IMF Offers a Glimpse at the Perils of Central Bank Digital Currencies
With Bitcoin climbing over $100,000, both investors and government officials are taking a closer look at digital money. The problem is that there’s a huge difference between an independent currency designed to resist surveillance and control, and one crafted by a central bank to enable exactly that. A new handbook from the International Monetary Fund embraces the potential of cryptocurrency while highlighting the dangers inherent in state dominance of the means of storing and exchanging value.
The IMF handbook’s opening chapter discusses how central bank digital currencies (CBDC) could keep government financial institutions relevant. “With digitalization and falling cash usage in parts of the world,” the authors write, “central banks are considering CBDC to ensure a fundamental anchor of trust in the monetary system.” Also discussed is the potential for CBDCs to “potentially help lower barriers to financial inclusion in countries with underdeveloped financial systems,” to “channel government payments directly to households,” and “to help reduce frictions in cross-border payments.”
The IMF and the central banks it serves see cryptocurrency as the wave of the future and want in on the action. But central banks are government entities, and what officials want is not necessarily what is desired by people needing reliable means of making and receiving payments. Putting it bluntly, government officials generally regard those they nominally serve as subjects to be monitored and controlled.
Following the CBDC Digital Trail
In a chapter on data use and privacy protection, the authors note that CBDC “may allow for a ‘digital trail’—data—to be collected 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.”
That stands in stark contrast to Bitcoin, whose users often debate whether the digital currency is sufficiently anonymous or if it leaves too much of a data trail that sleuths can follow. For fans of Bitcoin and its competitors, privacy is considered a desirable trait. They want to conduct their financial lives relatively free of scrutiny by using an online version of cash.
By contrast, for the IMF authors, “CBDC data use could allow for increased traceability” that would permit authorities “to track or prevent illicit and fraudulent activities.” They acknowledge that “CBDC data use, however, could pose risks to privacy, which, in turn, can undermine the
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