Following months of speculation, Brussels has moved closer to unveiling its long-awaited plans for the introduction of the “Digital Euro.” The announcement has excited many but is also causing concern in some quarters about its potential misuse by fraudsters. While CBDCs such as the Digital Euro clearly offer benefits in terms of helping to reduce transaction costs and improving levels of financial inclusion, their impact on rates of financial crime, such as money laundering and economic fraud, are less certain.
This latest announcement offers us a moment to reflect on how safe these solutions are likely to be. Across the world, CBDCs are becoming increasingly popular. In fact, the Atlantic Council reports that 65 nations are currently in advanced stages of CBDC development. Notably, more than 20 central banks, including those of Brazil, Japan, and Russia, have already launched their own CBDCs. However, it’s clear that should it be introduced, the Digital Euro, which will serve multiple countries, will be the highest profile CBDC yet.
Blessing or Curse?
CBDC solutions, such as the Digital Euro, have the potential to provide enhanced access to crucial financial infrastructures for businesses and consumers. Solutions of this nature could facilitate seamless cross-border payments and offer alternative money transfer methods. Additionally, CBDCs can be utilised to support broader Central Bank policies. However, despite the undeniable benefits, it is crucial to acknowledge that the launch of CBDCs will also make them prime targets for fraudsters.
Right now, this potential impact is being seemingly overlooked in favour of debates around the privacy implications of CBDCs. While this is a necessary conversation, it’s essential that it doesn’t overshadow similarly pressing discussions pertaining to fraud and financial crime. If not properly addressed, these fraud risks have the potential to cause immediate problems for users. Therefore, we must all now work towards establishing safe protocols around using these technologies before they’re introduced to a large population.
An Immediate Risk
Upon their launch, fraudsters will inevitably attempt to exploit CBDC solutions, such as the Digital Euro. It is crucial, therefore, that governments interested in deploying CBDCs accompany their implementation with a well-designed and comprehensive guidance campaign. Such initiatives should educate and inform new users about the technology’s capabilities and risks. Failure to do so would open the floodgates to unprecedented levels of fraud, potentially leading to the failure of CBDCs.
However, improving education around this topic isn’t enough to mitigate the risk of CBDCs being used to facilitate various forms of financial crime. In countries with more mature CBDC programs, such as China, there are countless examples of more sophisticated financial crime schemes at play involving digital currencies. It would be very optimistic to not envision these same tactics migrating into Europe once the Digital Euro has been officially launched, and as such, the European Central Bank must enforce a highly resilient defence program.
Bigger Problems Emerge
Sadly, there are even bigger problems at play surrounding CBDC solutions, such as the Digital Euro, which seldom receive the attention they deserve. Foremostly, the centralised storage of sensitive financial information on a single ledger creates a potential long-term fraud issue with major implications. This approach paves the way for the creation of a comprehensive database containing records of financial transactions belonging to people across Europe, which would be a veritable gold mine for fraudsters and financial criminals.
It could be argued that the information stored on that ledger would be more valuable to these crooks than any artefact, painting, or piece of jewellery housed among the continent’s most fortified art galleries, vaults, and banks. As such, the ledger would require almost impenetrable cybersecurity defences. Failure to do so would create new opportunities for fraudsters and cybercriminals to orchestrate larger, more impactful acts of online fraud, potentially on a scale that we have not witnessed before.
Finding the Right Balance
While the introduction of the Digital Euro may feel inevitable, there is still a lot more work to be done to ensure it can operate in a safe and secure manner. The operational benefits of a secure and tamper-proof ledger for all financial transactions cannot be ignored, but those pursuing such advancement must do so while keeping an eye on the world of online fraud and financial crime prevention. If not, they risk allowing a criminal element to seize upon the introduction of CBDCs for their own gain.
This dual nature of CBDCs presents a dilemma at the heart of the fraud debate. In capable hands, CBDCs offer exciting opportunities, and could even help to reduce rates of online fraud and financial crime. However, in the wrong hands, they can elevate this risk and leave more individuals vulnerable to falling victim to such activities. That’s why it’s so important the European Commission does all it can to ensure people have the necessary information and tools to prevent CBDC fraud early on in the journey before going any further in its pursuit of the Digital Euro.
Author: Tamas Kadar
Tamas Kadar is the Co-Founder and CEO of SEON Fraud Fighters. For more information about SEON, please visit: https://seon.io/