Do government-issued digital currencies spell an end for privacy?

Over the last year or so, the concept of digital currencies issued by central banks has moved from a niche idea to a mainstream proposition. But what does it mean for our privacy?

Digital currencies are an alternative to cash, based on an electronic record or digital token and held directly by the owner on their phone. Unlike, say, Bitcoin, they'd be pegged to the national currency, rather than fluctuating in value.

China recently announced that it has started pilot programs in a number of cities, giving $1 million in what's known as the Digital Currency Electronic Payment (DCEP) to a proportion of the residents, who can spend it at certain retailers.

Officials have said they hope to roll the system out more widely, and that it may be in use in time for the Beijing Olympics next February.

Meanwhile, the Bahamas is trialling the Sand Dollar, and Cambodia has launched Project Bahong; and more than 60 other nations are considering following suit, with the vast majority looking at a blockchain-based solution.

The latest nation to announce an interest is the UK, with the Bank of England recently having set up a taskforce to examine the concept.

A tool for spying?

The arguments in favour are efficiency and the reduction of fraud. However, concerns include the effects on those who depend on cash, the future of commercial banks - and, above all, the effects on privacy. 

Speaking recently at Imperial College London, Jeremy Fleming, director of the UK's spy agency GCHQ, said digital currencies held great promise.

But, he added, "Designed without liberal values, they could be used to enable significant intrusions into the lives of citizens and companies in those countries, and those they do business with globally."

China, of course, is already considered the world's most surveilled country, thanks mainly to its social credit system. Through this, the government can rate the behaviour of individual citizens, giving them rewards or punishments accordingly.

Adding DCEP into the mix would give the government a far greater level of control. It would become possible to cut off a citizen's source of funds directly, for example, rather than having to go through a bank.

It could also be used to monitor human rights activists or even 'undesirable' groups such as Uyghur Muslims.

Meanwhile, in the UK, the Bank of England has pledged to consider data and privacy issues as part of its evaluation. It has also stressed that any central bank digital currency would exist alongside cash and bank deposits, rather than replacing them.

"The Government recognises that cash remains important to millions of people across the UK, and has committed to legislating to protect access to cash," it says in a statement.

The European view

The European Central Bank (ECB) is also examining the concept of a digital currency, and recently carried out a public consultation on a possible digital Euro.

It turned out that what the public and professionals wanted the most was privacy, at 43 per cent, followed by security at 18 per cent.

In theory, privacy fears could be assuaged by using blockchain technology, leaving consumers the holders of the cryptographic keys needed to access their financial data. 

In practice, though, this would leave law enforcement unable to access financial records, and could also have a detrimental effect on the banking industry.

The ECB has already made certain pledges about privacy.

"The Eurosystem has no interest in collecting payment data from individual users, tracing payment behaviour or sharing such data with government agencies or other public institutions," it says.

"A digital euro would allow people to make payments without sharing their data with third parties, other than what is required to prevent illicit activities."

In order to achieve this, users’ identities could be kept separate from their payment data, except when criminal activity is suspected; in such cases, it says, the information would only be made available to the authorities under a well-defined legal framework.

Governments would, therefore, have much the same access to financial records as they do now, under much the same laws. In other words, nations that are already surveillance states will gain new tools; for the rest, it should be business as usual.