Financial and Monetary Systems

Privacy concerns around CBDCs – are they justified?

A person uses an ATM.

Any change in technology in any industry inevitably creates new concerns. Image: Unsplash/Eduardo Soares

Sandra Waliczek
Blockchain and Digital Assets, World Economic Forum
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Financial and Monetary Systems

  • Ensuring data privacy and consumer protection are of paramount concern in discussions around central bank digital currencies (CBDCs).
  • Complex coding systems involving cryptography as well as legal frameworks will be key to embedding privacy and keeping customer data safe.
  • Details on these developments and other elements of CBDCs are explored in depth in the World Economic Forum’s Digital Currency Governance Consortium white paper series.

Ten years ago, many of us were blind to the potential privacy pitfalls of oversharing personal information online. For some people, it resulted in their money – or even identities – being stolen.

A decade of rapid digitalization later and individuals are much wiser about privacy issues – partly thanks to legal protections that have been put in place to help them. The EU’s General Data Protection Regulation came into force in 2016 to make “Europe fit for the digital age”, and numerous US states are currently bringing in more comprehensive consumer data privacy laws.

The rapid privacy learning curve that started with the internet is helping trigger much quicker and clearer conversations about this issue when new technologies come into play. Discussions about safeguards around AI are widespread, and in the emerging world of central bank digital currencies (CBDCs), ensuring data privacy and consumer protection are of paramount concern for all those involved.

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Using cryptography to embed CBDC privacy

No bank wants to use a system that poses privacy, confidentiality or other security concerns. This is true whether they are using cash, cheques, credit card transactions or CBDCs – digital money issued by a central bank.

This is why highly detailed explorations of cryptography – a method of coding data so that only the person or institution meant to see it is able to see it – are happening long before any central bank considers adopting or even trialling a CBDC.

A chart showing some priorities that tend to align between regions when it comes to CBDC development.
Privacy is a top concern for central banks as they think about CBDCs. Image: World Economic Forum, Central Bank Digital Currency Global Interoperability Principles

Various complex types of cryptography are explained in the World Economic Forum’s Digital Currency Governance Consortium White Paper Series. These include zero-knowledge proofs, which ensures only the required level of data about an account or transaction is shared, rather than all the data.

“Zero-knowledge proofs can be used to prove that a transaction is legitimate, while hiding the data, or for revealing information about a CBDC account balance without revealing the balance itself,” the white paper says. “For instance, the central bank could calculate an interest payment or benefits for a stimulus payment for a certain account, without seeing the size of the account balance.”

Examples of CBDC privacy protections in practice

Sweden’s central bank, the Riksbank, has put in place privacy architecture for its pilot of the e-krona CBDC. This involves the use of an open-source distributed ledger that ensures information is only shared to central bank authorities, financial regulatory authorities and financial intermediaries on a need-to-know basis.

“This allows for a level of privacy that is akin to the two-tiered model used by central banks today,” the World Economic Forum Digital Currency Governance Consortium White Paper Series says.

Conceptual architecture for the e-krona pilot.
Sweden’s privacy architecture for its CBDC. Image: World Economic Forum Digital Currency Governance Consortium White Paper Series/Accenture

Newer systematic and mathematical methods are also being worked on to achieve the highest levels of privacy, confidentiality and anonymity in financial systems.

In China’s e-CNY pilot, transaction data is being encrypted and stored securely to protect user information, but in a way that allows the central bank to still trace transactions to prevent illegal activities such as money laundering and the financing of terrorism, the World Economic Forum Central Bank Digital Currency Global Interoperability Principles points out

Cybersecurity and CBDCs

Cybersecurity is another key concern when it comes to CBDCs, and will be critical for embedding privacy and data protection.

Banks have constantly updated their cybersecurity set-ups in the digital age as online threats have evolved and become more sophisticated. Any move to roll out CBDCs would necessitate the concurrent rollout of new cybersecurity measures.

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How is the Forum tackling global cybersecurity challenges?

As well as building on best practices on cybersecurity such as those laid out by the US National Institute of Standards and Technology or the STRIDE threat modelling framework, banks will need to explore new software and technologies such as multi-signature wallets to help secure and recover compromised credentials, the Forum’s CBDC Technology Considerations white paper says.

CBDC consumer protection considerations

Consumer protection is a key consideration in the design of CBDCs. This is why risk mapping around this area is the subject of an entire chapter of the Forum’s Digital Currency Governance Consortium White Paper Series.

Innovations in payment methods have always created new opportunities for consumers, but new challenges and risks also emerge. Consumer trust is critical in ensuring the successful adoption of any digital currency, so careful consideration of the appropriate consumer protections is paramount to achieve widespread use of CBDCs.

Educating consumers will also be key, in order to empower them to make informed decisions that match their needs with the appropriate digital payment solution, without exposing them to undue risk.

Comparison of current top-line consumer risks in existing systems and in digital currencies
Mapping the potential risks around CBDCs and consumer protection is a focus of central banks. Image: World Economic Forum Digital Currency Governance Consortium White Paper Series

Helping the public understand CBDCs

Any change in technology in any industry inevitably creates new concerns. Central banks are more than aware of the privacy and security considerations CBDCs will raise, and as well as working to ensure the practicalities around protection are addressed, they have another important job to do in educating the public about the benefits of CBDCs and the way they are being managed.

They need to explain how transaction data is being anonymized and aggregated to protect individuals' identities and activities. Banks including the European Central Bank are already exploring how to embed anonymity in CBDCs, while others such as the Bank of England have set up information pages explaining CBDCs in a question-and-answer format.

FAQs regarding CBDCs for the Bank of England.
Banks have a duty to clearly explain CBDCs to consumers. Image: Bank of England

Legal frameworks will also be needed to strictly limit any government's ability to access and use transaction data without proper justification or oversight.

These steps will help ensure not just that privacy is embedded in CBDCs, but that trust is too.

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