• As governments around the world grapple with the implications of crypto's explosive growth, 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 pose significant risks that the public sector must address before deploying a large scale CBDC.
  • With user privacy concerns looming large over CBDCs, governments must consult with experts across sectors.

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

Image: Atlantic Council

As governments around the world grapple with the implications of crypto’s explosive growth, many are continuing to explore—with increasing urgency—the development of central bank digital currencies (CBDCs) in the hopes of revitalizing and expanding access to payments infrastructure, facilitating cross-border payments, and maintaining sovereign currency control. Yet persistent concerns about CBDCs, including and perhaps most notably privacy concerns, continue to befuddle policymakers and central bankers, alike.

The rapid growth of the crypto market—valued today at roughly $1.75 trillionprivate sector attempts at developing cryptocurrencies, and world-wide governmental efforts to launch digital currency systems, have all helped galvanize governments to action. In an effort to control the narrative, maintain authority, and address the possible impacts of widespread adoption of cryptocurrencies, many continue to consider developing and implementing CBDCs.

Growth of CBDC exploration

CBDC is a digital currency backed and issued by a central bank. At present there are 87 countries, constituting over 90% of global GDP, actively exploring the concept. These projects range from research stage all the way to implementation. Their breadth evinces strong global interest in goals including strengthening financial systems and enforcing sovereign currency control.

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

Potential value of CBDC implementation

The potential benefits have engendered a flurry of activity, with 14 countries already piloting CBDCs. Indeed, though much of the media frenzy around 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 related to CBDCs that encouraged intra-governmental cooperation as well as international collaboration in the creation of a potential United States CBDC. Still more recently, Secretary of the Treasury Janet Yellen remarked that “[...]a CBDC could become a form of trusted money comparable to physical cash.”

Risks to consider prior to implementation

Just as CBDC may offer advantages for central banks, governments, and individuals around the world, they also pose significant risks that the public sector must address before deploying a large scale CBDC. The risk of banking sector disintermediation, challenges of cybersecurity, costs of implementation for central banks, and implications for the international financial system, are just a few of the concerns expressed by experts. Recent activity in the U.S. calls attention to perhaps the largest concern about CBDC adoption: user privacy.

Just last week U.S. representatives introduced the “electronic currency and secure hardware act,” which advocates 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. Its proponents argue that this lack of record would mimic the privacy-preserving nature of physical cash, girding user privacy in a world of increasing digital tracking.

Concerns over user privacy loom large

The concern for user privacy present in the ECASH act was echoed by another bill introduced only last week by U.S. representatives Grasslet, Cruz, and Braun directed at preventing the Federal Reserve from, as an accompanying press release put it: “[…]developing a direct-to-consumer CBDC which could be used as a financial surveillance tool by the federal government.” This sentiment seems to be shared by Secretary Yellen who, in her recent speech, noted that privacy protections must be built into U.S. approaches to CBDC.

Concerns about user privacy in the rollout of CBDCs are not unique to the U.S. Regulators in the EU are also reckoning with the surveillance potential of these systems. In a recent publication, EU regulators argued that any proposal for a digital euro must reckon with the privacy implications of CBDC.

Perhaps no CBDC project has raised more concern about user privacy than China’s digital yuan. Experts argue that the digital yuan could give the government significant access to data on citizens, further enabling state surveillance. Indeed, representatives in the U.S. have repeatedly referenced the Chinese example in their discussion of U.S. crypto strategy, often criticizing its potential for curtailing civil liberties.

Cross-sectoral engagement critical in responding to crypto’s rise

As governments continue to respond to the increasing prevalence of crypto, CBDC will likely remain a large 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, future-looking strategies to realize the benefits, and mitigate the risks, of these systems.