This process may be distributed among multiple nodes for resilience and performance reasons, as in the recent Project Hamilton proposal.28Lovejoy et al. Central banks and other institutions should evaluate whether those protocols meet their needs, depending on risk factors, the availability of computational resources, and need for throughput. Attacks on availability in this model are likely to target underlying infrastructure layers (e.g., network, storage, and/or compute). Security is defined with respect to a particular adversary. Thomas M. Eisenbach, Anna Kovner, and Michael Junho Lee, Cyber Risk and the U.S. Financial System: A Pre-Mortem Analysis, Federal Reserve Bank of New York, No. Process and policy can be an important tool for enforcing privacy with respect to system insiders. While details are still limited, the Fed has promised to include fraud prevention tools to protect integrity, including transaction value limits (with a maximum set by the Federal Reserve Banks), conditions for rejecting transactions, and reporting features. Takeaway: The design space for digital currencies is largeThe discussion in many CBDC reports focuses on currency designs that are based on a centralized database, distributed ledger, or token model. Security is an important component of conventional electronic payment systems. First proposed in the context of decentralized cryptocurrencies, the concept is much more general and can be applied to centralized financial services as well. Faults can be either accidental (e.g., random infrastructure failures) or intentional (e.g., caused by misbehaving nodes). Using such a framework, we then analyzed various possible digital currency design alternatives and compared their main advantages, drawbacks, and cybersecurity challenges. We call this design alternative distributed ledger with private transactions. To prevent double-spending of coins, the payment recipient deposits the coins to the payment validators immediately. The industry has taken steps to address this problem, with several major companies founding the Payment Card Industry Data Security Standard (PCI DSS) in 2006. Integrity. In some instances, it will be prudent to streamline or deconflict preexisting regulations that overlap and apply to CBDCs in needlessly complex ways. In many circumstances, it may be more effective for the federal government to consult withor expressly rely uponprivate or nonprofit consortiums that develop and maintain technical standards. A DLT-based CBDC could be enabled to support smart contracts. 2211, the Central Bank Digital Currency Study Act of 2021, introduced by US Rep. Bill Foster (D-IL), which commissions a study including: (1) consumers and small businesses, including with respect to financial inclusion, accessibility, safety, privacy, convenience, speed, and price considerations (emphasis added); (7) data privacy and security issues (emphasis added) related to CBDC, including transaction record anonymity and digital identity authentication; (8) the international technical infrastructure and implementation of such a system, including with respect to interoperability, cybersecurity, resilience, offline transaction capability, and programmability (emphasis added).82Central Bank Digital Currency Study Act of 2021, H.R.2211, 117th Cong., 1st Session (2021), https://www.congress.gov/bill/117th-congress/house-bill/2211/text?format=txt. These costs are divided between the back-end infrastructure and end users. If the attack lasts for several days, liquidity shortfalls could grow to reach $1 trillion by the fifth day, requiring a massive intervention from the Fed.106Ibid., 41. Integrity. This software should be thoroughly tested for call sequences that can induce faults in the liveness and/or correctness of the system. Further, data communicated from an oracle to a DLT may be intercepted through a meddler-in-the-middle attack. such as ransomware attacks. This design introduces the need for independent validators. In the case of card payment, this would happen during interaction with the recipients payment terminal. The researchers assessed how a cyberattack impacting the availability or integrity (core elements of the CIA triad) of a top-five financial institution ripples through the wholesale payments network. The future of digital currency - International Finance The system should be robust to faults, or failures, of different components of the system. Based on our research, we understand that several countries are interested in collaborating with the United States on cross-border pilot projects using both wholesale and retail CBDCs. This, in turn, mitigates the risk of validators approving faulty transactions. Fault models. Central Bank Digital Currency Tracker, Atlantic Council, last updated June 2022. Reduced regulatory oversight of financial systems, Increased difficulty reversing fraudulent or erroneous transactions, Challenges in payment credential management and key custody, Susceptibility to erroneous or malicious transactions enabled by complex, automated financial applications, Increased reliance on third parties (e.g., non-banks). At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future. DCG is a multi-billion dollar global enterprise that builds, buys, and invests in leading blockchain and digital asset companies all over the world. Regardless of the technology used, security must remain an important consideration for a CBDC. We present six digital currency variants that could form the basis of a CBDC system. The Rise of Cybercrime and Cybersecurity The decentralization of cryptocurrency is an excellent opportunity for cybercriminals. Private payment token systems do not provide privacy for the payment recipient. The payment validators need to check a signature and serial number for each deposited coin. Cryptocurrency Investigations & Compliance - Cybersecurity | Digital Fully homomorphic encryption and private set intersection are two examples. Common goals of malicious insiders include stealing resources or simply bringing the