The digital pound: Busting the privacy myths

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Source: Quant | Written by Martin Hargreaves, Chief Product Officer at Quant

Concerns about CBDCs are ill-founded, writes our Chief Product Officer, because the underlying infrastructure can and would be set up in a way that limits authoritarian controls, surveillance, and protects consumer privacy.

This article first appeared in CityAM on 28 February 2023 >

Since UK Prime Minister Rishi Sunak advocated for a UK central bank digital currency while Chancellor back in October, Google searches for the term have soared. In tandem, the suggestion that CBDCs could be used as ‘an instrument of state surveillance’ has also been gaining momentum – with the suspicion most notably included in a report from the House of Lords economic affairs Committee.

The idea that a UK CBDC would be used to control citizens and compromise their privacy is a position which has also surfaced in the pages of the financial press in past weeks, as the Bank of England and UK Treasury launched their joint discussion paper ‘The digital pound: a new form of money for households and businesses?’. The 116-page document outlines the opportunities and challenges raised by this new monetary instrument, inviting businesses and the general public to respond by 7 June.

But how true are the assertions that the introduction of a digital pound would allow the government undue oversight and control of people’s personal finances? Dialogue around the potential issuance of a digital pound has become increasingly alarmist, with suggestions we are on the verge of an Orwellian nightmare in which government officials have an up-close view of what we’re buying – along with an ability to freeze the money in our bank accounts on a whim.

The Bank of England proposes to address the privacy point via the use of an anonymised ‘core ledger’, via which high street banks and other approved firms could then provide a customer-facing interface. End-users would interact with the digital pounds in the ‘wallets’ provided by their normal bank, rather than directly with the central bank.

As described above, CBDCs can indeed be programmed to behave in a certain way. However, it is illogical to suggest that the Bank of England would program its currency in a way that could impact stability and fungibility. If constraints were put on how and when a CBDC could be spent, it would impact its value and open the door to arbitrage of the digital pound.

Nineteen of the G20 nations are now piloting CBDC projects, which means governments rightly need to consult on public concerns, as part of broader discussion of the potential benefits of this type of money.

The idea for a retail CBDC is a response to the declining use of cash and the corresponding rise in electronic payments. All central banks have an inherent responsibility to make central bank money useful and accessible to citizens, and it could be argued that cash alone is now struggling to fulfil this mandate.

CBDCs could usher in a range of benefits in terms of efficiency and transparency: A digital pound could enable citizens and businesses to automate cumbersome payments and processes and implement logic into money. For example, consumers could use new smart contract functionality within CBDCs to automatically issue payment after the delivery of goods or services – a sort of digital escrow, without the middleman. This feature would help people avoid the returns process and retain access to their money. Merchants could see payments cleared and settled faster, prevent chargebacks and gain a more accurate view of their accounts and stock. CBDC programmability could be extended even further. Payments could be graduated with automated triggers and built-in discounts and incentives to encourage better service delivery or performance.

At a macro level, CBDCs could equip central banks with new tools to significantly help soften the impact of forthcoming financial crises, given they would provide a real-time view of risks and currency outflows.

The elephant in the room, for those of us who believe retail CBDCs should be broadly welcomed, is China’s menacingly enthusiastic push of its digital yuan. This has been newly reinvigorated by the Lunar New Year holiday season, in which hundreds of government-backed events celebrating the digital yuan have taken place. More state control is certainly a major driver for Beijing in popularising its CBDC, allowing for the monitoring of citizens and the systems used by businesses.

However, the slippery slope fallacy comes when people argue that the same would happen in the UK. This line of argument ignores the fact that this is a matter of where a nation sits politically on the spectrum from libertarian to authoritarian, rather than any factor inherent to CBDCs. There is a lot of technology that could be used to control populations in the West that simply isn’t, as a matter of political preference. A CBDC would be no different.

It is also worth pointing out that government agencies already have widespread (and important) powers to track and freeze funds where nefarious activity is suspected. Again, monetary system control is a policy matter, rather than being inherent to a type of currency.

CBDC supporters like me are quick to remind opponents that the underlying infrastructure can be set up in a way that limits authoritarian controls, surveillance, and protects consumer privacy through public-private collaboration and partnership.

The launch of the Bank of England’s consultation on the concept of a digital pound is a chance to set the record straight and return to a more realistic conversation about what this new form of currency might mean.

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