Colombia’s Central Bank Recommends Limits on CBDC Transactions
- The central bank of Colombia has not yet decided whether to issue a retail CBDC, but recommends setting limits on transactions.
- Limiting CBDC holdings and spending could help address privacy and security issues.
- It could also reduce the demand for a retail CBDC as an alternative store of value.
Pros of Limiting CBDC Transactions
The central bank of Colombia concluded that the potential introduction of a retail CBDC does not pose any significant macroeconomic risks. In order to mitigate any potential threats associated with CBDC, the Colombian central bank recommended setting holding and spending limits for the digital currency. Such a design would increase security by safeguarding users from cyberattacks targeting their balances or transactions. It could also allow regulators to offer different tiers of privacy according to user preference. Additionally, it would reduce the demand for a retail CBDC as an alternative store of value in competition with bank accounts.
Tradeoff between Privacy and Security
Setting limits on retail CBDC holdings could help deal with the tradeoff between privacy and transparency. For example, users who place a high value on their transaction data can opt for digital wallets with small holding limits and high levels of privacy. Conversely, those who are comfortable disclosing more data can choose higher holding limits with lower levels of privacy.
Impact on Demand for Other Cash-like Instruments
The introduction of a CBDC could be an attractive alternative for some risk-averse holders of other cash-like instruments such as government bonds, commercial papers and term deposit certificates. This could affect their demand in the market if users shift towards using the digital currency instead due to its convenience and safety features.
Uncertainty Over Issuing Retail CBDC
Despite closely monitoring global developments related to issuing a central bank digital currency, Colombia’s central bank is still uncertain whether its nation needs such a digital currency or not. The decision must consider all aspects including how it would impact other cash-like instruments in terms of demand as well as how it would be used by citizens in terms or privacy preferences versus security requirements.