The challenges with designing a CBDC, explained
It’s fair to say that central banks are keenly aware about this design trilemma.
Among them is the European Central Bank, which has long said that digitization “represents a major challenge for the payments ecosystem, requiring that a balance be struck between allowing a certain degree of privacy in electronic payments and ensuring compliance with regulations aimed at tackling money laundering and the financing of terrorism.”
The Bank of England, which is exploring a potential CBDC for the U.K., doesn’t necessarily believe that such a currency needs to be built using distributed ledger technology — adding “there is no inherent reason it could not be built using more conventional centralized technology.” It says distribution and decentralization could end up making the CBDC more resilient and available, but this could compromise performance, privacy and security.
One country that’s streets ahead of the competition when it comes to rolling out a central bank digital currency is China. Mu Changchun, who is heading up research on the CBDC at the People’s Bank of China, says a completely anonymous approach wouldn’t work… but this doesn’t have to be at the expense of user privacy. Instead, Beijing’s stance champions “controllable anonymity” — meaning small transactions can be held in private, payment information can be encrypted, and telecoms operators are stopped from disclosing personal data and phone numbers with the central bank.
Some critics have taken a dim view about what “controllable anonymity” might mean — expressing concerns that this could result in transaction history being surveilled.
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