The Latest Threat to Privacy: CBDCs – Central Bank Digital Currencies

Posted on Jul 28, 2023 by Glyn Moody

There’s a huge new threat to privacy, and most people aren’t aware of it: the rise of central bank digital currencies (CBDCs). These are digital currencies issued by central banks, rather than by a commercial bank or company. Around 100 countries are looking at the idea, and several – such as China and Nigeria – have already implemented it. The US is among those interested: last year, President Biden issued an Executive Order on the topic. A 2022 report on CBDCs from Deloitte went so far as to say their introduction worldwide is “inevitable.”

Digital currencies like Bitcoin are interesting because they sit outside the traditional banking system and operate in a decentralized way that makes scrutinizing transactions hard. CBDCs, by contrast, are part of the current banking system and generally under the control of the authorities. Advantages of CBDCs include:

  • cutting the costs of financial transactions
  • reducing risks for merchants
  • simplifying payments for companies
  • making tax avoidance and evasion much more difficult, because every unit of currency is tracked as it moves through the financial system
  • helping combat crime by making it easier for banks and the authorities to spot criminal activity

The advantages for governments and companies come with huge risks for ordinary citizens, especially with threats to their privacy. It’s no coincidence that China was one of the first countries to introduce CBDCs as they fit well in a system with little protection from government surveillance.

As their name implies, CBDCs are generally controlled by a central bank, which itself often under the control of a government. Unlike other digital currencies, CBDCs are centralized. This means there is a single (but possibly distributed) store of information about every financial transaction carried out in a country – effectively tracking everything that happens in an economy. This creates an attractive target for hostile nations and criminals. If a central data store is breached, detailed personal information about everyone in the country would become available – perfect for fraud and blackmail.

The way CBDCs are designed means that complete anonymity is impossible – to prevent double spending and fraud, the system needs to be able to trace the digital money. If every digital transaction is recorded, the central database will be a huge store of inherently personal information that gives unprecedented insight into people’s lives at the level of individual transactions.

Inevitably, law enforcement and other authorities could make the case that that they need access in order to fight crime or for reasons of national security. As history shows, even nominally liberal Western governments are willing to provide this kind of information, regardless of the harm it may cause to privacy.

Some governments might even allow information from these databases to be used for targeted marketing purposes – just like details of visits to websites are used today, with serious consequences for privacy. Moreover, widening the use of such sensitive data will make data leaks inevitable, undermining privacy further.

Perhaps the most disturbing aspect of CBCDs is that they create the possibility of programmable currencies. In its submission to a UK inquiry on CBCDs, the UK civil liberties campaign group Big Brother Watch warned about the dangers of programmability as follows:

The potential to program the public’s personal finances or welfare payments is an invasion of privacy, potentially a breach of the right to protection of property and, depending on the limitations set, could pose a serious threat to a range of other fundamental rights – from freedom of expression, to freedom of assembly and protection from discrimination. In the worst case scenario, CBDCs could be hijacked and used as vehicles for surveillance and control. For example, expiry dates could be imposed on the public’s private funds; limits may be placed on how much CBDC a person can hold at one time; interest rates and prices could be varied depending on someone’s identity; purchases could be prevented; taxes and fines automatically deducted; or funds frozen if a citizen acts in a way the government or third party provider disapprove of.

In other words, as well as allowing governments to track everything that people do with their money, CBDCs could enable authorities to control how people spend their own money, and whether they could spend it at all.

No wonder then that resistance is growing to the idea of CBDCs. For example, in the UK the House of Lords Economic Affairs Committee described them as “a solution in search of a problem.” A 2022 survey in the US showed that two thirds of those commenting on the Federal Reserve’s proposal for a CBDC were concerned about the plans. In Switzerland, a national vote will be held on whether a move to a completely cashless society based on digital currencies should be prevented by law. And in Nigeria, people have already taken to the streets to protest about a shortage of cash caused by an attempt to push people towards the government’s CBDC.

A year after Nigeria’s eNaira was launched, fewer than 0.5% of Nigerians were using it, despite the government’s continuing and heavy-handed attempts to force people to do so. Nigeria’s evident problems are a warning to governments that people may be reluctant to give up cash, which comes with the big advantage of being completely anonymous. But given the benefits for governments, banks, and companies, we can expect efforts to introduce CBCDs around the world to continue and perhaps accelerate, with extremely serious harms to privacy as a result.

Featured image from Wikipedia.