What are the risks related to the use of digital currencies and how may the risks be mitigated?

Authors:

Vivienne Lawack, Brighton M Mupangavanhu, Etienne Olivier

Summary: 

A decade ago, it was probably unimaginable that central banks such as the South African Reserve Bank (SARB) could develop fiat (central bank money) in a purely digital banknote form that could be used to settle payments between persons interacting in commercial transactions or other kinds of relationships. The advancement of payment systems, aided by the arrival of financial technology and a branch of law called "Fintech law", has led to the emergence of cryptocurrency, stable coins and now, the central bank digital currency (CBDC). Cryptocurrency is a type of digital currency that allows people to make payments directly to each other through an online system, while stable coins are a form of a digital asset used to make payments, and this coins’ market value is pegged against another asset such as traditional central bank issued currency to keep it stable. In layman's terms, a CBDC is a digital or electronic version of a country's central bank money or what is known as fiat currency, that is, a government issued currency in a digital form. This article examines consumer protection aspects of CBDC from a policy and regulatory perspective, identifying consumer risks to be mitigated before CBDC can be launched in a country such as South Africa. The article seeks to answer the specific question: what are the financial consumer risks that need to be mitigated before the CBDC can be launched in a society in transition such as South Africa? To this end, the article briefly provides an overview of the landscape, meaning and functions of CBDC, the consumer risks and identifies gaps within the current consumer protection legal and regulatory framework that need to be addressed if South Africa were to adopt a retail CBDC. The article proposes recommendations to alleviate some of the challenges and risks for financial consumers of retail CBDCs.

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