The future of a US digital dollar will likely hinge on protecting privacy while tracking transactions, as efforts continue to make virtual payments as simple as handing over a $20 bill.
While the US government weighs whether to launch a central bank-backed virtual currency, civil liberties advocates and libertarians are pushing for a digital dollar that’s shielded from surveillance and offers similar anonymity to cash.
Interest in a digital dollar is fueled in part by the advent of alternatives like cryptocurrencies and the coronavirus pandemic-driven shift toward more cashless transactions. Paving the way for a central bank digital currency in the US would require extensive planning to win over skeptics, work out technical details, and implement policy objectives like fostering economic growth and stability.
The privacy a digital dollar affords will depend on design decisions such as how transactions are recorded, how users’ identities are verified, and how virtual wallets work. Details like these would determine how closely transactions could be tracked, either by law enforcement looking out for illicit financial dealings or by private sector firms interested in consumers’ buying habits.
“It’s the design that’s everything,” said Mark Young, a former US intelligence official who’s now chief risk officer at blockchain software technology company ConsenSys. Young serves as an adviser to the Digital Dollar Project, a group that’s researching the challenges and opportunities that would come with a central bank digital currency.
The US is among about 100 countries and currency unions that are exploring the possible use of virtual money issued by a central bank that’s not printed or minted like traditional tender, according to a tracker from the Atlantic Council. Skeptics have dubbed China’s deployment of a digital yuan a “surveillance coin” because it could allow the government to more easily monitor transactions.
Surveillance fears have prompted Republican policymakers, including House Majority Whip
A Democrat-led bill that Rep.
The legislative proposals represent opposing visions of what a digital dollar might mean for Americans’ financial freedom.
Digital Potential
Officials at the Treasury Department and the Federal Reserve are not yet convinced that the US needs a central bank digital currency, despite ongoing efforts to study its potential.
Federal Reserve Governor Christopher Waller, for one, has suggested that there are other ways to improve the current payments system in the US without introducing a new kind of currency.
Issuing a digital dollar is seen by supporters as a way to maintain US financial leadership globally while making transactions easier, more efficient, and more inclusive.
The growing digitization of finance through credit cards or payment apps can leave out communities that rely on cash, such as immigrants, low-wage workers, and rural residents who may lack bank accounts or lack trust in the current financial system.
Concern about privacy is one of the top reasons that “unbanked” households cite as why they don’t have a bank account, according to a 2019 survey by the Federal Deposit Insurance Corp.
Any digital dollar that’s pursued should act like cash, according to Jay Stanley, senior policy analyst with the nonprofit American Civil Liberties Union’s Speech, Privacy, and Technology Project.
“The gold standard is cash, where you have no middle man and almost no surveillance,” Stanley said.
Illicit Finance
Today’s digital transactions aren’t very private, in part because of federal regulations meant to combat money laundering, financing terrorism, and other criminal activities. The Bank Secrecy Act requires US financial institutions to assist law enforcement by monitoring suspicious activity and reporting cash transactions exceeding $10,000.
Maintaining such an oversight regime in a digital dollar system could force privacy tradeoffs.
“The more privacy you protect, the less efficiently the government can carry out its regulatory functions,” said Greg Guedel, chief legal officer at financial technology infrastructure company Fluent Finance Inc. “That’s really the tension they’re grappling with at the policy level now.”
Opponents of a digital dollar fear that financial surveillance will grow and get programmed into money, according to Jim Harper, a nonresident senior fellow at the American Enterprise Institute. Harper, along with J. Christopher Giancarlo, former chairman of the US Commodity Futures Trading Commission, has advocated for a “freedom coin” that’s not subject to undue tracking or surveillance.
One way to reconcile privacy and illicit finance concerns may be to tier reporting requirements so that less data gets collected about small dollar transactions or small volume accounts, Treasury Under Secretary for Domestic Finance Nellie Liang said in a March 1 speech.
Liang noted, though, that limits on the amount or number of transactions could make a retail central bank digital currency “less useful to end-users,” adding that finding ways to reduce such trade-offs, possibly with technology, was a work in progress.
Tech Innovation
Technological innovations could help make it possible to protect the privacy of digital dollar users while also preventing the currency from being used by bad actors. The White House Office of Science and Technology Policy has sought feedback on technologies like these to inform digital asset research and development.
“It’s an oversimplification to say a digital dollar transaction wouldn’t be as anonymous as a physical cash transaction,” said David Treat, a senior managing director at consulting firm Accenture who sits on the Digital Dollar Project’s board of directors.
Privacy-protective cryptocurrencies such as Zcash use what’s known as zero-knowledge proofs to ensure that each transaction is valid, while hiding the details.
The Massachusetts Institute of Technology and the Federal Reserve Bank of Boston built a hypothetical central bank digital currency in a joint research effort called Project Hamilton. The project showed that it’s possible to process transactions without needing centralized storage of user balances or identities.
Personal Spending
Aside from government monitoring of financial systems, digital rights advocates are worried about the private sector’s ability to track and share consumers’ financial data.
Current payment systems are designed in a way that enables data brokers to collect, aggregate, and sell consumer data, including credit and debit card transactions, the nonprofit Electronic Privacy Information Center wrote in response to the White House policy office’s research effort on digital assets.
EPIC said brokers can use transaction data to build detailed profiles of individuals that could reveal private information about them such as political views, religious beliefs, reproductive and family choices, and personal preferences and habits.
Lia Holland, campaigns and communications director at the digital rights nonprofit Fight for the Future, echoed concerns that companies can spy on what people do with their money and perhaps even censor certain activities—for example, by shutting down the bank accounts of sex workers.
Fight for the Future is urging US lawmakers to prioritize privacy protections for digital currencies.
“We don’t draw much difference between corporate surveillance and government surveillance,” Holland said.
