Central Bank Digital Currencies and National Security: Policy Considerations

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Central bank digital currencies (CBDCs) have come to the fore in recent years, developing organically alongside the steady decline in the transactional use of cash, the rise of cryptocurrency and the emergence of financial technology.

Many scholars and policymakers note both exciting benefits and potentially worrying consequences. CBDCs seek to offer a central bank issued fiat currency in digital form. In essence, CBDCs are the digitisation of the bank note in a user’s wallet. CBDCs are envisioned to come in two forms: retail, aimed at consumers, and wholesale, aimed at financial institutions. Numerous governments are assessing the utility of CBDCs, with some conducting pilot trials. However, concerns over the impact of CBDCs feature prominently in current discourse, with analyses noting risks such as reduced privacy, a single point of failure, banking disintermediation leading to a reduction in the availability of credit, and even the potential for external foreign interference in domestic payments. This paper examines the international security risks posed to the UK by foreign retail and wholesale CBDCs.

Due to the novelty of CBDCs, current debates are relatively narrow and rarely examine CBDCs in the wider context of international security. This is of particular concern as CBDCs could radically transform the way that people and businesses interact with fiat currency, both nationally and internationally. Therefore, this paper seeks to further understanding of the potential adverse international security effects of the development of foreign CBDCs – that is to say, of CBDCs developed outside the UK, backed by a central bank other than the Bank of England. International security concerns that emerged in the research for this paper centre principally on four themes:

  • Unease regarding China’s possible dominance in the CBDC market.
     
  • Implications of first-mover advantage (and conversely the implications of delaying domestic development of a CBDC).
     
  • The role of CBDCs in international sanctions.
     
  • The impact of foreign CBDCs on the UK as a financial centre.
     

As a result, the paper proposes action including greater awareness-raising, advocacy and research on these potential international security threats. The paper concludes that it is now vital to engage with CBDCs in order to develop the necessary preventative and mitigatory actions (regardless of whether an economic benefit to the introduction of a CBDC is currently identified) to avert the challenges posed by retrospective remedial action, the likes of which is likely to be challenging, costly, and time-consuming.


WRITTEN BY

Tom Keatinge

Director, CFCS

Centre for Financial Crime and Security Studies

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Joshua Tjeransen

PhD student at the Dickson Poon School of Law, King’s College London

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