“If the central bank gets involved in digital payments, privacy is going to be better protected…because we are not like private companies,” said Fabio Panetta, ECB executive board member, talking to the Financial Times.
“We have no commercial interest in storing, managing or monetising the data of users,” he added.
While physical cash is anonymous, central bank digital currencies (CBDCs) will require identification, apart from small amounts depending on the region. A major concern is that when physical cash disappears, that lack of anonymity could enable a government to exclude people from the economy by barring access to a digital currency. For example, Russia is considering introducing laws that allow the central bank to ban certain individuals or companies from accessing the digital ruble.
Losing the anonymity of physical cash
The irony here is that a so-called public good in the hands of a less than benevolent government could enable precisely the opposite.
Meanwhile, the reluctance of governments to provide an anonymous digital currency is not only to counteract money laundering but also about tax collection, which some countries have openly declared as an objective, and Panetta acknowledged.
“For very small amounts, we could permit really anonymous payments, but in general, confidentiality and privacy are different from anonymity,” said Panetta.
Turning to privacy, while the EU has been a leader in broader privacy legislation, not all countries are reluctant to share CBDC payment transaction data with private entities. Some are considering offsetting the costs of administering a CBDC system by allowing payment service providers to access consumer transaction data, as mentioned in a BIS report from seven central banks.
How will the ECB prevent tracking?
Most CBDCs will likely be two tiered with a wallet. This could take the form of bank wallet, Apple Pay, Google Pay, PayPal, or another type of digital wallet. So how can it stop the wallets from tracking payment data?
It’s conceivable that the EU might legislate that the wallet providers cannot store or share transaction data relating to a digital Euro. Alternatively, this could be enabled technically.
For example, this is a feature that China has implemented for its digital yuan. Users are able to shift between parent wallets and sub-wallets in a bid to reduce the flow of data to big tech firms. But it doesn’t protect data from the wallet provider.
One of the most interesting questions is whether consumers will be willing to trade greater privacy from big tech for less anonymity from big government.