The introduction of a central bank digital currency (CBDC) doesn’t inherently necessitate a compromise between privacy and the fight against financial crime, according to the Bank of England’s fintech chief.
Privacy has emerged as a significant topic in discussions surrounding CBDCs, particularly reflected in the feedback the Bank of England (BoE) received regarding its exploration of a potential digital currency, often referred to as “Britcoin.” During a recent address at the Future of FinTech conference, Tom Mutton, the BoE’s director of fintech, noted that while most respondents emphasized the importance of privacy, interpretations of what that means varied widely.
Generally, participants expressed that complete anonymity is neither feasible nor desirable in the realm of digital payments due to their electronic nature and the necessity to mitigate financial crime. Some respondents expressed concerns about the possibility of the central bank accessing their payment data through a CBDC framework.
Mutton asserted that it is possible to uphold privacy while simultaneously addressing financial crime points for three key reasons: the central bank’s lack of commercial motives to collect user data, the ability to implement protective measures within the system, and the potential of advanced technologies like zero-knowledge proofs and digital identity frameworks to enhance both transparency and security.
Furthermore, Mutton reiterated that the BoE is very much interested in the concept of a CBDC, but no definitive decisions have been made regarding its necessity, affirming that a digital currency would not replace cash.
He outlined several potential benefits of a CBDC, including fostering a resilient payment landscape, mitigating the risks associated with new forms of private money, promoting competition and innovation, enhancing the accessibility of central bank money, addressing the decline of cash usage, and improving cross-border payment processes.
Regarding the design of a CBDC, the Bank is considering a ‘platform model’ that would establish a core ledger and API, enabling regulated private sector firms to facilitate access for end users.
Mutton also addressed environmental considerations, emphasizing that the energy use associated with Bitcoin is not representative of all blockchain or distributed ledger technologies. “Some of these technologies, particularly those supporting certain types of private digital currencies, can be significantly more efficient per transaction. Thus, we shouldn’t dismiss the value of blockchain due to concerns about Bitcoin,” he remarked.