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The International Monetary Fund (IMF) has published its research on the ecosystem supporting central bank digital currencies (CBDCs).
Published at the end of August, IMF's research on the cyber resilience of the ecosystem of CBDCs delves into how safe and stable these digital currencies are, given the current need to update payment systems.
In order to build a more robust and secure infrastructure, the paper suggests that central banks should reconsider their old payment systems and use new technology. It stresses that a CBDC is a major change to the way central banks operate, which increases and introduces new risks.
Expanding Risks: The Complexities of a CBDC Ecosystem
By establishing a large and intricate ecosystem, a CBDC increases the impact of preexisting risks and brings to light new ones. Central bank operations will need to undergo a sea shift in light of the CBDC's far-reaching consequences.
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Based on trials carried out by local and foreign organisations, this note takes into account real-world CBDC experiences. It incorporates resilience and cybersecurity frameworks from organisations that create standards.
This paper provides a framework and tools to assist governments manage the trade-offs between privacy protection and CBDC data use. As concerns about data access and privacy preservation in a wholesale setting are comparable to those of conventional RTGS systems, it deals with CBDC in the retail sector.
It highlights how technology solutions, design decisions, data storage and access regulations, and institutional systems all play a part.
Based on an individual's privacy preferences, central banks can improve CBDC data utilisation through strong accountability and transparency measures, well-thought-out rules, and the careful application of privacy-by-design principles, which may involve the deployment of privacy-enhancing technology.
Comparing CBDCs and Private Digital Payment Systems
The IMF report argues that as opposed to private digital payment systems, CBDCs offer a better balance between data use and privacy protection.
Private digital payment systems face a comparable trade-off, but there may be many benefits for central banks if they can find a happy medium. They are in a prime position to organise the CBDC ecosystem's adoption of a privacy-by-design strategy, as well as to describe principles and regulations that support privacy.
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They also have great convening skills.
To allay worries about personal data breaches, central banks need to do more to educate the public and improve communication. They can provide a wide variety of CBDC designs to meet the needs of customers with varying levels of privacy concerns.
By promoting data exchange and eliminating data silos, central banks might foster innovation and competitiveness.
Last but not least, central banks need to cooperate with other responsible organisations to establish uniform legal and regulatory standards for CBDCs, which will go a long way towards establishing their credibility.
Central banks may choose to provide multiple CBDC designs to meet the demands of users with varying levels of privacy concerns, considering the wide range of possible privacy preferences.
Design Decisions and Privacy: Balancing Cash-like Anonymity
A high level of user privacy might be achieved by designing CBDCs to be near replacements for cash for small value transactions.
For this reason, it is imperative that stringent institutional frameworks, policies, and technology fixes be put in place to guarantee that CBDC usage complies with AML/CFT rules and regulations to an extent equivalent to that of cash.
Keep in mind that cash is a somewhat anonymous payment method, which makes it suitable for illegal activities.
If the user prefers, a modified version of this design decision for low-value transactions might make it easier to identify them. If these users are more likely to be approved for credit, they may be more inclined to consent to the usage of their payment information for that purpose.
Facilitating effective and secure CBDC data exchange among market players may put central banks in a better position to enhance market contestability and prevent data silos. As with other digital payments, CBDC data utilisation might provide a comparable degree of privacy protection for greater value transactions.
Such a scenario would see PSPs collecting and storing CBDC data in the same way they do data from other digital payment systems. While the central bank may not directly access or keep the CBDC data, it can nonetheless establish safeguards to promote the sharing of CBDC data among PSPs.
Market contestability and financial service efficiency might both benefit from such CBDC data exchange.
Rigid legal constraints and institutional protections are necessary to supplement technology in its ability to preserve privacy through the adoption of a privacy-by-design strategy.
To properly exchange data, technology allows for design flexibility to accommodate varied tastes and conditions. Anonymity and privacy settings may be easily customised using technology.
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For example, it might offer "proofs of correct execution" to persuade people that certain data can be accessed by law enforcement. In order to establish credibility, these "proofs" may be reviewed and shared with users. However, relying solely on technology cannot guarantee confidence.
Persuading people that technology will not be exploited and that those who violate their privacy will face prosecution requires strict legal and regulatory standards as well as solid institutional protections on accountability and transparency.
In a broader sense, it's possible that a dynamic and tailored strategy to different markets, legal systems, situations, and scenarios is required to safeguard privacy, rather than a one-size-fits-all solution.
It is the responsibility of policymakers to inform the public about the privacy consequences of various CBDC design options through open communication.
Additionally, they need to put measures in place to make sure that stakeholders follow the rules, that laws and principles are in place to preserve privacy, and that those who break the rules face consequences.
Cross-Border Data Flows: Navigating International Privacy Standards
When it comes to cross-border data flows related to CBDC data usage and privacy protection, however, individualised solutions should not be the only thing examined.
Like all private digital cross-border payments, CBDC data movements across borders pose a privacy concern. Stringent data localisation requirements may hinder cross-border usage of CBDC, which is logical given that data use and privacy standards differ between nations.
To support unrestricted cross-border data flow while guaranteeing privacy, supervision, and protection, the international community is attempting to harmonise standards. This is in response to these concerns.
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