A US Federal Reserve governor has poured cold water on the prospect of central bank-issued digital currencies, saying that they raise serious security and privacy concerns and could become a prime target for crooks.
China's central bank has already begun testing its own digital currency system, while the Bank of England has been publically toying with the idea for some time.
However, Fed governor Jerome Powell says that central banks should have "serious reservations" about their ability to keep a digital currency safe and secure because it would be the target of massive cyber counterfeiting and cyber theft.
During a speech, Powell argued that central banks would face a trade off between tackling these problems by strengthening security and enabling illegal activity such as money laundering.
"Advanced cryptography could reduce vulnerability to cyber attacks but make it easier to hide illegal activity. To the extent we relax strong cryptography to make it easier for authorities to monitor illegal activity, we could simultaneously weaken security," he warned his audience.
Powell also raised privacy concerns stemming from the fact that central banks would have to maintain records of digital currency issuance and might need to maintain records of individual transactions in order to authenticate them.
"Such records in the hands of a central bank or government entity, however, could raise serious privacy concerns by users and might limit public appeal."
Finally, Powell expressed concern that a central bank issued digital currency would compete with private sector products, stifling innovation.
In his speech, the governor also talked about the distributed ledger technology behind digital currencies. Noting the potential benefits, he also said that there are still technical and risk issues for firms and that the legal foundations supporting DLT need attention.
"We will need a thorough analysis of how DLT fits into current legal frameworks and what gaps need to be filled by contractual agreements or new laws and regulations. A robust legal basis that provides certainty across relevant jurisdictions is essential for building strong governance, risk management, and operations."