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#Digital Currency Ecosystem

Why a holistic approach is key to CBDC security success

6 Mins.

As CBDC pilots continue to take place around the world, ensuring the digital cash cycle is secure is one of the most important objectives.

A business man pays mobile

Barely a day goes by without a digital currency story making the news. From Elon Musk’s tweets about bitcoin and Dogecoin to the latest central bank digital currency (CBDC) projects, it seems only a matter of time before some of these emerging financial instruments become mainstream. But while the price of Ethereum or a press release from the Facebook-backed Diem Association creates clickbait headlines, industry players must continue to focus on the threats to ensure a bright future is achievable.

Security risks, in particular, continue to evolve. In 2020, global cryptocurrency thefts, hacks and fraud totaled $1.9 billion – the second-highest amount on record.1 It is a fact not lost on those central banks and governments assessing whether to launch CBDCs. “The instant nature of CBDC payments means that the system could be an attractive target for hackers or fraudsters who wish to steal funds,” the Bank of England noted in a recent discussion paper.2 “In addition, the CBDC payments system may become a target for hostile attacks with the aim of disrupting the system and, potentially, the wider economy. For these reasons, the security of the CBDC payments system must be of the highest standard.”

Europeans are in agreement. Privacy and security are the two most important features a digital euro should offer, according to a public consultation carried out by the European Central Bank.3

So how can the emerging digital currency ecosystem ensure that CBDCs are as secure as possible? “Security is an essential quality in a CBDC and must be engineered from inception,” the Bank of Canada wrote in a recent analytical note.4 There are various ways to create a CBDC, but when it comes to security, privacy and resilience are two key factors.

To be truly secure, a CBDC requires holistic, defense-grade security. This should cover issuance at the central bank, distribution and storage at commercial banks and other financial service providers, as well as consumers, merchants, and other key third parties. Security is also a lot more than just a technological discussion about appropriate algorithms – it should involve organizational processes as well. Here are some of the key security considerations for stakeholders within the digital cash cycle.

1. Central banks

The most important factor when designing a CBDC ecosystem is to ensure that money creation and destruction are controlled by the central bank. This is in order to prevent access by hackers or other malign actors intent on counterfeiting and similar illicit activities. One way to mitigate such threats is to physically separate the money creation and destruction processes from those related to modification and validation. The use of cryptographic algorithms and AI to monitor any anomalies that do occur will further strengthen security.

2. Commercial banks and financial services providers

Once created, CBDCs will reside in protected environments with strict authentication procedures. The digital cash can then be transferred to commercial banks or financial services providers who distribute it, like physical or electronic cash, to individuals. Ensuring that this transfer between central and commercial banks or other providers is as secure as possible requires the use of protected communication channels.

3. Merchants

Most merchants already offer electronic and mobile payment solutions that can be extended to enable CBDC payments. Interoperability with the highest level of security for all interfaces is a key requirement. Point-of-sale terminals might be a potential weak link in the chain if they do not adhere to the most up-to-date security standards. To mitigate the risk, they should be updated with the latest software.

4. Consumers

To access their money, which is held in a digital wallet, individuals will typically use a smartphone app or physical card. Apps must be secured against tampering and manipulation by employing state-of-the-art security capabilities. Solutions that temporarily deactivate wallets that are not updated to the required standard are also available. When it comes to cards, best-in-class technology, such as biometrics, and complying with the latest regulations, such as PSD2 in Europe, will help to ensure that CBDC payments are safe. It is important to note that end user behavior will not pose a systemic security risk to CBDCs. However, accounting for different user behaviors will improve trust and drive engagement.

“We take a holistic approach to security that utilizes the latest technologies and involves participating in the security community to develop new technologies and standards“
Dr. Raoul Herborg
Managing Director Central Bank Digital Currencies, G+D

To meet these and the many other complex requirements of a CBDC, G+D has developed a unique and innovative solution. G+D Filia® offers industry-leading security, is highly resilient with no single point of failure, supports consecutive offline payments, and delivers privacy for honest users while meeting regulatory requirements. Built on the company’s extensive experience in payments, connectivity, identities, and digital infrastructure, G+D Filia® provides the basis for a digital, public form of payment offered by governments.

“Developing a safe, secure, and trustworthy CBDC solution is a key objective for G+D,” said Dr. Raoul Herborg, G+D’s Managing Director Central Bank Digital Currencies. “With experience in building and running some of the most sensitive IT systems, we take a holistic approach to security that utilizes the latest technologies and involves participating in the security community to develop new technologies and standards. G+D Filia® has been designed with security at its heart.”

As CBDCs continue to evolve, a holistic approach is essential to mitigating the growing security risks. Ultimately, however, the security of any currency system is only as strong as its weakest part.

  1. Cryptocurrency Crime and Anti–Money Laundering Report, CipherTrace, 2021

  2. Central Bank Digital Currency: Opportunities, challenges and design, Bank of England, 2020

  3. Eurosystem report on the public consultation on a digital euro, European Central Bank, 2021

  4. Security of a CBDC, Bank of Canada, 2020

Published: 21/06/2021

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