A Korean survey involving 3,500 people found that privacy features heavily impact the adoption of central bank digital currency (CBDC). That’s according to a report from the Bank for International Settlements (BIS).
Cash is considered anonymous because there’s no record of transactions. In contrast, because CBDCs are digital, there’s a record of all payments. The BIS paper acknowledges that anti money laundering and other compliance features of CBDC might prove problematic for users. “There is a possibility of privacy being invaded to a degree that exceeds what consumers are willing to tolerate,” the paper states.
On the one hand, it seems obvious that the privacy design of a CBDC will impact adoption. But there hasn’t been much research about specifics. Rather than asking people whether privacy is important, such as an early EU survey for the digital euro, the Korean research split up the group and asked them targeted questions about specific designs.
It also explored different types of purchases and demographics. For most people, their main privacy issues are around sensitive purchases, such as those related to mental health, plastic surgery or adult products.
One of the questions was around concerns about institutions invading their privacy rights. The worry was highest for BigTech (76%), followed by financial institutions (67%) and government (50%). Men are a little more trusting than women. Older people are generally less trusting than younger people, particularly regarding the government.
How privacy design impacts CBDC usage
The research started with a baseline CBDC that is not so privacy friendly – it combines the identity and transaction data at the central bank, the ‘combo’ option. Consumers were asked whether they’d use the CBDC in various scenarios versus current payment methods such as cash, cards and mobile payments.
There was a high willingness to use the baseline ‘combo’ CBDC – a figure of 26% for offline usage. For online usage, there was a big variation depending on whether the purchase was sensitive or not. For sensitive purchases, 35.7% of people chose the baseline option compared to 28% who selected it for less sensitive shopping. That perhaps reinforces the distrust of banks and big tech.
A second CBDC design option separates identity data, which can be held at a bank, from the anonymized transactions stored by the central bank. A third CBDC design option involves privacy vouchers for low value cash-like payments where no AML procedures are performed.
By far the biggest impact was on privacy sensitive purchases. For offline purchases, the CBDC design involving separating data increased adoption by an additional 7.5%, bringing it to 33.5%. Privacy vouchers bumped up usage by 5%.
The results were more exaggerated for online purchases of sensitive items. An additional 10.5% of people would use online CBDC if it had a separate data design. That would bring usage to a whopping 46.2%. Privacy vouchers for online sensitive purchases would increase usage by 8.2%.
Given the nature of the survey, any increased CBDC usage must involve a decrease in another payment method. The reduction was in cash and card usage but not mobile payments. This explains why Visa and Mastercard are so keen to engage in digital currency payments.