Central Bank Digital Currencies: A Solution in Search of a Problem?

Treliant Takeaway:

A CBDC would be a form of central bank electronic money that could be used to make everyday payments – in essence a ‘digital banknote.’ The UK Government has not yet decided whether to introduce a CBDC. At Treliant, our consultant team has deep experience helping our global banking clients prepare for and manage the complexity of regulatory change and digital transformation.

 Highlights:

In a recent report published by the UK Economic Affairs Committee entitled, ‘Central bank digital currencies: a solution in search of a problem?’ it concludes there is no convincing case for why the UK needs a CBDC. The committee found that while a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.

Key Takeaways:

There are two main security risks posed by a CBDC:

  1. Individual accounts could be compromised through weaknesses in cyber security.
  2. The centralized CBDC ledger, which would be a critical piece of national infrastructure, could be a target of attack by hostile state and non-state actors. While no design can guarantee absolute security, any CBDC system will need to be adaptable to emerging security threats and technological change, including fast-developing quantum computing.

There may be some benefits from the introduction of a ‘wholesale’ CBDC for use between financial institutions. While the wholesale operations of the monetary system are already efficient, a CBDC may help to further enhance efficiency in securities trading and settlement, but further exploration and experimentation are necessary. The committee recommends that the Joint Taskforce consult on the use case for a wholesale CBDC alongside its 2022 retail CBDC consultation.

The case for a digital pound may change in the future and therefore the Government and Bank of England could derive the most benefit by taking action to shape global standards which suit the UK’s values and interests, specifically privacy, security, and operational standards.

 

Author

Kishore Ramakrishnan

Kishore Ramakrishnan is Delivery Partner and Regulatory Change Practice Lead (Europe) at Treliant. He has over 20 years of global industry and consulting experience across the banking, capital markets, asset, and wealth management businesses. Kishore is a trusted advisor and respected thought leader in the risk, regulation, and compliance domains…