About the authors: Hazem Danny Nakib is an honorary researcher at University College London and an investor in financial services technology solutions. Geoffroy Goodell is a researcher in the Financial Computing and Analytics Group at University College London and an associate of the London School of Economics Systemic Risk Center and the UCL Center for Blockchain Technologies.

As governments around the world redesign the financial sector with new infrastructure and digital currency, it’s time to reconsider what matters. Actions taken by central banks to issue new digital currencies must be examined to determine how they affect people’s rights, such as privacy, choice and access to the economy.

The People’s Bank of China has led the world in the development of a national central bank digital currency, the Digital Yuan or e-CNY. The research began in 2014. Today, China’s official digital currency has recorded more than $ 5.3 billion in transactions. Recently, the PBOC released a report in English highlighting the development of the digital yuan and the central bank’s guiding principles for inclusion, privacy, security, efficiency, regulatory compliance and interoperability. Taken individually, these principles are solid. At the same time, they each have system-level implications for the design of CBDCs. When in conflict, as values ​​and demands often do, compromises are made around “what matters” to the goals and objectives of the CBDC system. New G7 report on guiding principles for CBDCs notes that it will be necessary to find a “careful balance” between principles, such as confidentiality and inclusiveness versus regulatory compliance and private sector business interests .

The decisions China makes regarding the new domestic payment infrastructure will matter even outside the country. Governments and central banks around the world face the same questions. Many central banks have been guided by the PBOC and have replicated many of its design decisions. Some central banks have even argued that relaxed special standards somehow apply to them compared to other central banks, and that users should just trust central bankers when choosing the principles to be followed and the trade-offs to be made in the development of a digital public payment infrastructure. We recently wrote an analysis of the PBOC report in which we highlighted two main issues with these approaches.

First, there are issues with retail CBDCs, which ordinary people would use, for example, to buy coffee. A central bank must choose whether users of a digital currency can only access their funds through an account provided by a regulated entity such as a bank. Alternatively, allowing access outside of such an account would preserve the anonymity long enjoyed by those who use and have the choice of using cash. In its report, the PBOC discusses a proposal for what it calls “wallets”: a pseudonymous option for “small value” transactions that is provided and managed by “authorized operators”. The PBOC calls its approach a “quasi-account”.

The PBOC design refines the relationship between retail consumers and the financial custodians who control and authorize the use of money. This is a significant deviation from cash. CBDC users designed around PBOC style wallets could never own and use money without the permission of the custodian.

We have to ask ourselves: why are states even considering the CBDC? It starts with the decline in the use of cash for payments over the past decade in many countries as consumers turn to debit cards and internet payments through custody accounts. The motivation has shifted towards protecting monetary sovereignty against the threat of cryptocurrencies, the risks posed by money issued by the private sector, such as certain stablecoins from large tech companies, and against other states internationalizing their own digital currency. It is also part of states’ longer-term technological sovereignty plans.

Privacy, the full-fledged and robust genre in which users are not fully profiled by an organization, entity or individual, is and should be a public good.

Cash users generally do not have to worry about their activities being profiled on the basis of their transactions. However, many cashless payment methods leave behind a trail of data that can be used to build a detailed history of an individual’s habits, location, and circumstances. Consumers have the right to conduct low-risk transactions with suppliers of goods and services, without revealing personally identifiable information that can be used to associate with the transaction.

Since consumers are unable to verify the reliability of the digital payment infrastructure and its operators, profiling is a real risk with dangerous consequences. Users cannot trust what they cannot verify on their own and should not be forced to do so without payment alternatives that preserve the properties of cash. This principle must be a political imperative in the overhaul of the new social construction of money, both at home and abroad.

It is also perfectly possible to regulate transactions without connecting the transactions to the consumer’s personally identifiable information. It is possible to collect beneficiary information for tax compliance and anti-money laundering / know your client information, as well as information on the size, location and nature of the transaction, while allowing the payer to be anonymous.

The second problem is that the PBOC considers the CBDC to be part of the monetary base and, as such, is a direct substitute for cash. This is only half true. Indeed, a CBDC, like cash and banknotes, would be direct obligations of the central bank. At the same time, this does not mean that it is an individual substitute for cash.

In fact, there are a variety of reasons people use cash. In addition to privacy, people also want to avoid discrimination. Many do not have a bank account. Others suffer from a lack of infrastructure, such as Internet connectivity. Some want to transact anonymously, or simply choose to own and own their assets. In fact, the very option of having the choice to use a medium of exchange that ticks all of these boxes has value in itself.

Many central banks have a clear policy of ensuring that people under their jurisdiction have full and unimpeded access to the economy. Presumably, this is the main point of a central bank. This access includes payment methods and mechanisms, including cash, which implies access to public payment infrastructure and payment instruments with the properties of cash.

The fanciful idea that a CBDC would somehow avoid the obligation of central banks to provide access to cash-like payment instruments, or that a central bank could meet this requirement policy directly by issuing a digital currency, relies on seeing the CBDC as a perfect substitute for cash, which it is not.

We must be careful not to treat the CBDC as a panacea for financial inclusion. A secular decline in liquidity would prevent many groups, including the poor, the elderly, people with disabilities, those who lack expertise or appropriate technological infrastructure, members of remote communities and the unbanked from fully participating in modern economy. In particular, it would undermine the right of everyone to engage in the economy in private. This is especially the case if we confuse “portfolios” with “accounts” as the PBOC did. Under this regime, a digital yuan, or a dollar, or a pound sterling could never be used without the permission of a guardian who could always say no or change the rules, especially if those guardians maintain sound business models. on data collection and profiling.

One could imagine that there is no other way to design a digital currency, and that a certain balance must offer a set of trade-offs between compliance, efficiency, inclusiveness, security, interests. business and confidentiality. Not so. Central banks must have the ingenuity and courage to develop a CBDC policy that guarantees four key principles: first, accessibility, to ensure that almost anyone can use it; second, non-discrimination, to ensure that everyone’s money is as good as everyone else’s; third, confidentiality, to ensure that no user would fear being profiled on the basis of their transactions; and, finally, ownership, to ensure that the CBDC can be owned by its bearer, just as cash is held, and used without the risk of being blocked by a third party.

These four fundamental principles are constraints for rethinking the social construction of money and replacing the foundations of the financial sector with new national payment systems which should be a force for democratization. By neglecting them and making trade-offs between what matters, we are giving up rights and choices that have long been afforded to the public. Without them, the new digital economy will fail before it takes off.

Guest comments like this are written by authors outside of the Barron’s and MarketWatch newsroom. They reflect the views and opinions of the authors. Submit comments and other comments to [email protected]


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