European CBDC designers wrestle with privacy concerns

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Privacy seems to fall on the priority list of those designing a new digital euro, and experts warn that the design choices being made could make privacy harder to achieve.

There has been no formal political decision on whether to issue the euro in a new digital format, but there is clearly momentum behind the idea. Euro finance ministers will discuss the issue on Monday, and a European Commission consultation is imminent, a likely precursor to new laws.

Ensuring that a digital euro protects privacy emerged as the Number 1 in a consultation that the European Central Bank conducted last year. Naturally, because consumer habits data can reveal sensitive details about a person’s lifestyle, tastes and political leanings.

But privacy issues no longer seem like a sacred cow. More recent ECB searchbased this time on discussions with panels of EU citizens, emphasizes other competing concerns people might have, such as security and universal acceptance, and board member Fabio Panetta administration of the ECB, is now talking about a “barteramong these objectives.

Currency zone finance ministers are also expected to give their views at a meeting next week, and are unlikely to want new types of financial secrecy undermining anti-money laundering and anti-money laundering standards. ‘tax evasion.

A fully anonymous digital currency would raise “serious concerns,” according to the internal policy document that will form the basis of their discussion and which was seen by CoinDesk.

This matches the trend seen in conventional cryptocurrency markets, where national governments – and, as of Thursday, the European Parliament — have been keen to introduce customer identity checks even for small bitcoin payments, despite industry complaints about the invasion of privacy.

Privacy Questions

According to the guidance document, the ECB would have access to transaction data to the extent necessary to perform its functions, such as payment settlement and financial supervision, but the document states that the payment data mine should only not be “fully visible” to any central entity.

Panetta brushed aside concerns about state espionage, telling the European Parliament’s Economic and Monetary Affairs Committee on Wednesday that the ECB has “no commercial interest in using this data” and will “respect to the last comma” privacy laws – unlike him. suggested, businesses that are simply looking to make a profit.

He also argued that the details of how much privacy to offer — such as whether to offer disclaimers allowing small payments to remain secret and offline — remain matters for governments and lawmakers, not regulators. central bankers, saying “privacy…is not a technical issue”. publish; it is a political question.

But experts have criticized his characterization and warned that overly centralized systems could make meaningful privacy much harder to achieve.

Marina Niforos, an affiliate professor at HEC Paris business school, told CoinDesk that she rejects Panetta’s claim that privacy issues are only related to commercial use of data for profit and has said people would be right to worry about governments accumulating so much control over data. .

“We have seen, in other jurisdictions, a sovereign concentrating this kind of power perhaps not just for benign purpose,” said Niforos, a crypto technology expert who has previously advised the European Commission on the design of the digital euro.

State actors “have less commercial motivation, but that doesn’t mean there isn’t a danger of misappropriation and misuse of this data,” she said.

Additionally, privacy controls cannot be added solely on the whim of a decision-maker, but may depend on the type of technology chosen.

Distributed blockchain technology “may ultimately be the only solution left, in terms of being able to build privacy by design” into the digital euro, Niforos said.

This echoes a warning from the report produced by the EU Blockchain Observatory in March to which Niforos contributed. That report said unduly centralized CBDCs would mean central banks would “undertake mass surveillance on a scale that raises deep privacy concerns” and offer a “honeypot” of information to tempt spies and other actors. malicious.

Yet Niforos also warns that there are many open questions and gray areas that could make the ECB reluctant to opt for this more decentralized approach. “Blockchain as a technology itself faces several challenges” and lacks “much-needed clarity from a regulatory and legal perspective,” she said.

Centralized control

Panetta indeed seems to be flirting with a centralized model in which citizens’ assets would be held in accounts at the central bank, rather than a more distributed system where tokens circulate relatively freely.

In his remarks on Wednesday, Panetta worried about the “undesirable implications” of letting outsiders get their hands on large amounts of digital euros – something that would be impossible to avoid in a more distributed model.

Still, the account-based solution he apparently favors “would come with a different set of problems,” Niforos said.

“It’s not a panacea. This requires serious re-engineering of the way the ecosystem is set up,” she added, warning that some countries’ banking and regulatory systems are simply not prepared.

The ECB’s own study shows that many people don’t realize what a digital euro is, or why you would bother having one, and that’s already a major hurdle that Panetta needs to overcome. For others, this apathy turns into real concern about the damage being done to the EU crypto world.

“For the moment, we perceive it [the digital euro] more like a threat than an opportunity,” Faustine Fleuret, CEO of French crypto industry lobby group ADAN, told CoinDesk.

Fleuret said the digital euro plan could undermine innovation, as it could end up supplanting, rather than complementing, euro stablecoins, without the flexible protocols needed to support decentralized finance.

Central bankers rushed to issue their own digital currencies when they saw the threat posed by the industry-backed and now defunct Libra project.

In an effort to prevent platforms like Meta Platforms (Facebook’s parent company) from gaining a foothold, some fear the ECB is about to harm, not just people’s privacy, but also the innovation in the EU.

Read more: Small digital euro payments won’t need laundering checks, says ECB official

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