- “The likelihood of entirely private online transactions, which would not be transparent to central banks or intermediaries, is low.”
- “Countries with a restrictive view of their citizens’ right to privacy are likely to implement lower privacy standards in their CBDCs.”
- “Restricting the financial privacy and/or freedom of individuals would not be the absolute primary goal of pursuing CBDCs, as there are far greater benefits to a country’s economy.”
Central Bank Digital Currencies (CBDCs) are coming, with several already here. For central banks, they provide a way to lubricate and digitize the global economy, with a November report from JP Morgan and Olivier Wyman concluding that CBDCs could save businesses $100 billion a year.
However, with China’s CBDC – which is in advanced testing – equipped with capabilities that allow it to have an expiration date and monitor spending, central bank digital currencies raise the worrying possibility that they could be used to restrict confidentiality. It is something that the European Central Bank (ECB), at least, seems to be aware, with the ECB recently releasing a range of privacy options for its potential CBDC, from the most basic to the most private.
Unfortunately, a series of commentators say Cryptonews.com that it cannot be taken for granted that the ECB – or any other central bank – will opt for the most privacy-friendly options when launching a CBDC, particularly in light of the need to ensure a high anti-money laundering compliance. And with more than a few governments having less than impeccable human rights and civil liberties records, there’s also a good chance that a significant portion of CBDCs will be used to invade privacy.
What the ECB’s privacy options suggest
Given the size and influence of the European Union, the privacy options outlined by the ECB are instructive as to what real-world CBDCs will look like in much of the developed world.
The ECB presented three options. The first is its “baseline scenario”, which states that the identities of people/entities carrying out transactions are transparent to the intermediaries involved in the transaction, such as a private bank and the ECB itself. This is to ensure that the use of a CBDC remains aligned with pre-existing Anti-Money Laundering (AML) and Anti-Terrorist Financing (CFT) requirements.
For most commentators, there is little or no chance that a digital euro does not incorporate such an option, especially when it comes to large amounts.
“This scenario is available today through AML/CFT requirements, especially when users deal with commercial banks on a daily basis. As a process, this scenario has long been accepted by default by customers and commercial banks, and it’s not going away anytime soon, although it does cross some privacy boundaries through sharing personal data with commercial banks, which is seen as an acceptable norm,” said Francis Souza, director of the real-time payments partnership with payment provider ACI in the world.
Other commentators agree that transactions of substantial value should be monitored, at least to the extent that they satisfy AML/CFT regulations. This is also the opinion of Scott Girling Heathcote, the spokesperson for New Era Projecta UK-based private CBDC initiative led by the Association of payments and paywith.glass.
“It is clearly desirable from an AML/CFT perspective that digital money transactions be monitored. It is clear from the note that the ECB is studying how to achieve this,” he said. Cryptonews.com.
In other words, a CBDC would likely involve the level (or lack) of privacy we currently have with banks, financial institutions, and private services: you sign up for an account or service and provide verification of your identity, and an authority (such as a central bank) may have access to the resulting data in order to ensure compliance.
However, the ECB has raised the possibility of two more lax options, creating hope for anyone who would like CBDCs to preserve some of the privacy-preserving characteristics of cryptocurrencies. These imply that users must submit to identity verification in order to sign up for a wallet or service, but can keep small transaction data private from intermediaries (e.g. central banks) .
However, figures from the crypto industry suspect that the likelihood of small transactions being “invisible” to intermediaries is very low.
“Although considered a ‘desirable’ option, the likelihood of entirely private online transactions, which would not be transparent to central banks or intermediaries, is low,” said Benedikt Faupel, Blockchain Project Manager at BitkomCommentthe German digital industry association.
According to him, the central question posed by the ECB refers to the politically desired balance between a high level of confidentiality when using the digital euro and the integration of these confidentiality measures into the other political objectives of the ECB. EU, such as the prevention of money laundering.
Other CBDCs, outside Europe
The fact that the ECB is likely to prioritize anti-AML compliance over maximum privacy may be disheartening to privacy advocates, but it’s likely that CBDCs will end up being even more intrusive elsewhere in the world. the world.
“It seems likely that countries with a restrictive view of their citizens’ privacy rights are likely to also enforce lower privacy standards in their CBDCs,” Faupel said.
This is already evident in China, where the e-CNY (also known as the digital yuan) can be given an expiry date or can be made programmable so that it is only usable for certain items. Needless to say, all transactions are also completely transparent to the exchange People’s Bank of China.
“It is well known that the world’s first and recently launched CBDC, China [e-CNY] CBDCs will trace all transactions. It does not prevent Chinese citizens from transacting or limit their freedom, unless there is an abuse of rights serious enough to warrant blocking criminal individuals from using their CBDCs,” said said Francis Souza.
Programmability is a feature also highlighted in the context of the Bahamas sand dollar, which had the distinction of being the world’s first CBDC when it launched in late 2020. Writing at the time in a blog for the OMFIF think tank, representatives of Norton Rose Fulbright and NZIA limited – the two companies contracted to help the Bahamas launch – explained how the sand dollar could move to programmability and become the basis of a “national identity system”.
Given that the only two CBDCs currently in use were designed with programmability and identification at the forefront, chances are that future CBDCs could be used in the same way. For cryptocurrency users and holders, this may come as a shock, but it’s perhaps unsurprising that central banks are scrambling to make it clear that CBDCs aren’t cryptocurrencies.
Even with the ECB beginning to consider the privacy implications, there’s always a chance that privacy won’t win out.
“There must be a balanced approach between the right to privacy and AML/CFT concerns. At least for the ECB, user anonymity is not considered a guiding principle for the CBDC,” said Benedikt Faupel.
Why central banks are excited about CBDCs
Cynics may assume that governments and central banks are interested in CBDCs precisely because they are probably not privacy-friendly. That said, industry figures claim that there are other big motivations for pursuing central bank digital currencies.
“Strict policies can be adopted by any central bank through CBDCs; however, restricting the financial privacy and/or freedom of individuals would not be the absolute primary goal of pursuing CBDCs, as there are far greater benefits to a country’s economy,” said Francis Souza. .
It highlights several benefits, including reduced corruption (through the assignment of CBDCs), increased financial inclusion activities, targeted government grants, as well as the unintended benefits of digitization and the spread of financial innovation.
In addition to this, Souza notes that CBDCs solve securities settlement inefficiencies, credit and liquidity risks, given that they provide significant leeway to enable instantaneous remote settlement of securities or currencies. They also promise to reduce costs, for example through disintermediation by directly supporting national and alternative currencies for cross-border payments via new direct corridors with other countries using CBDCs.
To be sure, few central banks are fully confident that these benefits will be pronounced enough to commit to launching a formal CBDC. But with nearly every major central bank in the world considering a digital currency in one form or another, it may only be a matter of time before more CBDCs jump in and make the new economy a bit digital. less anonymous and private.
– CBDC in 2022: New trials and competition with Crypto
– The number of central banks involved in CBDC projects almost doubles in one year
– Central banks are battling CBDC privacy headaches
– DeFi “crucial” for financial inclusion, CBDCs are still welcome despite their centralization
– EU policymakers launch negotiations on controversial ‘non-hosted wallets’ regulation
– Here’s how you can help shape the digital euro