“Not your keys, not your crypto.”
That is the rallying cry for the security-minded nowadays. It also creates a legal and logistical encounter with generating a central bank digital currency.
That is the thread that runs through a new staff analytical note issued by the Bank of Canada today, further examining the security risks for the hypothetical token-based CBDC.
The short, methodical staff note, which didn’t necessarily reflect the Bank of Canada’s official stance, starts with the obvious: Digital currency users can eventually lose their private keys and, thus, their cryptocurrency holdings. It stands somewhat in opposition to the banks. If someone gets locked out of the online Bank of America account, it can typically call and verify the owner to get access back.
It is assumed that for this reason, a lot of CBDC users will turn to outside services to manage the cryptocurrency keys.
At some point, the liability issues can get tricky. Holders can use a wallet service, but when that service has failed, or the user loses the password, they are on the hook for losses. The regulated exchanges are appropriate because they operate more like banks; there’s an involved third party. However, unlike the banks, exchanges don’t typically have deposit insurance.
This will be money issued by the Canadian government, and the government is needed to determine how to regulate the intermediaries.
However, the authors don’t necessarily think that the account providers will be negligent or fly the coop in case of theft; they do also raise the possibility of regulations that “limit the losses account providers can pass on to users.”
Finally, the authors have argued that the central bank shall consider “limiting balances or transfers, modifying liability rules or imposing security protocols on storage providers.” One idea that was teasingly posed is for a “CBDC that is universally accessible but that can be stored only at approved intermediaries.”
The Bank of Canada has developed a central bank digital currency in February. However, it has been said that it will only turn into a CBDC if physical cash was severely reduced or when companies have increasingly turned to cryptocurrency to handle the payments.