“The Wild West of Finance”: CBDC, Crypto, and Privacy in the Digital Age

Dr. Hitesh Tewari explains CBDCs and why we should all consider the privacy implications before embracing government-sanctioned digital currencies.

CBDC or Central Bank Digital Currencies are a growing phenomenon that enjoys the support of many governments around the world. However, given the recent multi-billion dollar collapse of FTX and sudden large swings in the valuation of crypto tokens like Bitcoin Over the past few years, many people have grown tired of the crypto ecosystem that has grown in a short period of time.

For many observers, crypto is the Wild West of the financial world where there are very few rules or regulations, let alone enforcement. Many also fear what this new technological revolution will mean for them in terms of transactions of goods and services in an increasingly digitized world.

Many people got tired of the crypto ecosystem that grew in a short time

The Four Stages of Bitcoin Grieving

When Bitcoin was first launched in 2009, most diehard academics and crypto geeks aside, most observers dismissed it as another digital currency that was never going to garner mass support.

As Bitcoin began to gain traction, many of the same economists and bankers scoffed at the possibility that this new blockchain-based “decentralized currency” could actually challenge the existing global financial system.

The next phase was denial where banks and governments decided to ignore the small financial revolution that was starting on a global scale.

Finally, when the noise around crypto became too loud to ignore, the same organizations decided to jump on the crypto bandwagon and launch their own cryptocurrency offerings for fear of losing monetary control and missing out. the boat.

A New Era of Crypto Stability

This is where CBDCs come in. Central banks and governments around the world are promising a new era of stability and trust in crypto by launching their own stablecoins. These coins are pegged to fiat currencies such as Euro, Dollar and British Pound and therefore promise not to have the same wild swings in their valuations as has been the case with unregulated crypto tokens to date. .

CBDCs promise near-instantaneous transactions, less fraud, lower transaction fees, and better access to banking services for all citizens. From the outside, it looks like a win-win situation for everyone involved. However, if you delve deeper into what is on offer in these CBDCs, the rabbit hole you are making is deep and unsettling.

Digital banking to stay relevant

To understand why central banks are now beginning to deploy such digital tokens, it is important to understand the fundamental motivations of these organizations and the government payers they depend on.

Central banks, together with their governments, attempt to provide a stable financial and banking system for their citizens by controlling the supply of money in the economy, setting interest rates, promoting steady GDP growth, etc

This form of control is jealously guarded by central banks as a key weapon in their arsenal that intrinsically defines their existence. If banks cannot wield this weapon, they are no longer relevant in the digital age. In order to remain a force to be reckoned with, central banks have decided to launch their own crypto tokens in an attempt to preserve the status quo.

The double-sided coin of the “fully traceable” currency

These new CBDCs are not like existing crypto tokens such as Zcash which offer “total anonymity” of transactions to users. The level of anonymity provided by cryptocurrencies like Zcash is similar to what we have with physical cash today, where it is not possible to trace an individual’s daily transactions without a court order. signed by a judge to authorize a surveillance operation.

Instead, CBDCs are designed to be “fully traceable” and can easily be used to track our spending and create citizen profiles by state agencies. Banks and governments say they have to do this to avoid crimes such as fraudulent transactions, money laundering and extortion. However, the flip side is that if we were to replace all physical cash transactions with cryptocurrency transactions, we would be giving banks and governments carte blanche to track our spending habits and eventually our every action throughout the world. throughout the day.

China is leading the way in CBDCs with their e-CNY or digital Yuan. By the end of 2021, more than 250 million of its citizens had signed up for the e-CNY wallet and carried out e-CNY transactions worth more than $13 billion. Such a system is welcomed by the Chinese authorities, as it acts as a form of control for the regime over its large population. China has also teamed up with other “friendly countries” to enable cross-border e-CNY transactions which it hopes will allow the digital yuan to become a global cryptocurrency and wield its influence well. beyond its own borders. Imagine such a system being deployed or adopted in one’s own country and the disastrous consequences it would have for the privacy of ordinary citizens.

If we were to replace all physical cash transactions with cryptocurrency transactions, we would be giving banks and governments carte blanche to track our spending habits.

The history of money enters a new chapter’

As it stands, the International Monetary Fund says “about 100 countries are exploring CBDCs at one level or another.” They advise that while they support countries in their CBDC experiments, it is critical that policymakers build trust in digital currencies through “careful design and policy considerations.”

With apps like ChatGPT Showing us how fast AI technology is advancing, it is possible to imagine a scenario in which a vast AI network can monitor the consumption habits of all citizens of a country where a CBDC has been deployed.

If, for example, the AI ​​decides that a certain individual is drinking too many sugary drinks and that they could develop type 2 diabetes which could cost the state a lot of money to provide healthcare for that person, the IA might conclude that the citizen in question shouldn’t be allowed to buy other high-sugar products – now that’s a scary thought!

Closer to home, the European Central Bank is “working with national euro central banks to explore whether to introduce a digital euro” and aims to make a decision by Q3 2023 on whether to move forward. Ireland’s access to digital currency depends on this process.

Meanwhile, the US Federal Reserve released a research paper in early 2022 outlining the pros and cons of a digital dollar, but made no commitment to a rollout, so the future of CBDCs is still very much to be determined.

Now I think I could go buy a sugary drink while I still can!

Through Dr Hitesh Tewari

Dr Hitesh Tewari is Assistant Professor in the School of Computer Science and Statistics at Trinity College Dublin. His main research interests are in the areas of network security and applied cryptography.

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