Central bank digital currencies should not be expected to have features similar to cash, according to Sweden’s central bank.
In a Feb. 16 Sveriges Riksbank report, the central bank suggests that CBDCs—including those that are distributed ledger technology-based, token-based, or blockchain-based—would need a ledger that tracks their ownership. As a consequence, such digital currencies should not be expected to feature cash’s privacy:
“As all CBDC payments involve a remote ledger, no CBDC can be genuinely peer-to-peer, offline and anonymous like cash.”
Sweden’s central bank has been studying CBDCs for some time and has carried out significant testing that dates back more than a year.
As Modern Consensus reported in late 2020, Sweden’s financial markets minister Per Bolund said that the institution will decide whether it wants to launch a digital currency by the end of this year.
The Sveriges Riksbank report notes that many central banks are exploring CBDCs as a digital complement to cash that can be used for everyday payments, but there are still many questions when it comes to the form a digital krona should take and the features it should have. Specifically, many are asking if it “should be cash-like or more like money in deposit accounts.”
Sveriges Riksbank researchers argue that “all CBDC payments will involve reconciliation with one or more remote ledgers” that track the transactions and ownership to prevent double-spends. This requirement—according to the bank—should squash the hopes for a cash-like anonymous digital currency.
That is at least a more intellectually honest answer than the one offered by Mu Changchun, who heads up the People’s Bank of China (PBoC) digital currency research institute. In November 2019, he told attendees of a conference in Singapore that the government knows there is a “demand from the general public is to keep anonymity by using paper money and coins.”
While promising to “give those people who demand it anonymity in their transactions,” Changchun added, “at the same time we will keep the balance between the ‘controllable anonymity’ and anti-money laundering, CTF [counter terrorist financing], and also tax issues, online gambling, and any electronic criminal activities.”
Nor is authoritarian China the only government thinking that way. A month after Changchun’s comments, a paper from the European Central Bank said Accenture and R3 had come up with a “proof of concept” for creating “anonymity vouchers” allowing citizens a small number of low-value, hidden transactions each month. (Because using one of those wouldn’t be a giant red flag for police, suspicious spouses, etc. ad nauseum.)
And in October 2020, Central Bank of Russia head Elvira Nabiullina said a digital ruble will have, “no anonymity in the sense that there is in cash. But it is assumed that confidentiality will be strengthened.”
Sweden’s central bank came to a somewhat similar conclusion as Nabiullina, admitting that “CBDCs can still be somewhat peer-to-peer, somewhat offline and somewhat anonymous.” To add details when it comes to the privacy features achievable with digital currency design, Sveriges Riksbank researchers wrote:
“Cash payments are anonymous in that they need not reveal the identity of the payer and the payee to anyone. Cash payments leave no traces. A similar degree of anonymity is not possible with a CBDC.”
The central bank explains that the digital nature of CBDC payments makes them inherently traceable, and much like with Bitcoin (BTC) “even if the identities of the payer and payee are not known, the ledger will still record things like the time of the payments, encryption keys and digital wallets.”
The third—and last—reason why Sveriges Riksbank researchers believe CBDCs cannot be truly anonymous is that “legal regulations require digital payments to be non-anonymous.” The report explains:
“According to current regulations in the EU, account-based systems must have registers that make it possible to establish the identity of the owner of each account… We suspect that any system where CBDCs are stored remotely will fall under this regulation, regardless of whether they involve tokens or not.”
The Rijksbank noted that in the case of locally stored tokens, European anti-money laundering regulations “at present allow for the payer to make a payment of up to EUR 150 without needing to identify themselves.”