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There has been a rapid embrace of central bank digital currency (CBDC) recently, and the latest survey indicates that the technology is primed for further explosion. However, CBDC advocates have emphasized its increased convenience, while some experts express concerns about potential government overreach and the erosion of individual privacy.

According to data from Statista, there will be a 260,000% increase in CBDC transactions between 2023 and 2030. Interestingly, 2023 on-chain data shows that 105 countries are actively developing these digital currencies for their jurisdictions.

It is equally important to note that only a tiny percentage of these countries have successfully implemented CBDCs. At the time of writing, the jurisdictions implementing CBDC are Jamaica, Nigeria, the Bahamas, and the Eastern Caribbean Currency Union.

Some analysts argue that cryptocurrencies redistribute financial power to the general public. They also argue that CBDCs function as government-sanctioned digital currencies, allowing central banks to monitor transaction data such as personal ID, geographical location, and expenditure details. Meanwhile, the current regulatory framework indicates that financial institutions must maintain strict confidentiality regarding customer data, disclosing it only when required by law.

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As CBDCs become operational, central banks will use blockchain technology to record the flow of funds, including individuals’ spending habits and destinations. Hence, observers point out that this newfound authority may result in spending restrictions or, in extreme cases, the suspension of spending privileges.

Central Banks’ Cautiousness Over CBDC

According to research, CBDC implementation may negatively affect retail, wholesale, and international payments. The introduction of CBDCs for retail use may cause changes in how people divide their funds between physical cash and deposits, potentially undermining bank deposits and probable fluctuations in central bank reserves.

If these changes are excessive, they may weaken the channels through which monetary policies, such as credit availability and interest rates, are transmitted. This, in turn, may limit the ability of central banks to accurately predict reserves and conduct efficient Open Market Operations (OMOs), reducing the effectiveness of monetary strategies such as inflation leveling.

Furthermore, analysts opine that leveraging CBDCs for cross-border transactions may expose recipient countries to the risks of currency substitution. This could become more pronounced during economic upheaval, hastening the reversal of capital flows to a country.

As a result, local monetary entities’ ability to manage exchange rates and economic policies may be threatened. Tether’s Chief Technology Officer, Paolo Ardoino, has also echoed similar concerns about CBDCs potentially replacing traditional physical currency.

While speaking during a recent interview, Ardoino revealed that his private conversations with central bank representatives revealed their concerns about the long-term implications of CBDCs on the respective economies.

Are Privacy-Based CBDCs A Possibility?

Per the European Central Bank (ECB), privacy concerns dominated 41% of the feedback received during the consultation phase for a Euro-denominated CBDC. Hence, many experts believe that CBDCs have to be designed in a way that respects citizens’ privacy.

The e-corona pilot project conducted by Riksbank is an example of a privacy-oriented design. The foundation for this initiative is Corda, an open-source blockchain project created by Accenture.

In this model, there is a deliberate separation between transactional participants and banking regulators, ensuring that data is only distributed to those who need to know. As a result, only those directly involved in a transaction have access to the associated data.

These CBDCs would allow users to withdraw digital coins using their smartphones or computers while ensuring that banks keep no transaction record or a ledger linking the CBDC to its possessor. Through this mechanism, central banks would not know the identities of consumers, merchants, or the specific transaction amounts.

The data available to them would solely be limited to electronic coin withdrawal and redemption. Meanwhile, observers doubt that central banks would adopt such a CBDC privacy-centric model.

Time will tell whether the central banks will implement this CBDC model and prove analysts wrong.

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George Ward

By George Ward

George Ward is a crypto journalist and market analyst at Herald Sheets, known for his engaging articles on the latest digital currency trends. With a background in finance and journalism, he presents complex topics accessibly. George holds a degree in Business and Finance from the University of Cambridge.