Computers, Privacy & the Constitution

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AlberthaDewandariFirstPaper 3 - 26 Apr 2022 - Main.AlberthaDewandari
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Risk of the Implementationl of Central Bank Digital Currency: Invasion of Privacy

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Compliance of Central Bank Digital Currency with AML/CFT Regulations without Invading Users' Privacy

 

Introduction

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 The existing US payment system is generally effective and efficient to serve this phenomenon, however technological innovation has recently ushered in a wave of digital assets with money-like characteristics, known as “cryptocurrencies”. These cryptocurrencies have not been widely adopted as a means of payment in the US. They remain subject to extreme price of volatility, are difficult to use without service providers, and have severe limitations on transaction throughput. Many cryptocurrencies also come with a significant energy footprint and make consumers vulnerable to loss, theft, and fraud .
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To address the above-explained risks of the lack of financial inclusion as well as rise in the usage of cryptocurrencies and stablecoins, the Federal Reserve is considering how a Central Bank Digital Currency (hereinafter “CBDC”) might fit into the US money payments landscape. For the purposes of this paper, CBDC is defined as a digital liability of the Fed that is widely available to the general public. CBDC could potentially serve as a new foundation for the payment system and a bridge between different payment services, both existing and new. It could also maintain the centrality of safe and trusted central bank money in a rapidly digitizing economy.
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To address the above-explained risks of the lack of financial inclusion as well as rise in the usage of cryptocurrencies and stablecoins, the Federal Reserve is considering how a Central Bank Digital Currency (hereinafter “CBDC”) might fit into the US money payments landscape. For the purpose of this paper, CBDC is defined as a digital liability of the Fed that is widely available to the general public. CBDC could potentially serve as a new foundation for the payment system and a bridge between different payment services, both existing and new. It could also maintain the centrality of safe and trusted central bank money in a rapidly digitizing economy.
 
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Conversely, as many as its benefits for the US payment system, CBDC also raises many concerns, including privacy issue. In comparing CBDC to current alternatives, physical cash is typically used as a benchmark. Physical cash is unrivalled in its ability to provide a high degree of privacy and anonymity to its users. On the other side, one of the most predominant questions from the experts and economists about the implementation of CBDC is the appropriate degree of privacy that should be afforded to users of the currency.
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Conversely, as many as its benefits for the payment system, CBDC also raises many concerns, including privacy issue and its compliance mechanism with anti-money laundering and countering the financing of terrorism (AML/CFT) regulations without invading users' privacy. Know Your Customer (KYC) is the most used mechanism by financial institutions around the world in terms of their compliance with the AML/CFT regulations. However, since CBDC is expected to have similar characteristics with cash, in particular its anonymity, it is quite challenging to apply KYC mechanism for the CBDC.
 

Analysis


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