Programmable Central Bank Digital Currencies (CBDCs) could be used for state surveillance while posing risks to privacy and cybersecurity that could undermine trust in central bank money, according to an International Monetary Fund (IMF) policy brief.
The latest policy brief that “summarizes the main takeaways from a new wave” of chapters for the IMF’s CBDC Handbook warns that CBDCs could be perceived as an instrument for state surveillance where people’s transaction histories, demographics, and behavioral patterns are collected, processed, and stored.
“CBDC could be perceived as an instrument for state surveillance. Some may worry that the government or the central bank could use it to control or restrict payments users can make with CBDC, thereby undermining public trust in central bank money. This can be a particular concern in countries with severe governance and corruption vulnerabilities”
IMF, “Central Bank Digital Currency: Progress And Further Considerations,” November 2024
According to the brief, “Central Bank Digital Currency: Progress And Further Considerations:”
“CBDC, as a digital form of central bank money, may allow for a ‘digital trail’—data—to be accessed, collected, processed and stored.
“In contrast to cash, CBDC could be designed to potentially include a wealth of personal data encapsulating transaction histories, user demographics, and behavioral patterns.
“Personal data could establish a link between counterparty identities and transactions.”
“CBDC, as a digital form of central bank money, may allow for a ‘digital trail’—data—to be accessed, collected, processed and stored“
IMF, “Central Bank Digital Currency: Progress And Further Considerations,” November 2024
“CBDC could substitute for cash, commercial bank deposits, and reserves”
IMF, “Central Bank Digital Currency: Progress And Further Considerations,” November 2024
A CBDC will never be as a private or anonymous as cash, according to European Central Bank president Christine Lagarde.
One of the reasons is that because in order for a CBDC to operate, everyone must have some form of digital identity.
According to the Bank for International Settlements (BIS) Annual Economic Report 2021:
“Identification at some level is hence central in the design of CBDCs. This calls for a CBDC that is account-based and ultimately tied to a digital identity.”
And, “The most promising way of providing central bank money in the digital age is an account-based CBDC built on digital ID with official sector involvement.”
With digital ID being inextricably-linked to CBDC, the latest policy brief from the IMF states that:
“A certain degree of information on the identity of users and transactions is required to satisfy anti-money laundering and combatting the financing of terrorism (AML/CFT) requirements; therefore, countries need to carefully consider whether privacy by design choices allow for effective mitigation of money laundering and terrorism financing risks.“
The potential risks of a fully-programmable CBDC backed by digital ID are vast.
“If poorly designed or managed, CBDC personal data use could pose risks to privacy, arising from events such as data leakages, data abuses, and cyber-attacks, thus also negatively affecting CBDC adoption”
IMF, “Central Bank Digital Currency: Progress And Further Considerations,” November 2024
The policy brief lists several risks to privacy, cybersecurity, and government overreach:
“CBDC data use, however, could pose risks to privacy, which in turn can undermine the trust in central bank money. Privacy can include the protection of someone’s personal space and the right to be left alone, the control over and safeguarding of one’s personal information, and an aspect of dignity, autonomy, and ultimately human freedom.
“If poorly designed or managed, CBDC personal data use could pose risks to privacy, arising from events such as data leakages, data abuses, and cyber-attacks, thus also negatively affecting CBDC adoption.”
“CBDC could be designed to potentially include a wealth of personal data encapsulating transaction histories, user demographics, and behavioral patterns“
IMF, “Central Bank Digital Currency: Progress And Further Considerations,” November 2024
The authors go on to warn:
“CBDC could be perceived as an instrument for state surveillance. Some may worry that the government or the central bank could use it to control or restrict payments users can make with CBDC, thereby undermining public trust in central bank money.
“This can be a particular concern in countries with severe governance and corruption vulnerabilities.”
Apart from the data collection, surveillance, and cyber concerns, the notion of CBDC programmability is touted as being good for business, but it can also be used to restrict what you can buy and sell, when you can transact, and where.
“CBDCs can be designed in different ways and with different functionalities, such as programmability, smart contracts, and offline services”
IMF, “Central Bank Digital Currency: Progress And Further Considerations,” November 2024
The CBDC Handbook is intended for “medium- to high-level policymakers in central banks and ministries of finance, and to some extent in other government agencies.”
It is planned to be a living document, containing at least 19 chapters to be published incrementally over the coming years.
The Handbook aims to identify the most frequently asked questions related to CBDC, which include:
- Policy objectives and operational framework of CBDC
- Foundational requirements and readiness to issue CBDC, such as legal considerations, cyber resilience, central bank governance, and regulation and supervision
- CBDC design processes, considerations, and choices
- Project approaches and technology
- Potential macro-financial impacts of CBDC
Despite concerns surrounding privacy, government overreach, and cybersecurity, the latest IMF policy brief confidently highlights, “Countries’ interest in exploring both retail and wholesale CBDC remains strong.”
