During the financial crisis of 2007–2008, many people lost faith in traditional financial institutions and turned to alternative forms of currency, such as cryptocurrencies. It’s a way for people to maintain their financial freedom and privacy in a system that has loosened them. However, the rise of central bank digital currencies (CBDCs) has raised serious concerns about privacy and freedom.
One of the most important problems with CBDC is the death of anonymity. Today, cash transactions offer the privacy and anonymity needed for financial freedom. People can use cash to make transactions without leaving a paper trail, which is a fundamental right in a democratic society. However, the introduction of CBDC could change this.
CBDC will be fully traceable, meaning every transaction will be recorded and monitored by the central bank. This will allow central banks to monitor and control financial transactions in a way that was previously impossible. While this may seem like a positive development, it raises serious concerns about privacy and civil liberties.
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The potential negative consequences of CBDC can also be understood by examining the government’s response to the global financial crisis. For example, after the crisis, governments around the world created policies to stop the financing of terrorism and fight money laundering. Unfortunately, these regulations often affect people’s freedom and privacy.
For example, the Russian government has cunningly used the Anti-Money Laundering framework for purposes unrelated to the fight against terrorism and organized crime. However, the research revealed that the AML regime has been used by the Russian government to expand its strategic influence in domestic politics and business, as well as to attempt to restructure the banking system. The overall legitimacy of the regime is weakened by the inefficiency of AML rules and their use for covert purposes.
The Patriot Act of 2001 led to an abuse of power and a violation of civil liberties in the United States. The Federal Bureau of Investigation’s Office of General Counsel found 13 cases of false FBI allegations during intelligence operations between 2002 and 2004, according to the Electronic Privacy Information Center.
Central bank digital currency (CBDC): The government controls your money.
Bitcoin: You control the money. pic.twitter.com/KnUBuR7CE8
– Pan ₿ (@satstackerMY) December 30, 2022
In addition, some of the policies implemented in response to the crisis led to restrictions on individual financial activities. For example, some countries implement capital controls to limit the flow of money across borders and stabilize the financial system. For example, as the November 2022 report by the Bank for International Settlements noted, “individual wallets and merchants of eNaira” – Nigeria’s CBDC – “have different caps on the daily transaction limit and the amount of eNaira that can be held, depending on the level of diligence of the customer .”
The ability to impose restrictions on people’s everyday financial holdings and spending can significantly erode privacy and freedom and have chilling effects on freedom of speech and politics.
In addition, central banks can use CBDCs to implement negative interest rates, which will incentivize people to spend money instead of saving. This can lead to increased consumption and inflation, which can damage the economy. This will also pose some technical challenges. For example, a cap on individual CBDC holdings can limit the amount or amount of payments due to the need to know the recipient’s CBDC holdings in order to complete a payment.
In addition to these concerns, CBDCs may also exacerbate existing inequalities. For example, those who do not have access to the internet or digital gadgets will be shut out of the financial system. This can be applied to underrepresented groups such as the elderly, the poor and rural residents. CBDCs may lead to a new type of financial exclusion as central banks can refuse to do business with those deemed high-risk.
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For example, the Bahamas implemented Sand Dollars to address the fundamental problem of financial exclusion. However, Sand Dollar balances increased by less than $300,000 between January 2021 and June 2022, while the value of notes increased by $42 million – indicating that Sand Dollars are barely suitable as a means of payment.
Central banks should carefully consider the implications of CBDCs for privacy, freedom and financial stability. To ensure that the CBDC is created in a way that respects the rights and freedoms of individuals, they should also consider frequent consultations with stakeholders such as companies, civil society organizations and individuals.
Ultimately, the rise of CBDC could be a double-edged sword. Government-backed digital currencies can lead to faster, cheaper, safer transactions, but they also bring important issues related to freedom, privacy and financial stability. The goal of financial stability can come at a significant cost in terms of personal freedom and privacy, as we saw in the global financial crisis. The defense of individual freedoms and rights should be a top priority for central banks as they consider their approach to CBDC.
Guneet Kaur joined Cointelegraph as an editor in 2021. He has a master of science in financial technology from the University of Stirling and an MBA from India’s Guru Nanak Dev University.
This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.