Tuesday , November 28, 2023

A Digital Dollar Backer Applauds the Fed But Stresses a Need for Privacy Protections

The Federal Reserve’s release last week of a discussion paper exploring a central bank digital currency for the United States has evoked interest from a group that emerged two years ago to help launch just such an initiative. The Digital Dollar Project on Friday applauded the Fed’s effort and underscored in particular the need to guard consumer privacy in any undertaking to create digital versions of the U.S. dollar. 

“As our nation takes up exploration of a U.S. central bank digital currency, we must ensure that the values that are enshrined in the dollar today—global acceptance, stable economics, the rule of law, free enterprise, freedom of speech, and, yes, individual privacy—are embraced in the digital future of money,” said J. Christopher Giancarlo, executive chairman of the Digital Dollar Project, a Washington, D.C.-based organization, in a statement.

The Fed’s interest in a central bank digital currency has stirred hopes among many interested parties that the nation’s central bank will ultimately introduce a digital token representing the U.S. dollar. But the concept has also stirred concern about the drawbacks of a CBDC, not least its putative vulnerability to data leaks in comparison to paper currency. In response, the DDP issued a paper in November concerning ways in which a digital currency could guard user privacy under the Constitution’s Fourth Amendment, which bars unreasonable searches and seizures.

The Fed’s paper avoids a detailed description of how it might protect the information a CBDC would produce, but it stresses at various points that such protections would be vital at a time when digital data has been targeted by online thieves. “A general-purpose CBDC would generate data about users’ financial transactions in the same ways that commercial bank and nonbank money generates such data today,” the paper reads. “In the intermediated CBDC model that the Federal Reserve would consider, intermediaries would address privacy concerns by leveraging existing tools.”

The DDP emerged early in 2020 as an initiative of the non-profit Digital Dollar Foundation under the leadership of Giancarlo, who had served for two years as chairman of the Commodity Futures Trading Commission during the Trump administration. Working with the consulting firm Accenture, it proposed to develop a blueprint for a token that could complement physical cash.

Privacy concerns have taken center stage in recent years as a result of rising cyber attacks by thieves who steal payments data and sell it in various online marketplaces. The volume of identity theft and fraud reports in the United States rose to 4.77 million in 2020, up 45% from 2019, according to the Insurance Information Institute. And data compromises overall reached an all-time high last year, according to the Identity Theft Resource Center.

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