Paul Rossini, Co-Founder and CEO of AssetPass
The new BIS report has found that two dozen central banks globally are expected to introduce Central Bank Digital Currencies (CBDC) by the end of the decade, which would make digital currencies a legal tender in many countries for the first time. And it’s unsurprising given their attractive benefits, from offering better controls of monetary policy and reducing illicit activities, like money laundering and tax evasion, to improved financial inclusion and innovation through the integration with other emerging technologies.
However, there are a number of challenges facing the retail crypto market that must be considered and acted upon before governments introduce CBDCs to ensure that they don’t fall into the same traps.
Balancing security and access for digital wealth
One of the most significant barriers to the mainstream adoption of cryptocurrencies is the risk of being unable to access their digital wealth.
The vast majority of crypto accounts can only be recovered with a 24 seed phrase, which cryptocurrency exchanges advise users to keep secure and private to ensure that their accounts can’t be accessed, cloned or their funds spent. But the advice often just suggests users write this phrase down and keep it in a safe place. But this is a highly fallible solution, because if lost a user could be permanently locked out of their accounts and be unable to access their digital wealth.
In fact, it is estimated that up to 20% of the total bitcoin in existence has been lost forever – which could amount to over $100 billion. And it’s estimated that a significant part of this may have been lost through account lockouts or lost accounts.
And if the sheer number of lost bitcoin isn’t enough to convince you that the recovery protocols for current cryptocurrency exchanges aren’t fit for purpose, then you need only look to the countless examples of people losing their phone or even dropping it in the ocean and getting locked out of their account as a result. CBDCs could be a step toward mainstream crypto usage, and for that to happen it would mean addressing any security challenges with immediate effect.
Yet, the most striking issue, that appears to be the missing link that few in the retail crypto market have thought about, is how these assets should be passed on as part of someone’s digital legacy. To date, the crypto market has focused on how people can procure and store their digital wealth, without much thought to how the beneficiaries of digital assets will be able to access them if the original owner is incapacitated and hasn’t passed on the password in advance – which as we’ve touched on, they’re actively discouraged to do! Indeed, this is a real concern amongst crypto users. Research found 89% of owners of cryptocurrencies are very worried that their families won’t be able to identify and access their digital wealth if something happens to them.
Fit for purpose processes for digital legacy
Governments need to ensure that people can not only build digital wealth, but store and manage it securely. This means they need to ensure digital currencies have the same protections and processes as traditional currencies whereby the rightful owners have methods by which they can regain access to it even when they lose their security information.
For example, if you get locked out of your bank account there are systems in place that allow you to get back in, like going to the bank in person to show the appropriate legal identification or through probate in the event the original owner is deceased. Whereas there isn’t a comparable process for digital currencies.
Current reviews into the growth of digital assets are neglecting this issue. For example, the England and Wales Law Commission recently published recommendations that legislation be passed to confirm the existence of digital assets as a category of personal property and address in law where they differs from traditional wealth assets. But it didn’t highlight the need to address the issue of digital legacy.
Where current processes are lacking, governments and central banks need to look to the private sector for solutions. There need to be secure, digital processes that will stop people from having to staple the passwords for their digital wealth accounts to their Wills or from giving them out to their beneficiaries before they pass in the hope they won’t access their accounts. For example, leveraging a digital trustee process, where the trustee can release the digital assets to the designated beneficiaries at the appropriate time.
Seizing the potential of CBDCs without the risk to digital wealth owners
If governments and central banks are to introduce CBDCs, they must look at the current challenges in how digital assets are stored and recovered. Given the growing prevalence of this issue in the retail crypto market, solutions are now coming to the fore in the private sector. And governments must look to these when considering how they can seize the benefits that introducing digital currencies will bring, without replicating the same challenges and issues that crypto owners currently face in managing their digital wealth and digital legacy.
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