Central Bank Digital Currencies (CBDCs) are a growing topic of debate worldwide. Advocates of this type of digital money cite potential benefits, such as the ability of the unbanked to better participate in the economy, and a generally more efficient financial system.
But not everybody is impressed. Critics note that a CBDC could disrupt the big Wall Street banks and harm the payment processing business that currently handles financial transactions.
Here at RestorePrivacy, we’re focused on the privacy implications of CBDCs. And based on our research, there is a lot to be concerned about.
Financial privacy with CBDCs vs cash
CBDCs are often described by advocates as replacements for inconvenient, “unsanitary” cash (in a post-COVID world). While a central bank digital currency could be used in place of cash, that doesn’t mean it would have the exact same characteristics as cash.
When you buy something with cash, you take physical currency units (dollars, rupees, whatever) and physically hand them to the seller. Generally speaking, only you and the seller know about the transaction, which makes this a private transaction. And with a little care, you may be able to arrange things so that the seller doesn’t even know who you are, making it an anonymous transaction.
Now let’s imagine the same transaction using a CBDC. Instead of handing the seller some physical currency units, you transfer some digital currency units from your digital wallet to the seller’s digital wallet. From this perspective, the transaction looks the same, aside from the form of the currency.
But all units of a CBDC must be tracked by the Central Bank at all times. If they are not, some smart hacker would figure out a way to counterfeit them or spend them more than once. This is known as the double-spending problem, and it has plagued all attempts at producing a viable digital currency until the introduction of Bitcoin.
To prevent double spending, the Central Bank will always know which wallet holds every single unit of their digital currency at all times. This means the Central Bank will have a record of every transaction that occurs. And consequently, financial privacy is lost.
Can CBDC transactions be anonymous?
Theoretically, a CBDC could be designed to support anonymous transactions. But the chances of that happening are about zero. As David G.W. Birch argues in this Forbes article, no government will allow anonymous digital currency.
One of the “benefits” governments use to promote their digital currency plans is the ability to stop criminals from using the currency for nefarious purposes. And the way to do that, they argue, is to prevent anonymous transactions.
This also lines up with the arguments we have been hearing about eliminating cash. Cash also poses problems for governments that want to eliminate black market transactions.
With CBDCs, the tax collector cometh
And let’s not forget about taxes, the elephant in the room. A CBDC is a tax collector’s dream come true. By eliminating all privacy and having a record of every transaction, then every transaction (and individual) can be taxed by the government.
With governments around the world struggling to pay off debt and current obligations, rolling out a CBDC will become all the more attractive.
Can CBDC transactions ever be private?
Given that an anonymous CBDC looks very, very unlikely, could one be designed to allow at least some degree of privacy with transactions? Let’s start by agreeing that a private transaction is one where only the two parties involved in the transaction know each other’s identities.
If this is the case, then according to a recent paper by Sweden’s Riksbank, private CBDC transactions are impossible. The paper, titled On the Possibility of a Cash-Like CBDC, points out that no matter how you design a CBDC, it must include a record of all the transactions. That record also has to know the identities of the parties involved in the transaction. This makes real privacy impossible.
Of course, whoever controls the record could promise to keep your transactions private (unless they need to expose them for some good reason). But trusting a person or organization to keep your transactions private is a far cry from the kind of end-to-end, cryptographically secured privacy provided by the products and services we favor.
Is China the future?
China has already introduced its digital yuan, which is being called the “e-yuan”. This is a particularly scary version of CBDC that seems designed as much to control the populace as to make people’s lives easier. While the launch so far seems to have been a failure, it hasn’t stopped dozens of other countries from at least considering the implementation of their own central bank digital currencies.
It seems only a matter of time before most countries impose a CBDC on their citizens while simultaneously pressuring the populace to abandon the use of cash. While CBDCs do indeed offer some benefits, those benefits will come at the cost of your financial privacy.
Regarding cash – I don’t think the central bank will ever be able to eliminate it. Casinos currently have their own proprietary ‘cash’ in the form of chips, and I imagine that in the absence of real cash, black markets would adopt something similar.
No doubt enforcement agencies would attempt to crack down on this as much as possible, but it has been, and always will be, impossible to stop the black market.
Concerning the paragraph on CDBD privacy, I don’t personally agree with Riksbank (Rick & Morty anyone?). A CDBD could be designed with privacy in mind if it uses a model similar (or the same) as Monero’s zero-knowledge and pool mixing methodologies. It is true that a super-computer could eventually corroborate identities with transactions (eventually… in theory… maybe perfectly…), but who really does that? Except the IRS who was trying to understand crypto currencies ? And big investment firms trying to get ahead of the markets ? In practice, I think the communities are quite fond of their abilities for tracking whales and such, but who’s gonna track your beer purchase last night? No, when we talk about privacy, we refer to Personal Information, or Personally Identifiable Information (PII). Numbers and sellers just don’t cut it in that contextual realm. The real kicker is how the banks “require” KYC/AML data along with transaction data in their CBDBs in order to satisfy politicians. Now that is an entirely different subject, and a wee-bit more technical than labelling all CBDBs equal. China already had an Orwellian surveillance culture in place before their CBDB came out. Let’s see what happens in Latin America where drug lords prevail?
“but who’s gonna track your beer purchase last night”
If drinking beer becomes non-kosher per the surveillance state (like they are currently tying to do with taking natural supplements and health foods as a way to prevent illness) then I am very sure that they will track it. It will all be part of the data input to the predictive modelling systems (AI) that will tell them your social score.
We need to nip this in the bud ASAP!
😀 Good article.
But you’re actually making the case as to why the banks would attempt to NOT implement CBDBs. 😉 (ie; attempt to block their deployments, big time.) Banks, companies and a lot of governments are not interested in the public knowing about their secret spending. “The public” doesn’t care if their neighbor knows that they bought this brand or such of toothpaste, everything remains hidden behind large strings of numbers, but bankers don’t want the public to know what they really do in life, otherwise they’d be out of business.
I’m an old timer punk, and I say, the people WANT public economies. Its the (only?) solution to this vile corruption right now. (And this is where the Salvador experiment will be interesting to watch ?) Anyhoo, in Canada, CBDBs will only fly if the Banking Cartel (kof! exhale…) agrees to their own (corruptible) version. Just look at the job description for the Treasurer of Canada… its quite telling. I’m certain its the same in the US, albeit maybe hidden behind a delegated job in the treasury department.
Central Bank Digital Currencies must NEVER be allowed to replace paper currency. Everyone who visits Restore Privacy on a regular basis will realize this.
If you think the NSA collecting ALL of your digital communications is bad, just wait until the Central Banks/Governments log and track ALL of your purchases, whether online or at your local store’s cash register. BTW, if you pay with a credit/debit card, Apple Pay, Google Pay, PayPal, etc., they already know what you are buying and when/where you bought it. After all, some credit card companies have already become social justice warriors, and are blocking their customers from certain purchases, like firearms and ammunition. If CBDCs replace paper currency, then the banks/Governments have complete control over your purchases: They will know EVERYTHING you purchase, know exactly where/when you make the purchases and can block you from making purchases.
Consider “sensitive” purchases you may make that you wish to keep private/anonymous; do you really want the Banks/Governments to know what you are buying to “enhance” your personal relationships? Here’s a tip: use cash at adult stores.
If you feel privacy and your own decision-making are important to you at all, the thought of eliminating cash currency and moving to CBDCs should scare the hell out of you.
Hello admin please review brave search engine is it better than other privacy focused search engines
Yep, we’ll be checking it out soon.