BIS Report Stresses Need for Enhanced Security for Central Bank Digital Currencies
Summary:
The Bank for International Settlements (BIS) has highlighted the need for stringent security measures for any Central Bank Digital Currency (CBDC) during the course of its issuance in a report published on November 29th. It recommended putting a comprehensive risk management system in place at the outset and incorporating a secure system in the design of a CBDC. Risks vary by country and evolve over time, necessitating ongoing management. The study, while identifying eight risks, caters to 37 potential 'cybersecurity threat events.' It also drew attention to past risk management failures in countries such as China and positive relief efforts seen with the use of CBDCs, as in the case of the Eastern Caribbean Central Bank's DCash pilot project.
The Bank for International Settlements (BIS) advised central banks on November 29th, warning them that issuing a central bank digital currency (CBDC) demands high security measures. BIS emphasized in a report that a comprehensive risk-management system should be operational from the start of the project, and a secure infrastructure should be built into a CBDC. The study highlighted that the risk profiles of CBDCs are likely to be different across nations due to the varied economic conditions, objectives, and evolving nature of risks that need ongoing risk management. The study further segmented these risks into specific factors, suggesting their scaling with the overall sophistication of the CBDC.
The study stated, “A crucial risk factor is potential gaps in the internal competencies and abilities of central banks. While many CBDC-related tasks could conceivably be delegated to third-party vendors, doing so necessitates the ability to select and supervise these vendors correctly. Several operative risks for CBDC arise from human errors, insufficient definitions or incomplete planning.” The study identified vulnerabilities in cyber-security against countries, hackers, users, vendors, or insiders, which could lead to 37 distinct "cyber security threat events", resulting from eight identified risks. Central banks may not be familiar with distributed ledger technology, leading to insufficient scrutiny or over-reliance on external parties. The study propose employing a comprehensive risk management system to reduce these CBDC-related risks.
Despite the limited real-world implementation of CBDCs so far, there have been notable instances of risk management mishaps. China was caught unprepared with data storage needs after the launch of its digital yuan initiative. The Eastern Caribbean Central Bank's DCash, an active CBDC, experienced a two-month disruption early in 2022 owing to a certificate expiration in the software. The report also highlighted the importance of readiness amidst the "constantly changing" security challenges facing CBDCs.
However, the report also pointed out the positive aspects of CBDCs, noting that the DCash pilot project was effectively extended the previous year to provide relief in Saint Vincent and the Grenadines after a volcanic eruption, reflecting the currency's increased resilience.
Published At
11/29/2023 6:30:00 PM
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