Canada mentions striking ‚Bitcoin-like‘ risk for central bank money

„Not your keys, not your coins“. It is an important term from the world of Crypto Cash but it also creates a legal challenge for central banks. After all, how should they deal with this when creating their own digital currency?
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Bank of Canada

The Bank of Canada yesterday issued a new note in which it addresses the risks of a Central Bank Digital Currency (CBDC). It took as a common thread a hypothetical token that would act as central bank money.

The article was written by Charles Khan, professor at the University of Illinois and Francisco Rivadeneyra, Bank of Canada employee. They claim that:

„CBDC’s security will (…) depend on the competition between different solution providers and the interaction of third parties with the protocol.

The brief note assumes a digital currency in which third parties could lose private keys. This is a remarkable fact, because it is at odds with the way banks work today.

The central bank could mitigate risks by limiting the transfer of balances with the design of the CBDC. They could also impose liability rules on providers for protections related to the use of the protocols.

External parties

The authors of the report assume that many of the users of a CBDC (most of whom know little about digital currency) will turn to external services to manage the private keys of their crypt currency.

It is remarkable that this hypothetical example gives so much space to third parties.

On the other hand, it is not a strange thought. At a CBDC, the central bank has its hand on the money tap, while the traditional commercial parties and payment providers have to take care of the applications and helpdesks.

In China, for example, there is also a single digital central currency, while several banks are all developing their own app. Images from the China Construction Bank were already leaking out. Their app is different from that of, for example, Agricultural Bank of China (ABC), while they both use the same protocol.

In such cases this can cause a liability problem, the Canadians write. People who use a wallet service, but suddenly run into problems because it loses passwords, are then inherent in losing. But does the responsibility lie with the wallet service or with the central bank?

They also mention the problem of regulated exchanges. Because it is inevitable that digital central bank money will have to deal with exchanges. They come in handy because they operate almost like a bank, but unlike banks, exchanges have no insurance on deposits.

Since it concerns money issued by the Canadian central bank, the government has to decide how to regulate all the intermediaries.
Liability

According to the authors, the central bank should consider limiting transfers as much as possible and impose clear protocols regarding liability. Because somewhere you run into a problem.

On the one hand, a CBDC should be universally accessible and everyone should be able to receive and use it, but on the other hand, this should only be done via platforms of approved intermediaries.

The Bank of Canada has been developing its own digital currency since February. They did note that they will only switch to a CBDC if physical cash disappears or if companies increasingly use cryptocurrency to make payments.
Bitcoin

The ’not your keys, not your coins‘ aspect is an ideology well known in Bitcoin. But this is one of the few similarities between Bitcoin and a CBDC. Although digital central bank money sounds very innovative, this concept certainly has its hooks and eyes:

A CBDC offers no privacy over your payments;

You need approval from a bank to use the CBDC. It is most likely not permissionless (although it may not seem so in this hypothesis);
The digital currency does not work smoothly on an international level;
In terms of scarcity, a digital euro is the same as the euro we have now. Inflation is still the order of the day.

One advantage is that you remove the risk of commercial banks. You could see it as a public savings bank, which is housed at the central bank. You can keep money there without risks and without interest rates.