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Opinion | Why central bank digital currencies would mean the end of data privacy

  • There are numerous hurdles banks will need to clear before centralised digital currencies become a reality
  • The biggest, though, will surely be convincing users to give authorities access to all their transactions, with no option to back out later

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A symbol of the digital yuan, also referred to as e-CNY, is pictured on a vending machine at a subway station in Shanghai on April 21, 2021. Photo: Reuters
As the economies of the world go digital, cash is being left behind in favour of card or mobile payments. This has prompted central banks to consider issuing digital fiat money.
Indeed, 80 per cent of central banks worldwide are looking into digital currencies, while half are already running experiments or pilot schemes, according to a report by the Bank of International Settlements.

One interesting scenario would be the creation of a currency that is “blockchain agnostic”, meaning it can exist on public blockchains such as Ethereum. This would allow it to be traded as a crypto asset that is backed by a central bank.

In the case of a digital Hong Kong dollar, high demand could drive up the price beyond the 1:1 issuance based on the reserves of the Hong Kong Monetary Authority (HKMA). This would create an open market for CBDCs where people could invest and trade based on the fundamentals of each bank. May the best balance sheet win!

As fun as this sounds, it’s an unlikely scenario. Blockchains like Ethereum are decentralised, making them unsuitable for a central bank which is, by its very nature, centralised. As a recent paper published in ICT Express points out, central banks are more likely to opt for a “permissioned” blockchain – one which requires authorisation to use – rather than a “permissionless” one, which anyone can join.

Even then, central bank digital currencies would face the same challenges of scalability and throughput that have dogged Ethereum in recent years.

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