Privacy remains sticking point in America’s ongoing CBDC debate

A CBDC in the US could erode financial privacy and “upend the commercial banking system,” witnesses argued at a Thursday hearing

article-image

US Rep. Warren Davidson | lev radin/Shutterstock modified by Blockworks

share

Debate among members of Congress — as well as financial and law professionals — about a central bank digital currency continued just days after an anti-CBDC bill was introduced. 

Some of the witnesses testifying before the House Subcommittee on Digital Assets, Financial Technology and Inclusion Thursday argued that a CBDC could erode privacy and upend the commercial banking system. Another said it offers a chance to bolster financial security on public rails. 

A wrongly-structured system of money is “perhaps the biggest existential threat to Western civilization,” US Rep. Warren Davidson, R-Ohio, said during the hearing.

But Rep. Stephen Lynch, D-Mass., argued during the session that a government-issued digital dollar could be designed to promote financial inclusion and protect privacy while streamlining payments.

Lynch noted that there has been “fear mongering” — fueled in part by the crypto industry — about a CBDC being weaponized as a tool for government surveillance or control. 

Those narratives can shut down discussions, Lynch warned, as other countries make progress toward potentially implementing such a digital currency.   

China’s digital yuan pilot is ongoing while Russia is experimenting with a digital ruble. The European Central Bank has planned a digital euro pilot that could lead to a possible launch in 2028. 

Although concerns about data privacy and government surveillance are real, Lynch said, a CBDC can be designed in a way to protect personal data while also including features to counter money laundering and terrorist financing.

“It is counterintuitive that my colleagues should be raising concerns about data privacy while thousands of private companies — domestic and foreign — are surveilling, aggregating and selling consumer data each and every day,” the Massachusetts Democrat added. “As policymakers, we should be asking questions about how a digital dollar could be designed to maximize privacy and prevent exploitation of personal data.”

The hearing came just days after House majority whip Tom Emmer, R-Minn., and about 50 other Republicans reintroduced an anti-CBDC bill.

First unveiled in February, the proposed legislation seeks to block the Federal Reserve from directly offering a CBDC to individuals — all in a bid to protect Americans’ privacy.

CBDCs remain a hot topic. A 2022 Bank of International Settlements survey found 93% of central banks are exploring CBDCs. Despite the high interest, RBC Wealth Management said in a report last month that privacy and security risks stemming from such currencies outweigh any benefit.

Witnesses highlight concerns

Various witnesses during the Thursday hearing raised concerns about a CBDC — or questioned its benefits — while one said such a currency presented “a unique opportunity.”

Norbert Michel, director of the Cato Institute’s Center for Monetary and Financial Alternatives, focused on a CBDC’s risk to privacy, noting that it would “place all financial transactions either in a government database or leave them a keystroke away.”

But Raul Carillo, a lecturer at Columbia Law School, said that privacy concerns around CBDC should be compared to the current system. 

“The private sector does not protect data security or data privacy sufficiently,” he noted. “Crude opposition to CBDC based on surveillance grounds with no comparison to a real baseline, is blinkered and leads us to throw the baby out with the bathwater.”

Financial surveillance threats in the US exist in both the public and private sectors, Carillo added. 

“The digital dollar system presents a unique opportunity, I think, to actually build financial privacy and security in this country through public infrastructure that would benefit everyone,” he said. 

To the extent central banks create CBDCs, there will be a tradeoff between identity verification and privacy, according to Christina Parajon Skinner, assistant professor of legal studies and business ethics at the University of Pennsylvania.

“More than likely central banks will always choose identity verification because they will never feel comfortable sacrificing the national security goals that they see as accompanying robust identity verification,” Skinner said.  

Aside from privacy concerns, Paige Pidano Paridon, senior associate general counsel of regulatory affairs for the Bank Policy Institute, said that a CBDC could “upend the commercial banking system and create financial instability.”

Read more: Retail CBDCs could pose risks not yet known, IMF head says

Like an asset held in custody, a retail CBDC could not be used by banks to make loans the way that dollar deposits are used today, Paridon noted. 

“Any transfer of a dollar deposit to a CBDC is a dollar unavailable for lending to businesses or consumers,” she added. “By attracting deposits away from banks, a CBDC likely would […] severely constrict the availability and increase the cost of credit to the economy.”

Yuval Rooz, co-founder and CEO of fintech firm Digital Asset, urged Congress to work with the private sector on any digital dollar efforts to utilize proven technology.

“Any solution that ignores private sector innovation risks technological stagnation and will ultimately undermine our global competitiveness,” Rooz said.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2023

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Unlocked by Template.png

Research

With the spot ETH ETF approval, the institutions are coming. stETH - given its dominance in marketshare, existing liquid market structures, and highly desirable properties - is poised for institutions.

article-image

The QT taper begins this month…but what does that mean for markets?

article-image

Plus, the rise of RWAs could bring about a significant shift in how real-world investments are managed and accessed

article-image

The distributed cell plan provider started selling its own hotspots in October 2023

article-image

The Brazil-based asset manager’s filing comes during a year of milestone bitcoin and ether fund approvals

article-image

The purchase of five sites in Georgia set to help CleanSpark hit its mid-year operating hash rate target of 20 EH/s

article-image

Plus, it’s beginning to look like we may be in for a cruel summer