The role of CBDCs continues to be a hot topic for discussion within the payments space, and SEON CEO, Tamas Kadar, provided his insight on whether there is too much emphasis placed on the tech.

Earlier this year, the Treasury announced it will decide on a central bank digital currency for the UK by 2025. Despite still being some years away, the possibility of a ‘Digital Pound’ is already dividing opinion. For some, the cryptocurrency is an exciting prospect and could help to reduce the risk of a monopoly or duopoly developing around digital currencies in the future. However, there are also those who are concerned about the prospect. 

Right now, a lot of the concerns around digital currencies relate to their impact on privacy. While important, this focus overlooks the potential fraud risks of CBDCs, which are manifold. If adopted, it’s more likely to be this latter issue that causes users immediate problems. Therefore, the question is how we can secure trust in CBDCs before they’re fully implemented across a large population.  

As the name suggests, CBDCs refer to a digital currency that can be issued by a digital bank alongside physical cash. Across the world, more and more countries are beginning to assess the merits of this idea in more specific detail. According to the Atlantic Council, 65 countries are now in the advanced stage of development regarding CBDCs, with over 20 central banks, including Brazil, Japan and Russia having already launched one. 

It’s believed that CBDCs will provide businesses and consumers with more access to important financial infrastructures, while enabling more seamless cross-border payments and alternative money transfer methods. More generally, CBDCs have the potential to be used to support broader Central Bank policies. Sadly, while the technology has clear upside, it will also inevitably be targeted by fraudsters upon launch.  

Are we overlooking fraud? 

Upon launch, CBDCs will inevitably be targeted by fraudsters who will try to leverage their expertise to dupe less informed victims out of their money. That’s because despite the rise of cryptocurrencies, the vast majority of people have still never owned a digital currency and will therefore require education on how to safely use and store these items against the risk of fraud and to protect against loss. 

To this end, governments around the world who are interested in deploying CBDCs must do so alongside a well-designed, comprehensive guidance campaign, which educates and informs new users about the capabilities, and risks of the technology they’re using. If this doesn’t happen, then we would be opening the door to fraud on a scale that we have never seen before. Quite frankly, it would most likely lead to the failure of CBDCs. 

Tackling the issue

Using tactics they’ve refined over the years; fraudsters will look to use CBDCs to facilitate a constant stream of financial crime. Sadly, you’re beginning to see this already in places like China, which has been operating a CBDC program, entitled the ‘Digital Yuan’ since 2021. Just months after its launch, the Chinese Government announced the arrests of dozens of fraudsters who had been specifically targeting CBDCs.   

In a similar vein, the European Central Bank recently noted that a digital Euro “will need to be highly resilient to cyber threats and capable of providing a high level of protection to the financial ecosystem from cyberattacks”. Clearly, those pushing CBDCs understand that the technology comes with an inherent fraud risk. The question is whether these issues can be mitigated prior to the solution being more widely rolled out.  

It’s worth noting that fraud in general is on the rise around the globe. For example, in the US the number of cyberattacks has almost doubled since 2021. In a similar vein, ‘The financial cost of fraud report 2021’ by Crowe LLP and The University of Portsmouth found that fraud costs businesses and individuals a total of £137 billion (roughly equivalent to $189 billion) each year.

Another problem emerges

There is another fraud issue associated with CBDCs, which could be even more problematic in the long-term. Ultimately, the creation of a CBDC requires sensitive financial information to be centralized onto a single ledger. While this might not sound alarming at first, it means that CBDCs would pave the way for the creation of a single database, which stores records of an entire nation’s financial transactions.  

This database would be more valuable to fraudsters than the Mona Lisa, representing an unprecedented target for cybercriminals. So, if this is the plan, then it’s essential it’s protected in a similar fashion to the Louvre. If not, we’re creating new opportunities for fraudsters and cybercriminals to pull off larger, more impactful acts of online fraud, which we know they will certainly look to exploit.  

Two sides of the digital coin  

It’s also important to consider the operational benefits that such a database would have in the battle to reduce financial crime. If CBDCs are implemented in a way that provides a secure, tamper-proof ledger for all financial transactions, then governments and regulatory bodies will have much greater ability to track suspicious financial activity across a populus, and to respond to fraudulent transactions in real-time.   

Therein lies the double-edged sword at the heart of the CBDC fraud debate. In the right hands, the system offers new, exciting ways to reduce the effectiveness of different forms of financial crime and could represent the ultimate tool in the battle to stop it. However, in the wrong hands, the technology would open the door to elevated risks of financial fraud and could leave us all far more exposed to falling victim to these activities.   

Thankfully, the fraud threats discussed in this article can be largely mitigated through technical design choices, but every choice comes with implications around privacy, usability, and security. However, as we’re still a long way away from wide scale global CBDC adoption it’s difficult to say exactly how these systems will specifically work. Right now, all we know is that these risks could exist, if they’re not properly protected against.   

As someone working to prevent online financial crime with my company, SEON, I see CBDCs as both a blessing and a curse in equal measure. I worry that people aren’t prepared for this coming wave, and that governments will fail to provide the requisite information required to prevent fraud. At the same time, I marvel at the power these systems will give the world of financial crime prevention, especially when it comes to the visibility of transactions.