CBDCs: Addressing Key Risk and Compliance Challenges

Listen to the Newsletter: CBDCs: Addressing Key Risk and Compliance Challenges

The global financial landscape is undergoing a significant transformation, with central bank digital currencies (CBDCs) emerging as a major focal point. Currently, a striking 134 nations, accounting for 98% of global GDP, are actively investigating CBDCs. Three countries have already launched their own versions, and an impressive 36 pilot projects are underway, including the highly anticipated digital euro.? ?

While this transformation opens doors to new possibilities, it also presents unique challenges.? That’s why it’s crucial to grasp the complexities associated with CBDCs and understand how businesses can adapt to this evolving financial landscape. ? ?

Understanding CBDCs? ?

A CBDC is essentially a digital version of a country's national currency, issued and backed by its central bank. It functions as a secure digital instrument for transferring value, operating through either an account-based system, similar to traditional bank accounts, or a token-based system, akin to physical cash. The central bank directly issues CBDCs, which sets them apart from privately issued stablecoins.? ?

In this context, the term 'CBDC' will specifically refer to retail CBDCs, as defined by the World Bank: "a CBDC where access and circulation are open to a wider class of agents, including non-resident individuals and entities”.? ?

The Drive Behind Their Adoption? ?

CBDCs are primarily being explored to modernise and future-proof payment systems. They aim to improve financial inclusion, access to payments, payment efficiency, and security, as well as support a cashless society. By integrating future tokenisation capabilities and ensuring a resilient financial system, CBDCs seek to streamline international payments, making them faster and more cost-effective. However, they also introduce new risk management and compliance challenges that require robust measures.? ?

Key Influences on Risk and Compliance? ?

The key influences of CBDCs can be summarised as follows:? ?

• Cybersecurity and Operational Risks: CBDCs are vulnerable to cyber threats, requiring robust cybersecurity measures to prevent hacking, fraud, and data breaches.? ?

• Financial Disintermediation: The role of traditional banks could be altered, potentially destabilising their business models and affecting the banking system.?

• Regulatory Compliance: Ensuring adherence to anti-money laundering (AML) and counter-terrorism financing (CFT) regulations is crucial to preventing illicit activities.? ?

• Data Privacy Concerns: The digital nature of CBDCs raises issues regarding data privacy and consumer protection, necessitating comprehensive regulatory frameworks.? ?

Cedar Rose: Your Partner in Risk and Compliance? ?

As your organisation adapts to the era of CBDCs, Cedar Rose offers invaluable support through:? ?

• Fraud Prevention and Risk Management: Our all-in-one risk management platform, CRiS Intelligence, allows you to conduct AML/CTF checks, background checks, enhanced due diligence investigations, and screen any entity for sanctions lists, PEPs (politically exposed persons), and adverse media. You can also strengthen your third-party onboarding and compliance processes by identifying shareholding and directorship structures, revealing UBOs, and uncovering hidden connections in your supply chain.? ?

• Compliance and Verification: Our customised data license agreements provide access to comprehensive and reliable datasets that enhance compliance with AML and CFT regulations. We also ensure data privacy and security, facilitating efficient cross-border transactions.? ?

As you prepare to embrace CBDCs, consider leveraging Cedar Rose's expertise to ensure your business remains compliant and secure. We can help you identify and mitigate potential risks, streamline your compliance processes, and make informed decisions in the face of evolving regulations.? ?

Contact us to learn how our solutions can help you manage the complexities of this new digital era and maintain your competitive edge.???