system to a halt. While this approach provides weak integrity guarantees, it offers strong privacy protections. Good scalability is another noteworthy advantage. Finding 3: A privacy-preserving currency design can inherently provide security advantages. He has a PhD in computer science from Aalto. What is the World Economic Forum doing on cybersecurity? In February 2022, the Federal Reserve Bank of Boston, in collaboration with the Massachusetts Institute of Technology, released test code and key findings on what a possible US CBDC might look like. SEC v. This report examines the novel cybersecurity implications that could emerge if the United States or another country issues a Central Bank Digital Currency (CBDC). These threats can be mitigated through multi-factor authentication (MFA), including the use of hardware tokens. The security of CBDCs has real-world import and is one of the major challenges to overcome if a CBDC is to be issued in the United States. The use of consensus mechanisms in the context of DLTs is comparatively novel, and consensus mechanisms are not impervious to attack. Automatic Boost to Communities Act, H.R.1030, 117th Cong., 1st Session (2021). By Digital currency exchanges exist all over the world and allow for the conversion of one type of digital currency to another or digital currency into fiat- government central-bank issued . Digital Currency in India #erupee #cybersecurity #digitalcurrency This field is for validation purposes and should be left unchanged. The Brazilian central bank's broad digital currency guidelines follow the launch of a study group last August to analyze the positive impact, as well as the risks involved in having a digital real . Fedwire Funds Service Annual Statistics, Federal Reserve Bank Services, last updated February 15, 2022. In the modern era, security issues have multiplied with the rise of the Internet and the threat of cyberattacks. Adrian Nish, Saher Naumann, and James Muir. See U.S. Currency Education Program. Still, two overarching points are worth highlighting: First, Congress is still in a prime position to study and oversee the application of federal cybersecurity laws to a potential CBDC. After that, we discussed possible threat models and the key security requirements. Governance. Depending on the CBDC design, policy makers and regulators should assess which areas of a new CBDC ecosystem will be covered by current laws and regulations and where novel statutesor new technical frameworksmight be necessary to provide adequate protection. The payment credential can be created and stored on the users smartphone that hosts the wallet software. To break payment authorization, the adversary would need to steal coins from the user. Table 3 provides a side-by-side comparison of the areas of focus for these two frameworks. If an attack is successful, the impact would be less severe. Thus, policy makers should include considerations about the cybersecurity profile of a potential CBDC when deliberating the future of digital identification.68Privacy and Confidentiality Options for Central Bank Digital Currency, Digital Currency Governance Consortium White Paper Series, World Economic Forum, November 2021, 17, https://www3.weforum.org/docs/WEF_Privacy_and_Confidentiality_Options_for_CBDCs_2021.pdf. To create a payment, the payment sender passes an appropriate number of coins to the payment recipient who forwards them to payment validators for double-spending checks and for updating the payment recipients account balance. Network performance. Peiyao Sheng et al., BFT Protocol Forensics, CCS 21: Proceedings of the 2021 ACM SIGSAC Conference on Computer and Communications Security. Software bugs can lead to (sometimes catastrophic) security vulnerabilities. Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions, "Principles for financial market infrastructures" (April 2012). A central bank should consider how existing security frameworks can address the unique characteristics of a DLT-based system. That said, merchants can take additional steps like micro validation, tokenization, and encryption, and secure vault payments.138Is ACH Secure? Clover, accessed January 31, 2022, https://blog.clover.com/is-ach-secure/. Here we assume that the used zero-knowledge scheme cannot be forged, and thus the only way to violate integrity is to compromise (a sufficient number of) payment validators (either remotely or locally through insider attacks). Develop arrangements to establish, implement, and review the approach to managing cyber risks. and the Committee on Payments and Market Infrastructures and the Board of the International Organization of Securities Commissions Guidance on Cyber Resilience for Financial Market Infrastructures.60Committee on Payments and Market Infrastructures and the Board of the International Organization of Securities Commissions, Guidance on Cyber Resilience for Financial Market Infrastructures, June 2016, https://www.bis.org/cpmi/publ/d146.pdf. A different approach for policy makers would be to set concrete technical standards for CBDCs that include security and privacy protections. SEC.gov | Crypto Assets and Cyber Enforcement Actions Institutions are in various stages of research and development, with some just beginning their research and others already entering pilot testing or even production, albeit on a limited scale. In this section, we discuss major design choices related to cybersecurity for CBDC systems. 