Deutsche Bank and MIT Want to Make the Digital Euro More Private

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Deutsche Bank (Bundesbank) announced on April 10 that they’re working with MIT’s Digital Currency Initiative division to develop a central bank digital currency (CBDC).

Their inspiration comes from cryptocurrencies like Bitcoin and Ethereum, but unlike these two, a European CBDC would not be decentralized. Hint – it’s right there in the name.

But what does this mean for you, and what problems would the digital euro solve? Let’s discuss these aspects below.

What Benefits Would a Digital Euro Bring?

The CBDC concept isn’t new. Globally, 134 countries have researched, developed, halted, canceled, or launched a centralized digital currency.

According to Investopedia, CBDCs bring several benefits to users:

Only Nigeria, the Bahamas, and Jamaica have fully launched their CBDCs. And according to the IMF, 98.5% of all Nigerian eNaira wallets remained unused, as citizens are wary of its anti-laundering measures that allow the government to monitor all aspects of financial transactions.

The Bahamian CBDC, the Sand dollar, faces similar issues as adoption is at an all-time low. The country has introduced a tiered system, with Tier 1 having a $500 holding limit and a monthly transaction limit of $1,500. 

Tier 2 raises this to $8,000 for holding and $10,000 for spending, but you must do a KYC to qualify. This is hardly privacy-friendly and empowering to consumers.

China’s CBDC isn’t doing any better, either. An attempt to encourage people to use the digital yuan in Ningbo saw only 8,000 users/day in a city of around 10 million people. That’s 0.08% of the population.

Digital payments already exist and are near-instant, so why go to such lengths to create a digital currency with no compelling reason to have it?

A question many ask is, ‘What’s the difference between digital yuan and Alipay or WeChat Pay?’ Some users have even dubbed the digital yuan ‘centralized Alipay.’

The Privacy & Centralized Control Dilemma of CBDCs

For all these purported benefits, Denmark reported in 2022 that it doesn’t see a use case for a retail CBDC. And as a country with one of the most digitized payment ecosystems in the world, they’re in the perfect position to implement a digital DKK if they wanted to. 

They’ve also said ‘no’ to the Eurozone and are one of the few countries to do so. This begs the question, ‘Do we need CBDCs?’ 

Another point of contention is the digital euro’s supposed ‘increased privacy.’ True privacy and anonymity are unfeasible in a centralized system, especially when digitized. 

The bank will know how much money you have and what you’re spending it on and can impose restrictions and spending guidelines, as seen with the Sand dollar.

That’s the caveat to digitizing fiat – you relinquish even more control over your finances and head down a slippery slope.

Even fiat seems more private than a digital euro held in a government-controlled or government-issued wallet.

With fiat, we only have to trust the financial institution, but with CBDCs, we must trust both the bank and the underlying software with our private information.

For all the promises of privacy and anonymity, can we confidently say the central government won’t misuse this heightened level of control?

Indeed, China’s social credit system tells a compelling story of what happens when the government holds near-absolute control over its citizens.

Less privacy and increased government control never go well together. According to the IMF, CBDCs could implement ‘automated tax payments’ for merchants. Combine this with the cryptocarbon corrective tax that could extend to all things carbon-intensive, and the future looks dystopian.

The Big Picture

The digital euro appears to be an attempt to copy cryptocurrencies while increasing the government’s control over financial transactions. There doesn’t seem to be a conceivable scenario where CBDCs are equally private, anonymous, and fair as crypto or the current system of credit/debit cards.

Plus, there isn’t an actual use of CBDCs that the current system hasn’t already fulfilled. As Denmark’s investigation and China’s failed attempt to promote the digital yuan show, these arguments don’t hold much weight.

And while the intentions may seem honorable, that might not remain so. With time, national crises tend to muddy even the best intentions, and once you open the door to surveillance, it’s next to impossible to close it.