Why Governments Should Rethink Central Bank Digital Currencies (CBDCs)

The concept of banning digital assets, such as cryptocurrencies, has proven to be an ineffective strategy in the past. When China announced its intention to ban Bitcoin in 2017, the market initially reacted negatively, only to quickly recover as the absurdity of the notion became apparent. However, central bank digital currencies (CBDCs), which are digital forms of national currencies issued and regulated by central banks, are a different story.

While most governments are not as heavy-handed as China, which has been a strong proponent of CBDCs, they are seeking to develop digital currencies for administrative efficiency and economic data gathering purposes. The United States, under the Trump administration, took a different approach, cancelling its own digital dollar initiative.

This decision, although seemingly reactionary, highlights a critical issue with CBDCs: the lack of adequate privacy protections. If billions of citizens are going to have their data and financial assets placed on a global database, it requires much better safeguards than the current proposals offer.

The Impact of Trump’s Decision

Trump’s decision to ban the digital dollar has significant implications, potentially causing other nations to follow suit. The reason cited – privacy – resonates with the people, and other Western nations, especially in Europe, may need to re-examine their own CBDC initiatives.

The European Union’s digital euro, for instance, has been described as being “as private as cash,” but this is not entirely accurate. The potential for governments and other organizations to gain unwarranted insight into citizens’ spending habits and censor transactions is real.

Advancements in Privacy Technologies

Fortunately, there are now more robust and feature-rich privacy standards available, such as zero-knowledge (ZK) proofs and fully homomorphic encryption (FHE). These technologies can facilitate nuanced disclosure of sensitive data without leaving it at risk of exposure to centralized entities and malicious actors.

Implementing these technologies can provide tiered privacy, where low-value purchases are lightly scrutinized and high-value ones are subject to more intensive checks. The EU can still get this right, as the digital euro is still in its early stages.

A Call to Action

The EU needs to move forward and signal that its digital currency will be secure, private, and robust. Otherwise, it risks being canceled, just like CBDCs in the US. By incorporating advanced privacy technologies, the EU can create a digital currency that truly serves the needs of its citizens.

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