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News Every Day |

‘Privacy‐​minded’ CBDCs Are a Wolf in Sheep’s Clothing

‘Privacy‐​minded’ CBDCs Are a Wolf in Sheep’s Clothing

Nicholas Anthony

It may come as a surprise to some that there have been recent efforts to propose “privacy‐​minded” central bank digital currencies (CBDCs). Proponents counter concerns that CBDCs will lead to greater surveillance by saying things like, “It just needs to be designed right,” or “We just need a CBDC bill of rights.”

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The idea is a welcome change of pace, but one that is likely too good to be true. The problems with these arguments are probably readily apparent. But to put things bluntly, so that it is abundantly clear: There is little reason to trust the United States government to establish a “CBDC bill of rights” when it has already done so much to undermine the existing Bill of Rights. From the creation of the third‐​party doctrine to the failure to adjust reporting thresholds for inflation, the government has largely eroded any protections for financial privacy.

Another example from history might make the risk of proposing a privacy‐​minded CBDC more tangible. When Edward Snowden, a former National Security Agency (NSA) consultant turned whistleblower, leaked classified information in 2013, it was revealed just how huge domestic surveillance had become in the wake of the September 11 attacks. Yet there was a smaller story within these revelations that is especially telling when considering proposals for a privacy‐​minded CBDC. Thomas A. Drake, a former NSA official turned whistleblower, shared how he proposed a system at the NSA that could have better protected the privacy of Americans during domestic surveillance.

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The basic premise was that, although it would be a sweeping surveillance program, any identifying information would be anonymous by default. However, if there was actionable information, then a warrant could be secured to de‐​anonymize and identify to whom the information pertained. Drake took this proposal to NSA leadership, but he was ignored and eventually told that the NSA was not interested in the idea.

It later came to light that the program Drake proposed was used, but the section that would have protected Americans’ privacy had been stripped out. In other words, the team that worked to create a limited surveillance system that would attempt to respect Americans’ privacy inadvertently created one of the largest surveillance systems in U.S. history.

This experience should be viewed as a cautionary tale for those seeking to promote CBDCs. Much like Drake’s experience at the NSA, it’s likely that even a well‐​intentioned design could quickly become something very different. Whether due to inertia or a crisis, the history of financial surveillance has already shown how something introduced subtly can quickly expand.

Chris Meserole, the director of the Artificial Intelligence and Emerging Technology Initiative at the Brookings Institution, put it well when he responded to a question about the risk of a CBDC being used for surveillance and control in the United States. “I’m not worried about the U.S. immediately going down that road,” he said, “but I do worry pretty significantly that once [a CBDC] is created, all it is going to take is [an awful event such as a terror attack] and suddenly there is going to be immense pressure to use that system in pursuit of different security or criminal justice activity.”

Ethereum cofounder Vitalik Buterin has warned much the same, saying that he once had “somewhat more hope, probably naively” that CBDCs could incorporate the transparency, verifiability, and privacy of cryptocurrencies. However, he noted that after CBDC systems are developed, the protections “all sort of fall away.”

“We get systems that are not actually much better than existing payment systems, because they just basically end up being different front ends for the existing banking system,” Buterin said. “They end up being even less private and basically break down all of the existing barriers against both corporations and the government at the same time.”

These concerns should not be shocking. Central bankers — including Federal Reserve Chair Jerome Powell, Bank for International Settlements general manager Agustín Carstens, European Central Bank President Christine Lagarde, and Bank of England Governor Andrew Bailey — have openly and repeatedly said that anonymity and complete privacy would not be an option with a CBDC.

Given that the risks are so many, and the benefits are so few, this path is one that is likely better left untraveled. CBDCs are ill‐​suited for helping financial inclusion, too late to improve payment speeds, unlikely to advance monetary policy, and unhelpful for maintaining the dollar’s world reserve currency status. With that in mind, there should be little doubt that governments most likely want CBDCs to solidify their control over money in response to the rise of cryptocurrencies.

Likewise, there should be little doubt that organizations pushing CBDCs and the tech companies developing them have a profit incentive to encourage CBDC adoption regardless of the outcomes to which they may lead. Proposals for a “privacy‐​minded CBDC” are, unfortunately, likely to prove to be little more than a wolf in sheep’s clothing.

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