Europe Should Address Privacy and Centralization before moving forward with CBDC Development

The EU may place privacy as a low priority in the development stage of the upcoming Digital Euro, despite its position as the top concern in a European Central Bank consultation held in the previous year. While there has been no official discourse on policy formulation, European finance ministers will be convening on this matter this upcoming Monday. Reports also indicate an imminent consultation from the European Commission. 

Digital Euro: Possible Implications of a European CBDC

Data related to an individual’s purchasing patterns can unlock sensitive details about his/her lifestyle choices, preferences, and eleven political leanings. Safeguarding privacy was previously listed as the primary concern, but current events indicate the situation may have changed. Recent ECB research in conjunction with EU citizen discussion panels does not reflect the same leanings and rather focuses on security and universal acceptance. As per ECB board member Fabio Panetta, it is a necessary “trade-off” for the fulfillment of other requirements. 

A completely autonomous digital currency may have severe ramifications according to an internal policy paper considered to be the basis of the upcoming discussions. Despite industry protests, the European Parliament witnessed a majority vote to issue directives towards crypto exchanges for monitoring even the smallest crypto payments and reel in KYC regulations.  

Also Read: EU Lawmakers Sign Laws Restricting Crypto Privacy Ignoring Industry Protests

Privacy: A Cause for Concern?

The aforementioned policy paper suggests the ECB be given access to crypto transaction data to the necessary extent of completing its functions including payment settlements and financial supervision. The paper also warns of the potential misuse of payment information in the wrong hands, recommending against a complete hand-over of the total dataset to any central authority.  

Panetta dismissed state surveillance concerns, mentioning the ECB has zero commercial interests in the data sets and will strictly adhere to the privacy laws. Regarding the extent of available privacy, he suggests the matter lies under the jurisdiction of governments and lawmakers. According to him, “Privacy is not a technical issue; this is a political issue.”

However, there has been severe criticism of the EU’s approach and overly centralized systems. Critics include Marina Niforos, an affiliate professor of the HEC Paris Business School, who rejected Panetta’s statements and agrees with the logic for concern against governments absorbing and asserting control over data. An expert in crypto technology, Niforos had previous contributions to the EU Blockchain Observatory’s digital euro design. She stated, “We’ve seen, in other jurisdictions, a sovereign concentrating that kind of power may not only be for a benign purpose. State actors have less commercial motivations, but that doesn’t mean that there’s not a danger of misappropriation and misuse of that data,”  

Also Read: Russia To Accept Bitcoins For Oil and Gas

EU Blockchain Observatory Report 

Blockchain’s distributed ledger technology is arguably the only viable solution for embedding privacy through decentralization and design architecture. The mere mentioning of added privacy features and policymakers is not sufficient enough. It rather depends upon the technology used. The provision for added features may actually backfire and was alluded to by the EU Blockchain Observatory in its March report.

The European Commission-sponsored body was formed with the objective of determining the EU’s position in upcoming Web 3.0 technology and making the necessary recommendations. The March report highlights that complications may stem from unduly centralized CBDCs that empower central banks with mass-surveillance abilities severely undermining privacy concerns. The data also serves as an information honeypot enticing spies and agents with malicious intent. 

Centralization: A Setback to Crypto Innovation

The ECB’s assurances on the benefits of centralization are not seen in a positive light by crypto experts. The set of problems that can be solved through account-based documentation will in fact give birth to a different set of problems. According to Niforos, the proposed CBDC solution requires a complete overhaul of the existing ecosystem- a task currently impossible for multiple European banks and regulatory systems. Once enforced, the system will be a hindrance to blockchain and crypto development. 

Wrapping Up

Cryptocurrencies were designed to be an alternative to existing fiat currencies and help bypass intermediates during payment settlements. Multiple experts believe that recent developments in the Digital Euro project will not complement existing euro stablecoins but rather supplant them without adhering to DeFi-centric protocols. In other words, the ECB’s may not just erode the concept of privacy, but also become a roadblock to innovation.