Safe and Secure Systems
The Digital Dollar Project’s Risk Working Group was established to begin evaluating these risks, opportunities, and proposed mitigants. This year the working group released the first in a series of risk- and privacy- focused working papers, “Secure Adoption of a Digital Dollar – Operational and Compliance Risks for the U.S. Banking Sector,” a working group paper offering a unified risk framework outlining possible impacts on the private sector, specific to federal and state-chartered banks, in consideration of a potential U.S. central bank digital currency (CBDC).
The report highlights the need for the U.S. to strike a balance between the benefits of a digital dollar and the risks it might entail. Effective mitigation of these risks requires proactive engagement by the private sector and informed policy choices by the U.S. government. The policy recommendations and findings of the paper are non-exhaustive and represent initial effort toward understanding the potential operational impacts of a U.S. digital dollar.
The working paper discusses the risk framework and accompanying policy considerations under the following twelve risk-related themes:
Unclear traceability obligations for financial institutions and potential obfuscation of token provenance through mixers and tumblers
Potential inter-organizational reliance on the customer onboarding and verification processes of other financial institutions
Potential for counterfeiting existing tokens or creating fake tokens with new identifiers
Potential difficulty complying with federal recordkeeping rules due to the introduction of token-based systems and a multitude of custodial arrangements
Currency and settlement risk related to the convertibility of digital dollars against foreign CBDCs, privately issued stablecoins, and traditional deposits
Potential inability to recover erroneous transactions and an unclear relationship between existing regulations such as Reg E and card chargebacks to CBDCs
Lack of adoption driven by a lack of customer familiarity with the nature of digital assets, such as settlement finality and private key management
Risk of the mismanagement of private keys in both custodial, by banks, and self-custodial, by customers, arrangements
Risk of unauthorized and fraudulent access of customer wallets by bad actors resulting in a loss of funds
Risk of network reliability issues or technical compromises, such as encryption errors, malware, DDoS attacks, and hardware breaches
Risk of offline payments avoiding anti-money laundering and counter-terrorist financing measures
An increased reliance on third-party services, infrastructure, and applications with a possible lack of direct monitoring or accountability
Risk Working Group /// June 27, 2023
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