Major economies are taking a somewhat cautious approach to CBDCs. There are immense and undeniable benefits to CBDCs. But there are also very distinct and foreseeable risks and possible unintended consequences — none of which preclude the launch of a CBDC, but require thoughtful planning and execution.

One of the biggest concerns about CBDCs is that they may destabilize the financial system if many stampede out of banks and into central bank money. If people believe that digital cash is safer than the physical cash in banks, many may rush to withdraw their funds from banks and transfer them to CBDCs before the cash runs out.

Before the Great Depression, people literally ran to the bank to claim their cash and hide it under their mattresses, which is why these panics are called bank runs (and why we have an institutional memory of grandma hiding cash in her mattress).

If many or most people transfer their cash from banks into CBDCs, banks will no longer have sufficient assets to loan. Bank loans power our economy by providing the funds for personal and business purchases and even daily activity like meeting payrolls.

There are several ways to mitigate the risk of a bank run towards CBDCs, and one is to make CBDCs more cash-like and less deposit-like. These mitigations get into issues of interest rates, reserve holdings, caps on holdings, and many other central bank policy issues that have wide-ranging economic impacts. The point is, these CBDC decisions have big consequences and we want our central banks to take a cautious, deliberative approach to them. We also know that no decision is perfect, and we must have an experimental and scientific approach which leans heavily on data and rapid feedback-response mechanisms.

Other risks involve tradeoffs between security and convenience, as pointed out in a report by the Bank of Canada. Consumers, as we have seen with Bitcoin and other private cryptocurrencies, can lose the private keys to their accounts containing in some cases hundreds of millions of dollars-worth of digital currency. Hackers may steal into e-wallets and other account providers through code vulnerabilities. And of course, we all can fall victim to fraud and other crimes. Central banks need to establish liability rules governing who bears responsibility for losses of CBDCs, similar to rules governing physical bank notes in our bank accounts.

We see examples of the security problems with Bitcoin and other cryptocurrencies. Examples of exchanges and account sites losing hundreds of millions of dollars or more of digital coins. Examples of users losing hundreds of millions of dollars of their cryptocurrencies by throwing out their hard drives. These are issues that the central banks must address.

And they will.

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Source: https://medium.datadriveninvestor.com/wheres-my-bitcoin-the-rise-of-cbdcs-d9ebaee463e9?source=rss——-8—————–cryptocurrency