Central Bank Digital Currency (CBDC) is a new form of money that exists only in digital form. Instead of printing money, the central bank issues digital coins. It mainly aims to facilitate digital transactions and transfers through a new type of widely accessible, digitally issued money.
Efforts to make CBDC is growing all over the world for many reasons. First, the COVID-19 crisis induced a shift in payment habits towards contactless payments and e-commerce due to the fear of banknotes as a way of transmitting infection, which accelerated the decline of cash use. Second, cryptocurrencies developed by private companies (e.g. Novi by Facebook) or informal communities (e.g. Bitcoin) have seen significant developments and gain in value. As a response, 81 countries (representing over 90 percent of global GDP) are now exploring central bank digital currencies.
The European Central Bank, after exploring possible design scenarios for launching a Digital Euro, consulted some stakeholders. Results show that privacy is considered the most important feature of a digital euro by both citizens and professionals. An investigation phase will start in October 2021, with the aim of investigating what a digital euro might look like.
CBDC could be developed in a number of ways. With a centralised approach, transactions are recorded in ledgers managed by central banks that also provide customer-facing services. With a decentralised approach, a central bank sets rules and requirements for the settlement of CBDC transactions that are then recorded by users and/or supervised intermediaries.
According to design choices, CBDC could have diverse impacts. First, worth noting that actual money requires many intermediaries during the payment process, resulting in a less efficient and secure payment experience. CBDC could find solutions to these issues, developing a more efficient, fast and secure payment process. Then, CBDC can pose a risk of disruption to commercial banks and the financial ecosystem, depending on the new role that they will have or maintain.
Positive foreseen impacts on data protection:
- Difficulties in demonstrating positive impacts: since CBDC are at their very early stage, direct positive impacts cannot be demonstrated with concrete figures.
- More control over personal data and security: assuming that the development of CBDC will follow a strict data-protection-by-design and by-default approach, a CBDC could increase data protection and security in digital payments and provide payers more control over their personal data.
- Enhanced anonymity in the payment process: privacy-enhancing technologies could be used for enhancing anonymity within the entire payment process, while allowing auditability only in pre-determined lawful cases, such as for preventing money laundering, counter terrorism financing and tax evasion.
Negative foreseen impacts on data protection:
- New players might increase the amount of data collected: direct access to central bank accounts of a CBDC could lead to a greater number of new players that offer payment services and digital wallets. When this market development is linked to the increased efficiency of payments and transfers, many users might prefer a payment service based on CBDC, increasing the amount of personal data collected by such intermediaries.
- Wrong design choices might worsen data protection issues: payment data already reveals very sensitive aspects of a person. Wrong design choices in the underlying technological infrastructure might exacerbate the privacy and data protection issues that already exist in the digital payment landscape. For example, transactional data could be unlawfully used for credit evaluation and cross-selling initiatives.
- Lack of security might turn into lack of trust of users: security concerns over payments can be worsened, leading to the lack of privacy of payers and turning into lack of trust in the CBDC, which is among the core requirements for a monetary instrument to be exchanged.
- • CBDC Tracker - https://cbdctracker.org/
- • Atlantic Council, The Rise of Central Bank Digital Currencies, 20 April 2021 - https://www.atlanticcouncil.org/cbdctracker/
- • European Central Bank, A digital euro – 2021 - https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html
- • European Central Bank – Bank of Japan, Balancing confidentiality and auditability in a distributed ledger environment, February 2020
- • Institute and Faculty of Actuaries, Understanding Central Bank Digital Currencies (CBDC), March 2019 -
Tech Champions: Stefano Leucci; Robert Riemann