Reserve Bank of India’s Acceptance of Digital Rupee Highlights Privacy Concerns

If you look deeper at the news of India’s central bank accepting a “basic” digital rupee as “a safe, robust, and convenient alternative to physical cash,” something jumps out of the “Report on Trends and Progress of Banking in India 2020-21,” released on Tuesday (Dec. 28). 

Compared with cash, a central bank digital currency would “offer benefits to users in terms of liquidity, scalability, acceptance, ease of transactions with anonymity and faster settlement,” the Reserve Bank of India (RBI) said in four bland paragraphs on the subject of CBDCs. 

It’s the second-to-last one — “ease of transactions with anonymity” — that could be the joker in the pack. 

Privacy, and the lack thereof, in CBDCs is a growing concern as more large economies pivot from if to how, and how to when. Those concerns come particularly as China has made clear that its digital yuan CBDC, expected to launch by February, will have some formidable transaction tracing capabilities. 

And as the first mover, it has the potential to influence how other CBDCs follow in its privacy footsteps, even in substantially more democratic countries like the U.S., the U.K. and the 27-member European Union, where the CBDC privacy debate has already begun.  

Mu Changchun, director of the Digital Currency Research Institute of the People’s Bank of China (PBoC) that is driving the digital yuan project, has used the phrase “controllable anonymity” to describe its goal. This means monitoring transactions in real time to look for criminal activity even as the digital wallets are anonymous to commercial institutions, Mu has said. 

Just how anonymized they would be for the authorities, in a country in which criticizing those authorities can be a crime, remains somewhat vague.  

Following China’s Lead 

The fate of India’s CBDC is still largely unwritten, including whether it will be a retail CBDC for consumer payments or a wholesale one for back-end financial settlements and transactions, the report said. In calling for a basic CBDC, the RBI said it would prefer one that does not “assume the complex form of a financial instrument.” 

As for privacy, you have to head a bit into crystal ball territory. But its worth noting two things: First, under Prime Minister Narendra Modi, India has seen autocratic tendencies growing. Human rights groups like U.S.-based Freedom House earlier this year demoted the country from “free democracy” to “partly free democracy,” citing growing crackdown on dissent. India also slipped on The Economist Intelligence Unit’s 2020 Democracy Index, issued in February, which called it a “flawed democracy.”

Second, Modi’s decision in look back at 2016’s 500- and 1,000-rupee note debacle, in which Modi to eliminate the 500- and 1,000-rupee notes, pulled the country’s largest bills out of circulation without notice, causing substantial economic disruption. 

Aimed at curtailing the shadow economy and increasing electronic payments, the move suggests that Modi is willing to play hardball with the digital currency, and have a preference for tracking transactions more effectively, for taxes as well as fighting crime and terrorism. 

American Values 

As for the U.S., Federal Reserve Chairman Jerome Powell has been clear that he is not yet convinced a digital dollar is needed or wanted. 

But if a U.S. CBDC does get the nod, it’s been made very clear that privacy will be key, but not absolute. 

In its statement of privacy principles, the Digital Dollar Project, headed by former Commodity Futures Trading Commission Chairman Chris Giancarlo, said: “People should be able to use a U.S. CBDC without making themselves subject to undue government surveillance. People may benefit from above-board, contractual sharing of information with financial services providers, or they may refuse it. Law enforcement access to CBDC usage data should be strictly controlled by due process, and other applicable U.S. law, including the Fourth Amendment.” 

There’s another benefit to a strong privacy regime. “The privacy protections of the U.S. Constitution and our democracy’s commitment to individual privacy offer a unique opportunity for U.S. digital money to be more appealing to users then other, less-private digital currencies, solidifying its position as the world reserve currency,” the Digital Dollar Project added.

Politicians get that, too.  

“You don’t want a situation where any policeman could get on his console and look at any payments made by any person in the United States, including his ex-girlfriend,” Rep. Bill Forster (D-Ill.) told Roll Call in June. “You want to require a clear legal regime for this.” 

Largely unspoken in this debate is the question of how that clear legal regime would handle civil access to that information. Would the Securities and Exchange Commission be able to subpoena it in a civil investigation? How about lawyers in a divorce seeking hidden funds? 

At the same time, there’s some skepticism about the importance people really place on privacy.  

Philip Middleton, chairman of the OMFIF Digital Monetary Institute, noted that while surveys show overwhelming support — more than 70% — of strong privacy features in a CBDC, “this coyness to share transaction data with the central bank is grossly at odds with our existing behavior. We willingly share a mountain of data — financial and other — with our banks and financial services providers.”