The Bank of International Settlements (BIS) has said that token-based central bank digital currencies (CBDCs) could enhance money laundering and terrorist financing because of their anonymity.
It added that for all the confidentiality and availability an offline CBDC offers, it could increase the possibility of digital counterfeiting and double-spending.
- In its CBDC operational lifecycle and risk management framework, the BIS noted that while token-based CBDCs could address privacy concerns, their strength could be their Achilles’ heel.
- Token-based CBDCs, unlike account-based CBDCs, are not stored in central bank accounts. Instead, they are hosted in wallets and secured with private keys, much like privately issued cryptocurrencies.
- As with the eCedi, this type of CBDC can be stored on hardware such as cards, wristbands and feature phones.
- They are more like physical cash in that they are minted by a central bank and distributed to the consumers who use them in a fully peer-to-peer manner, handed from person to person and used anonymously.
- According to the central bank of central banks, the privacy-preserving feature of these digital currencies could see them become easy tools for illicit transactions.
- It added that offline CBDCs ensure financial inclusion and availability but pose an increased risk of counterfeit currencies and double-spending.
- The BIS said:
“Offline transactions could ensure CBDC availability by making payments possible even if there is no connection to the internet. However, it also increases the possibility of digital counterfeiting and double spending.”
- It added:
“For token-based CBDC, the access mechanism is via private/public keys, and while this allows for anonymity, it also implies risks related to the loss or theft of keys. Further, it could also enhance money laundering and terrorist financing risks.”
Why this matters
- Ghana’s CBDC, the eCedi, is a token-based CBDC by design. In the digital currency pilot, the Bank of Ghana tested an offline version, an exercise the bank described as successful.
- The BoG’s head of fintech and innovation, Kwame Oppong, said the bank desired to make its CBDC as inclusive as possible. As a result, it was created to work beyond the last mile of cell connectivity and internet connection.
- For the pilot of the offline version of the eCedi, the bank distributed hardware such as smart cards and wristbands primarily focused on merchant payments.
- The eCedi tokens are hosted on these hardware objects, and consumers only need to visit merchants with devices capable of interacting with them.
- Oppong, speaking at Ghana’s Africa Money and Defi summit, said that the eCedi is designed to balance privacy with a need for law enforcement and keeping with anti-money laundering (AML) guidelines.
- He said:
“We are doing the token-based CBDC so you don’t have a central bank account from [the BoG] directly … We ensured that we balanced privacy and anonymity with the need for law enforcement, and we have to protect against AML concerns.”
- He said the eCedi’s framework is crafted to align with Ghana’s existing financial and monetary system.
- It is unclear what exact measures the eCedi’s designers have incorporated into the CBDC to address the frailties of a token-based CBDC.