CBDCs: Is privacy important to the people?

According to a public consultation on the possibility of a digital euro conducted by the European Central Bank (ECB), the responses of over 8,000 individuals and businesses suggested that privacy was the number one concern for 43% of them, when talking about the issuance of a central bank digital currency.

Fabio Panetta, an ECB board member, declared that the digital euro could meet those requirements without relaxing security standards. The survey also revealed that 18% wanted any CBDC to provide secure payments, while 11% focused on cross-border payments within the European Union. Panetta said, “As I have already mentioned, privacy emerges as the most important feature of a digital euro. Protecting users’ personal data and ensuring a high level of confidentiality will therefore be a priority in our work.”

Cointelegraph reports that the ECB has been exploring privacy enhancing techniques, even before the concept of a digital euro emerged and its research indicated “that a digital system could still be monitored for illicit activity, while still allowing for transparency and privacy.”

A decentralized CBDC is preferable, but unlikely

However, while the ECB may be working on privacy for its CBDC, Anne Fauvre-Willis, chief operating officer at Oasis Labs, thinks that even though the EU has supported the concept of consumer privacy in the past, “that won’t count for much if the digital euro is issued on a centralized system.”

She asked, “Instead of enabling this via a centralized bank, why not empower a decentralized protocol to do this instead?” The obvious answer would be to use the Ethereum blockchain for a digital Euro, so that it would have the same level of decentralization and autonomy as ETH. But if she is right, it appears there is little chance of a central bank allowing all control of its money to be decentralized.

The public will vote for ‘Ease’ over privacy

However she points out that the public’s behaviour may simply go for whatever is easiest, rather than worry about privacy. “In regards to people adopting the digital euro, unfortunately I think ease will win over privacy alone,” said Fauvre-Willis. She added, “Privacy is a feature but it’s not enough to drive people on its own to change their behaviour. Instead for those of us who really believe in privacy we have to simultaneously strive to make compelling and life changing products and as we do we need to put privacy at the centre of what we make.”

Currently, the ECB is still in its research stages regarding a digital Euro, with a final decision expected some time during summer 2021. The region is somewhat behind others in the CBDC race, and need to pick up their pace if it is to compete with other nations’ digital versions of the national currency.

Making the case for CBDCs

Crypto purists probably balk at the idea of a Central Bank Digital Currency, if only because it flies in the face of cryptocurrency’s ‘raison d’être’. As Kraken’s CBDC report says, “While the concept of CBDCs was

inspired by cryptocurrencies like bitcoin, the ethos of CBDCs show a stark contrast from the ethos of cryptocurrencies in that they are issued by the state as a centralized form of digital money.”

The growing popularity of bitcoin, as well as Facebook’s proposed venture into digital assets with Dien, spurred governments to consider creating a digital version of their sovereign currency. While most countries are still at the research phase, a few, such as China, are already piloting CBDC programmes. Whilst this may be a slow process, it looks as if the global rise of CBDCs has begun.

How can a CBDC benefit a country?

According to the BIS’s quarterly report,3 retail CBDCs may help overcome the limitations of national payment systems and act as a convenient and affordable payment method of transferring funds across accounts held at different Payment Service Providers (PSPs) while reducing the costs and inefficiencies associated with low interoperability. Another use case is in areas where access to cash is limited, and a CBDC would guarantee access to central bank money.

Why CBDCs are gaining popularity now

The COVID-19 outbreak hat started in early 2020 prompted governments and central banks around the world to start directing their attention to CBDCs as the advantages of having a digital currency that is easily accessible and distributable became apparent. Latin America is one region where cashless methods of payment quickly became popular and it noted a fast decline in cash withdrawals following the emergence of the pandemic, alongside an expansion of mobile, phone and internet banking use.

What else are CBDCs good for?

Mass adoption of CBDCs would greatly assist governments and make it far easier for them to track transactions; something they can’t do with fiat money in cash form. This would allow them to have real-time updates about economic activity. It would also allow payment systems to operate more efficiently by offering almost instant settlements at lower costs than present. Both of these have a significant appeal for central banks. The one factor that has less appeal is the possibility that hackers would find it too easy to attack digital wallets, so security is a big issue to be resolved.

Taking all these things into account, it is likely we will see more regulatory discussions around CBDCs, digital wallets and blockchain. Merchants and business too will have to adapt their payment systems to facilitate digital currency transactions.

Every day we are seeing announcements from the different regions of the world as individual countries make their move on CBDCs. Chinese internet, fintech and e-commerce giants are leading the digital yuan vanguard and the Bank of England indicates it is moving ahead with one by posting job ads for seven positions ranging from solution architect to senior manager. South Korea will pilot a CBDC later this year, and the European Central Bank is pursuing the idea of a digital Euro.

But, one thing all central banks will have to over come is there aversion to decentralization, because for CBDCs to succeed, they need to grasp “ the most revolutionary aspect put forth by cryptocurrencies and blockchain tech as a whole,” which is decentralization. Public trust in centralized control of the banks has been eroded, so centralized CBDCs are unlikely to have mass appeal.

As, Sky Guo wrote in Cointelegraph last month: “It stands to reason that there truly does exist a real window of opportunity for the creation of digital currencies that are decentralized in their governance and overall scope of utilization, “ adding “Another point to consider is that centralized blockchains are still relatively slow, thus the use of decentralized solutions, such as distributed ledger technology, stands to make CBDC transactions much faster and far more streamlined.”

It is perhaps too early to make an exact call on the future of CBDCs, but there will be a future for them, and that’s all we need to know right now.