1030, titled the Automatic Boost to Communities Act, introduced by US Rep. Rashida Tlaib (D-MI),80Automatic Boost to Communities Act, H.R.1030, 117th Cong., 1st Session (2021), https://www.congress.gov/bill/117th-congress/house-bill/1030/text. The most powerful central bank digital currency (CBDC) in EMEA will be the digital euro. The approach outlined in the NIST RMF is meant to be iterative and ongoing throughout the life of a given information system. The main concern in a CBDC is that these errors could erroneously transfer large amounts of money to the wrong recipient, or enable malicious agents to steal money by exploiting vulnerabilities in a smart contract. First, the payment sender creates a zero-knowledge proof that allows the payment validator to verify that the cryptographic commitments that represent account balance values are updated correctly. A potential technology solution that is often discussed for a CBDC is distributed ledger technology (DLT).2 The use of a decentralized ledger replicated across a distributed network could offer enhanced availability and minimize single points of failure, and the use of cryptographic hashes ensures the integrity of transaction records. He is a term-member at the Council on Foreign Relations and an Economic Diplomacy Fellow at Harvard Universitys Belfer Center for Science and International Affairs. The Latest in U.S. Currency Design, U.S. Currency Education Program, accessed January 31, 2022. Return to text, 4. Because oracles typically sit outside of the DLT system, security protections inherent to a DLT-based CBDC may not automatically extend to associated oracles. Good protocols are designed to be robust up to some threshold number of corruptions. Because payments happen directly between the sender and the recipient, there is no information leakage to validators or any other parties. Consensus. The U.S. thinktank Atlantic Council released a report Wednesday on cybersecurity issues related to central bank digital currencies (CBDC). Then, the payment sender creates a payment request that defines the identity of the recipient and the payment amount, signs the payment request using their payment credentials, and sends it to the payment validators. ACH Network Volume and Value Statistics, Nacha, accessed January 30, 2022. In practice, digital currency serves a similar practice to other currencies in terms of acting as payment in transactions. Executive Order on Ensuring Responsible Development of Digital The security frameworks introduced earlier generally approach governance from the perspective of a centrally owned system, where boundaries are well-defined through the system architecture and where roles, authorities, and permissions are clear. Our analysis shows that privacy-preserving CBDC designs are not only possible, but also come with inherent security advantages, compared to current payment systems, that may reduce the risk of cyberattacks. This report introduces key concepts, potential design trade-offs, and some policy principles that we hope can help federal stakeholders make foundational decisions around the future of CBDCs in the years ahead. Atlantic Council looks at how to maintain central bank digital currency . Central bank digital currency explained - IBM Supply Chain and "Digital currency: cybersecurity, fraud problems" - Now Jon VersaBank, which works in B2B digital banking and cybersecurity, has plans to launch a new encryption-based digital currency, according to a press release. NAFCU cybersecurity and payments committee discusses interchange They can also be proactive, by establishing mechanisms that incentivize validators to correctly and promptly validate transactions. Users can be both a vector for launching attacks as well as victims. In the case of physical currency, the prevalence of counterfeits presents a significant threat to trust in cash as a payment instrument. Ensuring Responsible Development of Digital Assets.. Such designs can enable improved user privacy or transaction validation scalability, for example.Clarify common misconceptions: Throughout our discussion, we also point out common misconceptions, recurring harmful practices, or otherwise bad patterns related to the design and deployment of digital currencies. Payment authorization is similar to the plaintext setting (passing coins from the sender to the recipient). This threat can (and should) be mitigated in part by encrypting all traffic between validators and end users. CBDCs promote financial inclusion . Such spoofing attacks work even if the adversary does not obtain the users payment credentialsthe adversary merely tricks the victim into using their credentials to the benefit of the adversary. Since the Bangladesh Bank hack, SWIFT has taken several steps to shore up its defenses, focusing on stronger security standards and quicker response.122Three Years on from Bangladesh: Tackling the Adversaries, SWIFT, April 10, 2019, https://www.swift.com/news-events/news/swift-report-shares-insightsevolving-cyber-threats. Smart contracts, which digitally facilitate the execution and storage of an agreement, will be critical to many future CBDC applications. This report puts forward a road map for policy makers to build secure CBDCs. Common examples of such mechanisms include transaction fees, which reward validators for each transaction processed, and block fees, which reward validators for processing a batch of transactions. The identities of the payment sender and recipient and the payment amount are hidden from the payment validators (and all other parties) because the used commitments hide all such details. The United States can and should play a leading role in shaping standards around the future of money. Also, if an external adversary is able to compromise even one of the deployed hardware modules, unlimited double-spending is possible. Cybersecurity in Cryptocurrency: Risks to Be Considered Application. Unlike public ledgers, this design variant aims to break the linkage between users and their transactions. The easiest way for an adversary to break payment authorization is to compromise the initial authentication process, for example, through phishing attacks or malware. They are generally able to access and exploit applications only to the extent that they can manipulate other users. After recent attacks revealed significant vulnerabilities, SWIFT and its member banks have taken several steps to shore up their defenses, focusing on stronger security standards and quicker response times. Safe backups can be difficult to organize in practice (paper backups may get lost, online backups are not safe, and many