Privacy is especially problematic with CBDCs issued for retail payment use in developed economies, including the so-called “digital euro.” Dea Markova, managing director and head of digital assets at Forefront Advisers, explains the challenges of privacy and politics when it comes to Central Bank Digital Currencies (CBDCs).
The European Commission proposed legislation on the digital euro in June, and the European Central Bank (ECB) is near-certain to conclude its investigation into the digital euro this October. Privacy is the most important feature for both citizens and professionals, and the ECB has made it clear that the digital euro will be distributed via intermediaries.
The ECB has zero interest and insufficient resources to launch a CBDC so it can snoop on the individual spending decisions of eurozone citizens. Tokenized payments even between identified wallets give more options to create privacy protections, and the legislation requires the ECB to explore pseudonymization or encryption to preserve privacy.
However, the ECB is looking to replicate some cash-like features, like paying offline or not needing a bank account. This could lead to lower limits for identity verifications than what is currently available with cash payments.
The ECB is aware of citizens’ concerns and the Commission launched a proposal to enshrine the right for cash to circulate EU economies. It is critical for the safe future of payments to take away the power to abuse privacy in payments from both the central bank and the private sector intermediaries.
Ultimately, privacy is a politically-sensitive topic and it is a convenient vector of attack regardless of why part of the industry or a decision maker may have reservations about the CBDC.