Central Bank Digital Currencies and Financial Privacy

Technical Feasibility vs Political Feasibility

While it is technically possible to design a retail central bank digital currency (CBDC) that promotes financial privacy, the political feasibility of such an undertaking is questionable. It's unlikely that the U.S. government would adopt a privacy-protecting CBDC. If implemented, a CBDC could potentially be used to monitor the transactions of American citizens.

Government Surveillance and Private Banking

The U.S. government is already using existing technologies to monitor its citizens. The introduction of a CBDC would likely be seen as an opportunity to expand these capabilities. This makes it crucial to maintain a private banking system firewall between the government and transaction data.

The Status Quo

Currently, the government uses the private banking system to monitor customer transactions. Banks keep records on customer transactions, which the government can access by subpoena. Banks are also required to report suspicious activity and currency transactions in excess of $10,000.

Declining Reporting Thresholds

Real (inflation-adjusted) reporting thresholds have gradually declined over time. For example, money-service businesses must obtain and record information for transactions worth just $3,000. The government vigorously defends its ability to monitor transactions and prosecutes those making transactions just below reporting thresholds.

Government Response to Cryptocurrencies

The government's response to cryptocurrencies, which offer a high degree of financial privacy, has been to require cryptocurrency exchanges to register as money-service businesses and comply with Know Your Customer requirements. The government has also taken action against cryptocurrency mixing services, which make it more difficult to trace transactions back to an exchange.

ANOM Messaging Service

The ostensibly private messaging service ANOM was not private. It was the centerpiece of the Federal Bureau of Investigation’s Operation Trojan Shield. Messages sent using the ANOM app were delivered not only to recipients, but also to the FBI’s database.

Financial Privacy Today

Americans do not have much financial privacy today. We would have even less financial privacy if not for the private banking system firewall between the government and our transactions data. This firewall isn’t perfect, but it is better than nothing.

The Importance of Financial Privacy

Financial privacy is very important for a free society. What we do reveals much more about who we are than what we say. And what we do often requires making payments. In order to exercise our freedoms, we must be able to selectively share the details of our lives with others — and withhold such details from those who would otherwise use them to harm us.

Bottom Line

We should take steps to bolster financial privacy in the United States. The introduction of a retail CBDC would be a step in the wrong direction. What are your thoughts on this matter? Do you think the government should have more control over our financial transactions, or should we strive for more financial privacy? Share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.