users might forget to create a backup altogether). We gave it a close read,New Atlanticist (Atlantic Council), March 11, 2022, https://www.atlanticcouncil.org/blogs/new-atlanticist/what-does-bidens-executive-order-on-crypto-actually-mean-we-gave-it-a-close-read/ Of particular relevance to cybersecurity are the portions of the executive order that ask the Director of the Office of Science and Technology Policy and the Chief Technology Officer of the United States, in consultation with the Secretary of the Treasury, the Chairman of the Federal Reserve, and the heads of other relevant agencies to study how the inclusion of digital assets in Federal processes may affect the work of the United States Government and the provision of Government services, including risks and benefits to cybersecurity.85Ibid. This makes payment verification fast and easy to scale for a large number of parallel validators. As discussed in this appendix, current wholesale and retail payment systems face a complex cybersecurity landscape and represent a major point of attack for both criminals and geopolitically motivated actors. The security considerations for a CBDC are not any different than those for conventional payment systems, online banking, and other financial activities. Incentives may also be instituted to ensure that validators act in the beneficial interest of the system. Technology provider. Takeaway: Privacy and compliance can coexistProviding users with strong privacy protections and regulators with the extensive oversight they may desire are two inherently conflicting requirements. Resilience. This offers policy makers and regulators ample options to choose a technological design that is both reasonably secure and leverages the unique benefits a CBDC can provide. These third parties have emerged due to the novel characteristics associated with DLTs. Mistaken transactions. The Federal Deposit Insurance Corporation (FDIC) alone offers detailed guidance and resources on cyber risks and examinations for banks.57Banker Resource Center, Information Technology (IT) and Cybersecurity, Federal Deposit Insurance Corporation, accessed February 15, 2022, https://www.fdic.gov/resources/bankers/information-technology/. For example, a bank can create the payment credential and provision it to the users digital wallet on their smartphone. As will be discussed below, a digital currency can also be realized as signed balance updates or as a set of trusted hardware modules, and both the distributed ledger variant and the token model can support privacy-preserving transactions in addition to plaintext ones. Policy makers and industry stakeholders may find some useful road maps in the existing standards, like the EMV standard for chip credit cards or the Data Security Standard published by the Payment Card Industry Security Standards Council. Byzantine fault-tolerance is a stronger concept; in addition to tolerating crash faults, it is additionally robust to a fraction of validators actively misbehaving, for example, by deviating arbitrarily from protocol. The role of account provider may not be needed in a wholesale CBDC deployment where the end users are financial institutions like commercial banks. Such attacks can affect payment validator nodes, end user wallets, and custodial wallets hosted by account providers, to name a few. Another possible attack is to trick the user into performing a fraudulent transaction that transfers some of their cryptocurrency assets to the adversary.49Charlie Osborne, Microsoft Warns of Emerging Ice Phishing Threat on Blockchain, DeFi Networks, ZDNet, February 17, 2022, https://www.zdnet.com/article/microsoft-warns-of-ice-phishing-on-blockchain-networks/. These may be combined with other considerations that safeguard and establish equitable participation among stakeholders to prevent de facto centralization. In a CBDC, though, there is no reason for third parties to have access to transaction packet contents. To counter phishing and other types of user error, ACH and other platforms require unique user credentials and offer merchants additional steps like micro validation, tokenization and encryption, and secure vault payments. In a CBDC deployment, all payments that exceed a similar threshold amount could be automatically forwarded to the regulator for audit. Although CBDCs are conceptually equivalent to . When it comes to selection of a technical platform for pilot CBDC programs, policy makers should carefully consider the key contractual terms they negotiate with those vendors for who will own and have access to the code base and who will be responsible for testing and auditing that code. Physical cash: The most basic form of retail payments, and the only current public layer, is paper money. CBDCs have the potential to significantly increase centralization by storing a single ledger or similar data repository that aggregates transaction data from all participants. In 2021, the Swiss National Bank (SNB) released a working paper that outlines one possible design for a CBDC system.44David Chaum, Christian Grothoff, and Thomas Moser, How to Issue a Central Bank Digital Currency, SNB (Swiss National Bank) Working Papers, March 2021, https://www.snb.ch/en/mmr/papers/id/working_paper_2021_03. In assessing Fedwires cybersecurity, the Fed aims for the core principle that it should possess a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.95Board of Governors of the Federal Reserve System, The Fedwire Funds Service: Assessment of Compliance with the Core Principles for Systemically Important Payment Systems, revised July 2014, 26, https://www.federalreserve.gov/paymentsystems/files/fedfunds_coreprinciples.pdf. A CBDC could take multiple forms: a retail CBDC would be issued to the public to enable fast and secure payment, while a wholesale CBDC would only be accessible by banks and would facilitate large-scale transfers. The integrity of a digital cash scheme relies on the correctness of the following two operations. 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