ANALYSIS: ‘Slippery Slope’: Experts Warn About Pitfalls of Central Bank Digital Currencies

ANALYSIS: ‘Slippery Slope’: Experts Warn About Pitfalls of Central Bank Digital Currencies
The Bank of Canada is shown in Ottawa in a file photo. (The Canadian Press/Sean Kilpatrick)
Matthew Horwood

As the Bank of Canada seeks consultation from Canadians on its design of a potential central bank digital currency (CBDC), digital privacy experts are warning that the technology could be used by governments to track payments and freeze dissidents’ bank accounts.

“CBDCs could be a nightmare for democracy, for civil liberties, and potentially all sorts of human rights,” Ori Freiman, a post-doctoral fellow at McMaster University’s Digital Society Lab, who is researching the responsible implementation of emerging technologies, said in an interview.

“At the end of the day, all those policy-makers need to understand that this technology can be weaponized to identify people, and because of that, they need to come up with a clear red line.”

On May 8, the Bank of Canada announced it was exploring the possibility of issuing a digital currency, and was thus seeking consultation from Canadians on its design.
“As Canada’s central bank, we want to make sure everyone can always take part in our country’s economy. That means being ready for whatever the future holds,” Senior Deputy Governor Carolyn Rogers said in a press release.
The bank said that while it did not currently see the need for a CBDC, Canada may require one in the future and the bank needs to “get ready.” It said that ultimately, however, the decision on whether to create a digital dollar will be determined by Parliament.

Oversight Mechanisms Needed

Freiman said digital currencies could offer many benefits, such as allowing for accurate and automated tax collection and assisting governments in their fight against money laundering and terrorism financing. But he said these positive aspects of CBDCs are exactly what could make them so dangerous.

Under the subtext of fighting crime and keeping people safe, governments could seek to gain control over users’ private financial data, according to Freiman. He said this “slippery slope” could lead to the surveillance state being massively expanded to the point where dissidents and those critical of the state are identified and financially restricted.

Freiman cited the example of the 2022 Freedom Convoy, when the federal government used powers under the Emergencies Act to freeze some of the protesters’ bank accounts.

“In Canada, which is a liberal democracy, the government wasn’t afraid to use financial instruments exactly for political reasons,” he said.

To prevent this possibility, Freiman said democratic oversight mechanisms need to be in place to ensure governments do not use CBDCs to threaten privacy and freedom.

“We must make it so that it wouldn’t be even possible for them to have this information and also to ensure the independence of the central bank,” he said.

Trend in Global Economy vs ‘New Level of Control’

Sergey Gorbunov, an assistant professor in the Faculty of Mathematics at the University of Waterloo, said that with more countries mulling the creation of their own CBDCs, it is “absolutely necessary” for the Canadian dollar to go digital in order to “stay relevant in the global economy.”

Some 120 countries, representing over 95 percent of global GDP, are currently exploring some form of a CBDC, according to American think tank the Atlantic Council. As of May 20, at the time of this writing, 40 countries are researching the issue, 32 are in the development stage, 18 have launched pilot projects, and 11 have fully launched a digital currency.

However, like Freiman, Gorbunov said CBDC adoption could lead to a worst-case scenario where governments use the digitalized financial system as a tool to silence dissenters, such as by blocking their transactions and freezing their bank accounts.

“This is not far-fetched. It is happening in some countries today,” he said.

Dave Bradley, chief revenue officer at Bitcoin Well, said CBDCs offer few real benefits to users, as most people already use digital payments in lieu of physical money. According to the Bank of Canada, only about 20 percent of retail transactions are conducted using cash.

“But there is a benefit to the government if they decide to use that new level of control to crack down on people in some way,” Bradley said.

Bradley pointed to the example of China, which is in the process of testing out both a digital yuan and a social credit score system. He said if Western governments were to adopt a similar system, it would have the power to monitor the transactions of citizens and penalize them based on their spending decisions.

“They could have things like, ‘you bought too much red meat last week, and so next week, you’re punished. You’re not allowed to spend any money more than five kilometres from your home,’” he said.

“We could see the minutiae of our lives tracked and our choices really cracked down upon by the government, and it’s a dystopian possibility where personal decision-making could be completely eliminated.”

Privacy Concerns

Rohan Grey, assistant professor of law at Willamette University in Salem, Oregon, said CBDCs could offer benefits such as the elimination of private intermediaries, faster settlement times, and the potential to hold funds directly with a central bank, which could offer greater security and remove deposit insurance limits.

But Grey said an account-based CBDC system—where intermediaries are required to manage transactions between users—would come with privacy concerns.

“You are always going to need to ask permission to move your money around, and the act of storing your money is always the act of trusting a third party not to shut down your account or otherwise freeze it,” he said.

Grey said this transition to a digital system of money would be different from how cash and digital money has historically existed in parallel. While the Bank of Canada has assured Canadians that it would still continue to provide banknotes following the implementation of a CBDC, Grey said this type of monetary system would make cash “functionally dead.”

He said the “ideal” design for CBDCs could involve a government-issued currency that functions similarly to physical coins by providing direct access to individuals without intermediaries.

“And there are obvious ways that you can put restrictions on that legally, but those restrictions are not baked into the technology,” he said.

Options for Design

Grey said that while those concerned about the privacy considerations of CBDCs are “not wrong,” they are framing the conversation as if there is only one possible design for the technology.

“The conversation is framed around ’there’s only one possible design,‘ and maybe that design isn’t good. We leave other avenues of progress off the table, and then the debate becomes, ’Well, do you like the status quo?‘ Well, nobody likes the status quo either, so thank God we have a third option, which is ’we can continue to have progress, but not towards a bad outcome.'”

Grey said the “future of money” doesn’t need to be a panopticon, which refers to the design of a prison building that allows all inmates to be observed by one security guard without the inmates knowing whether they are being watched.

“It doesn’t have to be the panopticon or 18th-century money,” he said.

“It can be another form of the future of money that is protective and respecting of individual people’s privacy and autonomy and expands the capacities that we currently have in digital payments, by allowing us to do things [like peer-to-peer payments] in a capable way without a third party.”