There have been intense discussions about central bank digital currencies (CBDCs) over the past year. While some countries have already rolled out their CBDCs, some are still assessing the feasibility of these digital currencies and how they can be developed to suit the needs of all users.
ECB says CBDC will offer privacy options for CBDC
One of the main concerns by users regarding CBDCs is that they will erode user privacy. The European Central Bank recently released a presentation about this matter, saying that the Eurosystem would focus on heightened user privacy. An EU CBDC will only reveal minimal transaction data, but the central bank added that total user anonymity was not an option.
The ECB has offered three privacy options that can be used by users of this CBDC. The first option addresses the need for transaction data to monitor transactions to avoid their use in money laundering or terrorism financing. To combat the use of the digital euro in illicit activities, financial intermediaries such as banks will gain access to transaction data.
The bank said that the other privacy options were the “desirable” path toward developing a CBDC. One of the options would offer a high level of privacy for low-risk payment options that do not involve large sums of money. However, higher monitoring options would be used in high-value payments. The ECB did not reveal the exact threshold for low value and high-value payments.
The other option is for the central bank to offer a high level of privacy. This privacy will permit transactions and balance details to be unavailable to the central bank. However, the central bank said that such a degree of privacy could only be offered for low-risk payments. These offline payments will be similar to physical cash transactions.
CBDCs cannot guarantee 100% anonymity
The ECB has stressed that user anonymity is not a recommended option for its CBDC. It noted that there were increased risks caused by digital currencies and that transaction anonymity could promote the use of the CBDC for illicit activities.
The ECB’s discussion raised the question of whether the bank preferred privacy to a strong oversight over the crypto space. Adopting AML strategies could erode users’ privacy, but it could also guarantee that CBDCs are used for the right reasons. However, this presentation demonstrates that the ECB is taking user privacy seriously and accessing the strengths it would go to preserve personal data.