Government Interest in Digital Currencies
The main reason why central banks and other financial regulators have a problem with cryptocurrencies is their anonymity, making these assets easy to manipulate and be used for money laundering and terrorism financing. This created a gap for a central bank digital currency (CBDC) that governments could monitor and control.
While some parties have advocated for CBDCs, others have come out to refute that CBDCs will be good for everyone. Some of the reasons why CBDC development has been opposed include:
Having a CBDC will necessitate the centralization of the entire financial sector under one blockchain. This increases the vulnerability of a country to cyber-attacks that could paralyze the economy.
For example, the US has been a victim of major cyber-attacks such as the colonial gas pipeline attack and the Solar Winds attack. These two incidents had a significant impact on the energy sector. If threat actors attack a central bank’s private blockchain that controls CBDC transactions, the impact would be devastating.
Issue with Cross-Border Payments
The current financial system works because of institutions such as forex exchanges and stipulated exchange rates that are accepted globally. However, with the introduction of CBDCs, cross-border payments will not be as easy as they are.
The World Bank and the IMF recently compiled a report promoting CBDC adoption. However, the main issue in the report was how cross-border payment would be an issue because of exchange rate restrictions and monetary policy independence.
However, the two institutions proposed developing a “Hippocratic Oath of CBDC design” that all central banks will follow to facilitate cross-border exchanges.
Technology Risk and Obsolescence
Blockchain is a new technology, and no one has so far been able to maximize its potential. New blockchain technologies that are more scalable are sprouting each year. For central banks to adopt CBDCs, they need up-to-date technology, which will be tested.
Testing these technologies and experimenting with them until a solid one is found will burden the taxpayer. The only way that this can be solved is through active participation from the public sector. However, late CBDC developers will inevitably enjoy the best out of blockchain.
With these challenges presented by CBDCs, it is prudent that central banks do thorough due diligence and engage the public to increase their chances of success. The same way that the financial systems changed from barter trade to mediums of exchange is the same way these systems will transition to CBDCs.