IMF: Central banks may control CBDC transactions

The International Monetary Fund (IMF) last week published a handbook for central banks and regulators on central bank digital currencies (CBDCs), which confirmed that they will not likely feature privacy and autonomy.

A CBDC is a digital currency issued and governed by a central bank. A digital euro, for example, would be issued by the European Central Bank (ECB) — though critics point out that unlike cash, it could also be controlled by the ECB. A digital euro could be used at any point of sale and in any transaction, which would be settled instantly.

At the Singapore FinTech Festival last Wednesday, IMF Managing Director Kristalina Georgieva urged countries to develop CBDCs which she hoped “can replace cash.”

That same day, the IMF published a five-part handbook on CBDCs for policymakers saying that while preserving the privacy of taxpayers is important, governments need to know who is transacting using CBDC for “anti-money laundering” (AML) purposes.

“Using CBDC for domestic transactions requires information on the payer and the payee as part of standard checks for anti–money laundering/combatting the financing of terrorism,” said the handbook. The IMF added, “Information stored in data repositories owned by the central bank” could be easy to “access and cross-reference.”

But the UN agency fretted that if CBDC users feel they lack privacy they may not use the currency as much. Therefore, the IMF recommends central banks implement “privacy-preserving technologies” while at the same time making sure to “allow transparency to regulators.”

The lack of privacy in CBDC was confirmed by Federal Reserve Chairman Jerome Powell last year, who said digital currencies will be “identity verified, so [CBDC] would not be anonymous.”

With identity verification, CBDC could also be “programmable,” says the IMF. This means that authorities “could restrict where or when it could be spent,” like in the case of welfare funds being earmarked for welfare recipients, sent directly to them in the form of CBDC. But the agency adds that some central banks may not wish to program the CBDC itself because that could limit its use. To overcome this, the IMF recommends “payment conditionality” where the transaction is restricted at the payment level but the actual digital currency is unaltered.

The handbook also recommends “user identification and transaction tracking,” which can either be programmed into the currency or made a precondition for the user being granted the digital wallet which will receive the funds.

Programmability in CBDC, which allows the central bank to dictate where and how the currency is spent, has been dismissed as a “conspiracy theory” by media operatives despite open admissions by experts.

In April, for example, IMF Deputy Managing Director Bo Li expressed hope that programmability will be a feature of CBDCs.

“The third way we think CBDC can improve financial inclusion is through what we call programmability,” said Li. “That is, CBDC can allow government agencies and private sector players to program, to create smart contracts, to allow targeted policy functions. For example, welfare payments. For example, consumption coupons. For example, food stamps. By programming CBDC, those monies can be precisely targeted for what kind of people can own and what kind of use this money can be utilized, for example for food.”

At the World Economic Forum (WEF) Summer Davos conference in May, Cornell Professor Eswar Prasad also advocated for programmability but presented a broader scenario.

“If you think about the benefits of digital money, there are huge potential gains. It’s not just about digital forms of physical currency. You can have programmability [like] units of central bank currency with expiry dates,” he said.

“You could have . . . a potentially better — or some people might see it, a darker — world, where the government decides that units of central bank money can be used to purchase some things but not other things that it deems less desirable, like say, ammunition or drugs or pornography or something of the sort. And that is very powerful in terms of the use of a CBDC.”

Brazil has programmed a feature into its digital currency Drex which allows the Central Bank of Brazil to freeze and even withdraw the funds after they are transferred to a taxpayer.

Thirty-two other countries besides Brazil are currently developing CBDCs, according to data from the Atlantic Council. Forty-six countries are still in the research stage and 21 countries are already pilot testing their digital currencies. Eleven countries, including Nigeria, the Bahamas, Jamaicas, and Eastern Caribbean countries, have already adopted CBDCs.