Privacy concerns weigh heavily as governments react to crypto

  • As governments around the world grapple with the implications of the explosive growth of crypto, many continue to explore the concept of central bank digital currencies (CBDCs).
  • CBDCs could benefit consumers by enabling faster and cheaper payments, but they also present significant risks that the public sector must manage before deploying a CBDC at scale.
  • With user privacy concerns plaguing CBDCs, governments need to consult with experts from all sectors.

Last week, U.S. Treasury Secretary Janet L. Yellen gave a speech on crypto policy. Broad and insightful, it focused in part on central bank digital currencies and the attendant privacy risks. Secretary Yellen’s remarks are timely.

Image: Atlantic Council

As governments around the world grapple with the implications of the explosive growth of crypto, many continue to explore – with increasing urgency – the development of central bank digital currencies (CBDC) in hopes of revitalizing and expanding access to payment infrastructure, facilitating cross-border payments, and maintaining sovereign currency control. Yet lingering concerns about CBDCs, including and perhaps most notably privacy issues, continue to confuse policymakers and central bankers.

The rapid growth of the crypto market – valued today at around $1.75 trillion – private sector attempts to develop cryptocurrencies and global government efforts to launch digital currency systems have all helped to spur governments to act. In an effort to control the narrative, maintain authority, and address the possible impacts of widespread cryptocurrency adoption, many continue to consider developing and implementing CBDCs.

CBDC Exploration Growth

CBDC is a digital currency backed and issued by a central bank. Currently, 87 countries, representing over 90% of global GDP, are actively exploring the concept. These projects range from the research phase through to implementation. Their magnitude reflects strong global interest in goals such as strengthening financial systems and enforcing sovereign currency controls.

The World Economic Forum has published a series of articles examining, in part, the benefits and risks of CBDCs. CBDCs have the potential to benefit consumers by enabling faster and cheaper cross-border payments and transactions, facilitating trade and aid disbursement, promoting financial inclusion, and deepening global economic integration.

Potential Value of Implementing CBDCs

The potential benefits have spawned a flurry of activity, with 14 countries already piloting CBDCs. Indeed, while much of the media frenzy surrounding President Biden’s recent executive order on ensuring responsible development of digital assets was related to cryptocurrency, the EO also contained an important call to action. action related to CBDCs that encouraged intra-governmental cooperation as well as international collaboration in the creation of an eventual CBDC in the United States. Even more recently, Treasury Secretary Janet Yellen remarked that “[…]a CBDC could become a form of trust money comparable to physical money.

Risks to consider before implementation

Just as CBDCs can provide benefits to central banks, governments, and individuals around the world, they also present significant risks that the public sector must manage before deploying a CBDC at scale. The risk of banking sector disintermediation, cybersecurity challenges, implementation costs for central banks and implications for the international financial system are just some of the concerns expressed by experts. Recent activity in the United States draws attention to perhaps the biggest concern with CBDC adoption: user privacy.

Just last week, US officials introduced the “Electronic Money and Secure Hardware Act,” which calls for the development of a digital dollar held by individuals on smart cards and personal devices. Unlike many proposals for CBDCs, the ECASH Act would not leverage a decentralized ledger to facilitate transactions. Proponents argue that this lack of logging would mimic the privacy-preserving nature of physical money, girdling users’ privacy in a world of increasing digital tracking.

Concerns about user privacy loom large

The concern for user privacy present in the ECASH law has been taken up by another bill presented last week by U.S. Representatives Grasslet, Cruz, and Braun aimed at preventing the Federal Reserve from, as an accompanying press release put it:[…]develop a direct-to-consumer CBDC that could be used as a financial monitoring tool by the federal government. This feeling seems to be shared by Yellen Secretary who, in his recent speech, noted that privacy protections need to be built into US approaches to the CBDC.

Concerns about user privacy when deploying CBDCs are not unique to the United States. EU regulators are also taking into account the surveillance potential of these systems. In a recent publication, EU regulators argued that any digital euro proposal must consider the privacy implications of the CBDC.

Perhaps no CBDC project has raised more user privacy concerns than the Chinese digital yuan. Experts say the digital yuan could give the government significant access to data on citizens, enabling state surveillance. Indeed, representatives in the United States have repeatedly referenced the Chinese example in their discussion of US crypto strategy, often criticizing its potential to restrict civil liberties.

Cross-industry engagement is key to responding to the rise of crypto

As governments continue to respond to the growing prevalence of crypto, the CBDC will likely remain a big part of the discussion and, with it, privacy concerns. It is essential that policymakers, regulators and central bankers work with experts from the private sector, civil society and academia to develop evidence-based and forward-looking strategies to realize the benefits and to mitigate the risks of these systems.

Melvin B. Baillie