These risks could be mitigated, the paper notes, by making the CBDC non-interest-bearing, which would be less attractive as a substitute for commercial bank deposits, or by capping the amount of CBDC that a user could hold. This article covers continuing deliberations by the Federal Reserve about the risks, benefits and feasibility of a U.S. central bank digital currency. Furthermore, the Treasury is considering the risks and utility of lowering the $3,000 threshold.
When considering offering any new product, financial institutions should assess their risk appetite and risk management framework, and make sure to align those accordingly. A more conservative institution may face challenges when developing product sets serving VASPs. If an institution decides to expand into serving VASPs, then it likely will need to recalibrate its risk appetite and risk mitigation practices. One of the challenges of the rapid evolution and proliferation of VASPs and cryptocurrency is a lack of clarity in how institutions should handle them and the risks they can pose.
Although digital assets only began to be traded in 2009, the current worldwide market cap for digital currencies sits at around $1 trillion dollars, according to CoinMarketCap, and nearly $400 billion of that is Bitcoin alone. However, U.S. regulators have expressed concerns for the risk posed to the U.S. financial system by these privately issued stablecoins and have recommended that they be subject to comprehensive regulation. The paper observes that each of these types of money carries different amounts of risk. It describes commercial bank money as being quite safe, and nonbank money as less so, lacking the full suite of protections applicable to banks, such as bank supervision and deposit insurance. Central bank money is the safest form of money, carrying no credit or liquidity risk.
As of November 2024, the U.S. is still ironing out which agencies have specific jurisdiction and is working on reporting requirements. On one hand, this frees investors from being beholden to those institutions. You can also make duplicates of the wallet and put one in a safe deposit box, so you never lose your key. For investors who are seeking the thrill of a high-risk asset in their portfolio, there are other options available.
The biggest perceived risk of many digital currencies is price volatility. This is a risk for investors in the short run, and makes it difficult for a digital currency to function as a means of payment. For example, over the last three years, the price of Bitcoin has fluctuated from less than USD4,000 to more than USD19,000.
Moreover, the central system controlling the digital currency can learn about the deposits and how they kept the money. In this article we identified twelve potential risks, six risks that could affect specific digital currencies, and six system wide risks that have the potential to affect civil society and the future of an entire nation. While digital currency may be the way of the future, the potential risks should be understood so that they can be avoided, reduced, or carefully managed. Given the massive economies of scale involved in producing a digital currency, it is possible that a single player could dominate the entire global monetary system. Its digital currency would then play the role of global reserve digital currency, similar to the role currently played by the US dollar. This would most likely be the digital currency of a large country with significant productive capacity or proven gold reserves.
