In yesterday's op-ed in The Hill newspaper, Christopher Giancarlo, former CFTC Chair and co-founder of The Digital Dollar Project, and Jim Harper, a lawyer and senior fellow at the American Enterprise Institute, offered their expert opinions on the benefits and implications of central bank digital currencies (CBDCs).
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"Rise of CBDCs is a chance to reassess and rebalance current financial surveillance in accord with American constitutional norms, the presumption of innocence and the rule of law," Giancarlo, who had served as a chairman of the Commodity Futures Trading Commission (CFTC) in the past, tweeted after the publication of the op-ed.
"Programmable, instantaneous round-the-clock payments at much lower cost, and greater access to financial services, for both retail and wholesale participants. CBDCs may strengthen the ability of central banks to implement monetary policy, allowing direct infusions of money across the economy and vastly improving the administration of benefits and economy-boosting payments compared to efforts made at the outset of the COVID-19 pandemic," Giancarlo and Harper wrote in their piece.
While The USA is still exploring the capabilities and limitations of CBDC, the prospect of introducing the digital dollar has raised legitimate concerns about its impact on privacy. Giancarlo and Harper specifically cited the architecture of a blockchain, where "every payment a digital ‘communications event,’ which is easily recorded and tracked," as the major threat to privacy.
"The public side of a public-private key pair (known as the ‘wallet’) comes to serve as an identifier. Its use is readily observed, and it can be correlated to other wallets, creating records of who is transacting with whom. Who in their right mind would trust their financial information to it?" the authors wrote.
At the same time, Giancarlo and Harper believe that the CBDC also has the potential to become a "freedom coin." In contrast to those who see the digital dollar as a threat to privacy, the authors argue that the current US financial system, with its anti-money laundering (AML) and Know Your Customer (KYC) regulations, has already become a "surveillance regime" that requires serious changes.
Earlier, in their March 1 report, they had outlined the pillars for digital coins counter to "surveillance coins" introduced by autocratic societies. These are privacy, security, accessibility, and transparency.
"In free societies, digital transactions should be designed to not require the sharing of identifiers readily tying transactions to individuals. A freedom coin should not change — and certainly not weaken—the financial privacy available with today’s paper cash," Giancarlo and Harper laid out their view on the privacy layer of the digital dollar.
Authors also emphasized that such transaction record-keeping system must be secure, saying that “it must be essentially impossible for attackers to alter transactions, create counterfeit dollars, spend existing dollars twice, or take the system out of service.” At the same time, Giancarlo and Harper warned in their report about the potential misuse of CBDC by the government.
"Security against theft is one thing. Security against illegal seizure is another. A freedom coin CBDC system should not become a new, easier avenue for government agencies to levy fines and punishments without citizen consent, as can be expected from autocratic governments using surveillance coins."
To make the digital dollar transparent, Giancarlo and Harper believe its code should be open-source and "available to the reviewers outside the system." At the same time, they believe that making the digital dollar programmable and reducing the number of intermediaries will improve its accessibility.
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Giancarlo and Harper hope that the solutions proposed by Project Hamelton will help bring the concept of a "freedom coin" to life. The project established by the Federal Reserve Bank of Boston explores the privacy complications associated with CBDCs. According to the researchers working on the project, it is possible to avoid information disclosure by using homomorphic encryption, zero-knowledge proofs, and multiparty computation.
"Many assume that a CBDC would build existing surveillance capability into the money, but we presume the opposite. The advent of CBDCs offers the opportunity to reassess contemporary financial surveillance activities in their entirety and possibly rebalance them in accordance with American constitutional norms, the presumption of innocence, and the rule of law," Giancarlo and Harper believe.
