Digital currency has vulnerabilities

There are important factors such as anonymity to consider for central banks that wish to develop a digital currency, because it could open doors to illegal activities. 

This is according to the International Monetary Fund (I.M.F.) Deputy Division Chief (Monetary and Capital Markets Department), Tommaso Mancini Griffoli, who told the Samoa Observer that it all comes down to how the central bank digital currency is designed. 

“A central bank will want to maintain control over the design, it will not want to issue the digital currency that is entirely anonymous, that wouldn’t facilitate illegal transactions, money laundering, corruption, terrorist financing, even more so than cash,” Mr. Griffoli said. 

“Cash at least is costly to hold and transfer because it’s risky, it takes room, it takes space, and the digital currency doesn’t. So central banks probably wouldn’t want to do that.”

He said then there is also the extreme factor of no anonymity at all, which is possible, but central banks would have to think about consequences of doing so.  

“If there is no official means to undertake transactions that are anonymous, where will those who want to pursue anonymity for legitimate reasons go, currently they can use cash.

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“And there are legitimate reasons to desire anonymity, the sense of privacy, concern with data being hacked, concerns with customer profiling. So you would want to satisfy those who have legitimate reasons for anonymity and not the criminals. 

“Maybe one way to do so is to have a digital currency where only the State can follow the transactions and link those transactions to the identity, but not private parties. That’s a very interesting prospect of thinking creatively about design, of introducing something, a form of money that improves the tradeoff between anonymity and financial integrity, relative to the current offering attached.”

Mr. Griffoli said there are central banks in China, Brazil, Sweden, Canada and Uruguay have considered the idea of issuing official digital currency by investigating the possibility of doing so. 

“Some have run pilots, Uruguay has, some are about to start pilots like Sweden, and the reasons they give range from facilitating financial inclusion to decreasing cost of cash, managing circulating cash to countering monopoly power of private payment providers,” he said.

“There’s a concern that with the disappearance of cash, payments will be increasingly concentrated in the hands of few private companies that might impose monopoly power, and it’s not just a consumer protection issue, it’s also a security issue because these private companies may invest less in the payment of the security systems, they may not fully measure the cost to society of a major disruption to the payments systems, and even if they did to an extent that they are not entirely liable for it, they would not necessarily try to avoid it as much as State might. 

“These are all hypotheticals, it’s not that all private companies will behave like this, but that is the tendency and that is why central banks are concerned.”

Mr. Griffoli said these issues can be addressed with proper regulations, but regulations have limits especially when these companies are large, often foreign and revolve quickly.   

“So to the extent that regulations are limited and its impact, central banks may want to step in and provide an alternative, cheap and efficient alternative means of payment, or at least have some hand in the system. 

There are others who are not interested; we have heard statements from the Federal Reserve of the United States for instance, saying that for now they don’t really see the advantages. I think it’s an area that is very ripe for research and analysis.”

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