiat currencies as we know them today. However, this transformation is not easy and involves many risks.

Kevin Brain, CEO of Kroll, discusses the risks and benefits of CBDC

Kevin Brain, director of research and operations at Kroll — a provider of digital products and services related to valuation, governance, risk and transparency — weighs the pros and cons in an attempt to assess whether central bank digital currencies (CBDCs) are worth it or not. He explains how CBDCs are being developed and how, in the current pandemic, CBDCs have a clear path to compete with new currencies today.

Crypto has been on everyone’s mind, including many investors and technology buffs, for at least a decade, but today it looks like another group has fallen in love with digital currencies.

More and more central banks are considering setting up CBDCs if they haven’t already taken the practical steps to implement them. This is the case of Banque de France, which has been experimenting with the introduction of a digital currency for a year now. CBDCs can drive innovation in the markets and maintain central bank control through distributed ledger technologies (DLT).

Similarly, China has been testing a digital version of its yuan since April 2020. 140 million citizens have already had the opportunity to try it. This currency should appear first in a large economy. Thus, the future of payments seems to be looming over digital. Whether this digital future will go through national and international central banks remains to be determined.

Central banks have a number of advantages. Financial affordability is likely to have the biggest impact. CBDCs may also allow unbanked individuals to access payment methods and savings services. Instead of relying on third parties, banks and other digital currency platforms, a central bank could distribute funds directly to citizens. And for developing countries, distributing digital financial assistance directly to citizens can make a big difference.

From a security point of view, CBDCs will make money laundering much more difficult and will make it easier to identify people. Each user of the currency would then have a digital transaction profile through which the central bank and regulators could track any anomalies and ultimately succeed in reducing illicit activities and terrorism and their financing.

The project must be thought out to the smallest detail in order to avoid a future disaster.

At the same time, the first tests revealed great difficulties with the introduction of a digital version of the state currency. Of the nearly 80 countries conducting CBDC research, none have yet developed a practical technology framework. The Bank of England is still debating whether to use the distributed ledgers used by crypto assets or develop some kind of centralized technology, which shows how new this all is for the banking industry.

Cyber ​​security, both for individuals and countries, is a fundamental aspect among those who oppose the creation of a CBDC. For the average user, data theft through social engineering or any kind of malware can have dire consequences. The technological infrastructure of centralized currencies can also become a target for terrorists. If CBDC omnipresence takes hold, the slightest threat to the structure surrounding the CBDC of a large economy could be devastating.

The use of cash has fallen sharply – in the United Kingdom since 2010, with a 35% loss in 2020 compared to 2019 – a direct consequence of the fact that coins and other banknotes are the main carriers of infection with the Covid-19 virus. Despite this, the Federal Reserve and the Bank of England are showing enthusiasm for CBDC executives. The CBDC must be strictly regulated to prevent any manipulation and be based on a very robust technological structure. Any rush to digitize a country’s main currency could end up having the opposite effect on businesses and people.