During the financial crisis of 2007–2008, many people lost trust in traditional financial institutions and turned to alternative forms of currency, such as cryptocurrencies. It was a way for people to maintain their financial freedom and privacy in a system that had let them down. However, the rise of central bank digital currencies (CBDCs) raises serious concerns about privacy and freedom.
One of the most significant concerns with CBDCs is the death of anonymity. Currently, cash transactions offer the secrecy and anonymity needed for financial freedom. People can use cash to make transactions without leaving a paper trail, which is a fundamental right in a democratic society. However, the introduction of CBDCs could change this.
CBDCs would be fully traceable, meaning that every transaction would be recorded and monitored by the central bank. This would allow central banks to surveil and control financial transactions in ways that were previously impossible. While this may sound like a positive development, it raises serious concerns about privacy and civil liberties.
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CBDCs’ potential negative consequences can also be understood by examining the government’s response to the global financial crisis. For instance, in the aftermath of the crisis, governments all over the world established policies to stop the financing of terrorism and combat money laundering. Unfortunately, these regulations frequently came at the expense of people’s freedom and privacy.
For example, the Russian government has shrewdly used the Anti-Money Laundering framework to further goals unrelated to the fight against terrorism and organized crime. However, the research has revealed that the AML regime has been used by the Russian government to expand its strategic influence over domestic politics and business, as well as to try to restructure the banking system. The regime’s overall legitimacy is weakened by the inefficiency of AML rules and their use for covert purposes.
The 2001 Patriot Act led to abuses of power and violations of civil liberties in the United States. The Federal Bureau of Investigation’s Office of General Counsel found 13 cases of alleged FBI misconduct during intelligence operations between 2002 and 2004 alone, according to the Electronic Privacy Information Center.
Central bank digital currency (CBDC): Government control your money.
Bitcoin: You control your money. pic.twitter.com/KnUBuR7CE8
— Pan ₿ (@satstackerMY) December 30, 2022
Additionally, some policies implemented in response to the crisis led to restrictions on individual financial activities. For instance, some countries imposed capital controls in an attempt to limit the flow of money across borders and stabilize their financial systems. For example, as a November 2022 report by the Bank for International Settlements notes, “individual and merchant wallets of the eNaira” — Nigeria’s CBDC — “have different caps on daily transaction limits and the amount of eNaira that can be held in them, depending on their customer due diligence tier.”
The ability to impose limits on people’s daily financial holdings and expenditures could serve to significantly erode privacy and freedom and have a chilling effect on free speech and political dissent.
Moreover, central banks could use CBDCs to implement negative interest rates, which would incentivize people to spend their money rather than save it. This could lead to a surge in consumption and inflation, which could destabilize the economy. This would also lead to a number of technical challenges. For instance, a cap on individual CBDC holdings could restrict the number or quantity of payments because it would be necessary to know the recipients’ CBDC holdings to complete the payment.
In addition to these concerns, CBDCs could also exacerbate existing inequalities. For instance, those without access to the internet or digital gadgets would be shut out of the financial system. This could apply to underrepresented groups like the elderly, the poor and residents of rural areas. CBDCs may potentially lead to new types of financial exclusion since central banks may decline to do business with those regarded as high-risk.
Related: Did regulators intentionally cause a run on banks?
For instance, the Bahamas implemented the Sand Dollar to address the fundamental problem of financial exclusion. However, Sand Dollar balances increased by less than $300,000 between January 2021 and June 2022, whereas the value of notes increased by $42 million — indicating that the Sand Dollar hardly qualifies as a means of payment.
Central banks should carefully consider the implications of CBDCs for privacy, freedom and financial stability. To make sure that CBDCs are created in a way that respects individual rights and freedom, they must also consider frequent consultations with stakeholders like corporations, civil society organizations and individuals.
Ultimately, the rise of CBDCs could be a double-edged sword. Government-backed digital currencies may result in speedier, less expensive, more secure transactions, but they also bring up important issues related to freedom, privacy and financial stability. The goal of financial stability could come at a significant cost in terms of personal freedom and privacy, as we saw in the global financial crisis. The defense of individual liberties and rights should be a top priority for central banks as they consider their approach to CBDCs.
Guneet Kaur joined Cointelegraph as an editor in 2021. She holds a master of science in financial technology from the University of Stirling and an MBA from India’s Guru Nanak Dev University.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
