CBDCs are one of the hottest topics in the fintech space, but as their inception comes closer, serious privacy concerns come with it.
Central Bank Digital Currencies, or CBDCs, have been an increasingly popular topic in the cryptosphere and financial world as a whole, especially with the onset of the COVID-19 crisis. In the United States, the need for a universal electronic payment system for stimulus checks gave rise to a proposition for the creation of a digital dollar and its implementation.
While members of the U.S. government move to create a CBDC on the back of the pandemic, it doesn’t end there. A recent report by the Bank for International Settlements has also revealed that the development of CBDCs may be accelerated by the impact of the coronavirus on retail payments, which have seen a sharp decline in cash payments due to concerns over viral transmission.
However, CBDCs have been in the works for many years in some countries, as there are many other benefits in the eyes of lawmakers that speak in favor of introducing them. In fact, the Chinese government has been working on its digital yuan since 2015, with few details about the project being known.
Put shortly, CBDCs are basically a digital version of a country’s fiat currency. While this already exists for virtually all national currencies in the form of bank account balances, the main idea around CBDCs is that all the information regarding transactions and balances would be centralized in one or several databases run by the government or assigned proxies. This bears multiple benefits but also raises some concerns, especially when it comes to citizens’ financial privacy.
Recent moves around CBDCs
China is by far the leader when it comes to CBDCs, even more so than the U.S., whose efforts have only been materialized with the start of the COVID-19 pandemic. Recently, the People’s Bank of China’s National Council for Social Security announced the completion of the backend architecture development for the digital yuan. Even large local companies like the ride-hailing app DiDi appear to be joining the digital yuan network.
Meanwhile, in the U.S., the aftermath of the coronavirus and the ever-growing “digital arms race” with China has led to CBDCs taking a central role in last month’s Senate Banking Committee. The committee called upon experts within the crypto industry, like Charles Cascarilla, the CEO of Paxos, and even former CFTC Chair Chris Giancarlo as witnesses.
While China and the U.S. have taken the mainstage, several other countries are currently developing their own CBDCs and experimenting with different kinds of technology. The Bank of Japan, for example, has recently announced it will begin working on its own CBDC, a digital yen.
CBDCs: A wolf in sheep’s clothing
While some may see the recent growth around CBDCs as a positive sign for Bitcoin (BTC) and digital assets as a whole, further reaffirming the validity of blockchain technology, others believe they will compete with cryptocurrencies while removing their founding ethos: financial privacy and sovereignty built on top of a peer-to-peer transaction system.
There are multiple concerns about the creation of CBDCs, however. While some of them revolve around the security and centralization of data and access, the main issue is privacy. Many point to CBDCs as the start of demonetization which is itself an effort to eliminate untraceability in the financial sector. Tone Vays notes that CBDC’s may be the first step toward demonetization while providing none of the advantages that pseudonymous currencies like Bitcoin do. He told Cointelegraph:
“These new digital dollars will still be confiscatable, and they will still be censored if the banks want them to be, so nothing changes. It’s all about the elimination of cash, and the sooner that happens, the sooner Bitcoin will shoot to the moon.”
When it comes to privacy, it doesn’t end with demonetization. The aforementioned “security and centralization” concerns also boil down to privacy when further analyzed. When information is centralized, it can be easily accessed, which means users’ financial information can be targeted by the government or even criminals. Of course, other risks like actual theft are still at play.
The end of financial privacy?
More “Orwellian” concerns arise when CBDCs are being created by countries like China that use mass surveillance technology on its population. Some fear that the digital yuan and even other CBDCs can become part of some social scoring system like the one currently used in China. CBDCs can also serve as a punishment mechanism in which users are blocked from transacting if the government deems it so.
As concerns around digital privacy continue to grow in 2020, CBDCs seem to pose a serious threat, given that they may signal the demise of paper currency. With this in mind, cryptocurrencies may be the only alternative to achieve financial anonymity, and even then, digital assets like Bitcoin can be tracked successfully with the use of tools provided by several crypto forensics companies.
Moreover, privacy-centric cryptocurrencies like Monero (XMR), Zcash (ZEC) and others may be the only alternatives, but one must wonder if they will be legal to use in the future, given that they have been accused of facilitating money laundering and other financial crimes. Additionally, such crypto forensics firms may soon discover a way to trace even the most anonymous coins.
Are CBDCs worth it?
Although CBDCs are beginning to look like an unavoidable future rather than just a novelty, they may not have as much impact as some in the crypto industry fear. For one, they may not eliminate cash and coexist with paper currency, at least for the immediate future.
Additionally, experts believe they’ll have a hard time displacing stablecoins. According to a recent report by CryptoCompare, Tether (USDT) still represents 69% of the total volume exchange to and from Bitcoin. Thus, it will be hard for any CBDC to challenge this dominance.
It’s unclear whether stablecoins will overcome CBDCs in the long-run or if privacy coins will even still be around, but according to Matthew Graham, a veteran investment banker in China and the CEO of Beijing-based Sino Global Capital, the digital yuan aims to displace the dollar and not Bitcoin or cryptocurrencies, and the same may be true for other countries.
Furthermore, many also believe that CBDCs don’t actually fix the most pressing and meaningful problems in today’s monetary system and even if they did, CBDCs would still be plagued with technical difficulties and shortcomings, the most severe which today being their lack of interoperability with other CBDCs or other electronic payment systems.
It’s unclear when CBDCs will truly take off and to what degree, but if they are heavily implemented, it’s possible that citizens will lose yet another set of financial liberties and privacy to convenience — a picture that is all too familiar.