adopted, the central bank would have more direct control over the money supply and the ability to influence interest rates. However, changes in the demand for CBDCs could also impact the availability of liquidity in commercial banks and the transmission of monetary policy, requiring careful management by the central bank to maintain financial stability.64 While there hasn’t been a major cybersecurity incident with far-reaching consequences for financial stability yet, cybersecurity risks naturally increase with an increased reliance on digital payments. The implementation of a CBDC introduces new cybersecurity and operational risks. As a digital currency, a CBDC could be vulnerable to cyberattacks, fraud or operational glitches that may disrupt the functioning of the financial system. Establishing robust security measures and resilience protocols is crucial to mitigate these risks and maintain financial stability. Introducing a highly interoperable CBDC would, in the medium to long term, likely create additional competition for banks and potentially erode banks’ profitability. This could lead to further financial stability risks. The introduction of a CBDC could lead to shifts in the allocation of funds from commercial bank deposits to CBDC holdings. If a significant portion of deposits were to move into CBDCs, commercial banks might face reduced funding, potentially affecting their ability to lend and perform traditional banking functions. This could have implications for financial stability, especially if not managed carefully. CBDCs can affect the overall systemic risk and interconnectedness of the financial system. The integration of CBDCs with existing financial infrastructure, such as payment systems and settlement networks, requires careful consideration to ensure that potential risks, including the concentration of systemically important CBDC nodes or vulnerabilities in interconnected networks, are properly managed. 3.3 Geopolitical risk 3.4 De-dollarization The digitization of sovereign currencies and the availability of digital payment systems have implications for international relations and sanctions. CBDCs have the potential to introduce new payment channels that may challenge the current effectiveness of sanctions and, in turn, increase geopolitical risk. CBDCs can offer an alternative payment system that is less dependent on existing international payment networks dominated by foreign currencies. This reduced reliance on foreign payment systems could potentially mitigate the geopolitical risks associated with disruptions, sanctions or political tensions involving those systems, so countries may find CBDCs as a means to enhance their financial resilience and reduce their vulnerability to external pressures. The adoption of CBDCs may influence countries’ choices regarding financial alliances and partnerships. Countries seeking to reduce their exposure to geopolitical risks may seek closer relationships with countries or regions that share similar goals and interests in CBDC adoption. These shifts in alliances and partnerships can reshape geopolitical dynamics and power structures, potentially leading to realignments in global economic and financial systems. The dollar remains the dominant currency in the international system, but there are recent trends towards de-dollarization. If a CBDC is widely adopted and provides a convenient and efficient medium of exchange, it could potentially reduce the reliance on foreign currencies, including the US dollar. Individuals and businesses may prefer to use their CBDC for domestic transactions, reducing the need for holding and transacting in foreign currencies. If a CBDC gains international acceptance and trust, it could potentially be used as a reserve currency by other countries, leading to a diversification of global currency reserves away from traditional reserve currencies like the US dollar. This could contribute to de-dollarization efforts by reducing the dominance of the US dollar in global trade and finance. CBDCs could impact the landscape of international payment settlement systems. If CBDCs are interoperable across borders, they could facilitate faster, more efficient and lower-cost cross-border transactions. This could reduce the need for intermediaries and traditional settlement systems denominated in foreign currencies, potentially diminishing the role of the US dollar in international payment settlements. As a digital currency, a CBDC could be vulnerable to cyberattacks, fraud or operational glitches that may disrupt the functioning of the financial system. Central Bank Digital Currency Global Interoperability Principles 24
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