Privacy remains sticking point in America’s ongoing CBDC debate

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.

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