NY Fed: CBDCs Will Be More Private Than Big Tech Digital Currency

Central bank digital currencies, or CBDCs, have more potential for privacy than their private sector counterparts, according to economists at University of California, Santa Barbara and the Federal Reserve Bank of New York.

The findings were published in a recent paper, entitled “Monetizing Privacy,” written by Rod Garratt, Professor of Economics at UCSB, and Michael Lee, an economist at the NY Fed; it’s the subject of a new blog post published today, which synthesizes the paper’s findings.

Digital currencies proposed by big tech companies aren’t a great option, according to Garratt and Lee, since the business interests of those companies are fundamentally at odds with promoting privacy; selling data collected during payment transactions (to a company like Cambridge Analytica) is great for companies trying to make a buck, and bad for users who don’t want their data scrutinized by large corporations.

And the more data these big tech companies collect, say Garratt and Lee, the closer we get to so-called “data monopolies,” which allow individual corporations to more effectively screw over consumers.

The post explains the hypothetical as follows: “We find that the monopoly firm controls the vast majority of data and is able to offer a product that is far superior to its competitors’ products. This gap in product quality enables the firm to set discriminatory prices between payment types, taking into account the profit-maximizing quantity of data it would like to extract from consumers. As a consequence, consumers obtain only a small share of the surplus generated from their data.”

You can see the seeds of this phenomenon in Libra, Facebook’s digital currency initiative. The paper suggests that Facebook’s foray into finance represents “the clearest glimpse of what a future might look like with little or no separation between individuals’ social and financial status,” which should set off the same alarm bells for users that it has for politicians and regulators; the Libra project has languished since last fall, when Mark Zuckerberg attempted to defend it before congress.

Proper cryptocurrencies like Bitcoin, on the other hand, may preserve some degree of user privacy, but come at the cost of fluctuating transaction fees and escalating energy costs, according to Garratt and Lee.

The paper’s answer to the question of privacy in digital payments is the humble CBDC—a digital currency backed by a central bank—which, it claims, can offer more privacy protections than alternatives from Big Tech and independent crypto, and could actually function as a protective measure against the eventuality of data monopolies.

“The emergence of digital cash directly reduces the cost to consumers of making purchases whilst preserving privacy,” says the blog post.

The paper is more concerned with policy than with CBDC design considerations, but the co-authors do underscore that “the ability for consumers to purchase products without revealing their private data to vendors” should be baked in. This is a tall order in and of itself; the European Central Bank said in an October report that it doesn’t believe total anonymity will ever be possible in the context of a CBDC.

Garratt and Lee don’t see CBDCs as a cure-all, though—a potential privacy-protecting CBDC won’t actually prevent these data monopolies, which will soon be intruding on our lives whether we like it or not, but will essentially just force them into keeping prices semi-reasonable for consumers.

Put simply: “The data monopolist has to offer better prices to consumers who pay digitally to prevent them from using digital cash.”