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CBDCs Are Likely to Make You Less Anonymous

Simon Chandler
Last updated: | 7 min read
Source: Adobe/wip-studio


  • “The likelihood of fully private online transactions, which would be non-transparent to central banks or intermediaries, is small.”
  • “Countries with a restrictive view towards privacy rights of their citizens have a high chance to implement lower standards of privacy into their CBDCs.”
  • “Restricting financial privacy and/or freedom of individuals would not be the absolute primary goal towards pursuing the CBDCs as there are much larger benefits to a nation’s economy.”

Central bank digital currencies (CBDCs) are coming, while several are already here. For central banks, they provide a means of lubricating and digitalizing the global economy, with a November report from JPMorgan and Oliver Wyman concluding that CBDCs could save companies USD 100bn per year.

However, with China’s CBDC — which is in advanced testing — featuring capabilities that enable it to have an expiry date and to monitor spending, central bank digital currencies raise the worrying possibility that they could be used to restrict privacy. This is something that the European Central Bank (ECB), at least, appears to be aware of, with the ECB recently publishing a range of privacy options for its potential CBDC, from the basic to the very private.

Unfortunately, a range of commentators tell that it can’t be taken for granted that the ECB — or any other central bank — will opt for the most privacy-preserving options when launching a CBDC, particularly in light of the need to ensure high anti-money laundering compliance. And with more than a few governments having less-than impeccable records as far as human rights and civil liberties go, there’s also a good chance that a significant portion of CBDCs will be used to invade privacy.

What the ECB’s privacy options suggest 

Given the size and influence of the European Union, the privacy options outlined by the ECB are instructive as to what real-world CBDCs are going to look like in much of the developed world.

The ECB outlined three options. The first is its “baseline scenario,” which stipulates that the identities of people/entities transacting are transparent to the intermediaries involved in the transaction, such as a private bank and the ECB itself. This is to ensure that the use of a CBDC remains aligned with pre-existing anti-money laundering (AML) and combating the financing of terrorism (CFT) requirements.

Source: European Central Bank


For most commentators, there’s little-to-no chance that a digital euro won’t incorporate such an option, particularly when dealing with large amounts.

“This scenario is available as of today through AML/CFT requirements especially when users deal on a day-to-day basis with commercial banks. As a process, this scenario has been long accepted as a default by customers and commercial banks, and it isn’t going away anytime soon though it does cross certain boundaries of privacy through sharing of personal data with the commercial banks which is considered an acceptable norm,” said Francis Souza, the Partnership Director of Real-Time Payments at payments provider ACI Worldwide.

Other commentators agree that transactions of substantial value would have to be monitored, at least to the degree of satisfying AML/CFT regulations. This is also the view of Robert Courtneidge, the spokesperson for Project New Era, a UK-based private CBDC initiative led by the Payments Association and

“It is clearly desirable, from an AML/CTF perspective, for digital money transactions to be monitored. It is clear from the memo that the ECB are looking at how to achieve this,” he told

In other words, a CBDC would likely involve the level (or lack) of privacy we have now with banks, financial institutions, and private services: you sign up for some account or service and provide verification of your ID, and an authority (such as a central bank) can have access to the resulting data in order ensure compliance. 

However, the ECB raised the possibility of two more lax options, creating hope for anyone who would like CBDCs to preserve some of the privacy-preserving features of cryptocurrencies. These involve users having to undergo ID verification so as to sign up to a wallet or service, but being able to keep data of smaller transactions private from intermediaries (e.g. central banks).

However, crypto industry figures suspect that the likelihood of smaller transactions being ‘invisible’ to intermediaries is very low.

“Although considered a ‘desirable’ option, the likelihood of fully private online transactions, which would be non-transparent to central banks or intermediaries, is small,” said Benedikt Faupel, Project Manager of Blockchain at Bitkom, Germany’s digital industry association.

According to him, the central question the ECB asks refers to the politically desired balance between a high standard of privacy when using the digital euro and integrating these privacy measures into the EU’s other policy objectives, such as prevention of money laundering.

Other CBDCs, outside of Europe

That the ECB is likely to prioritize anti-AML compliance over maximum privacy may be discouraging for privacy advocates, yet it’s likely that CBDCs will end up being even more intrusive elsewhere in the world.

“It appears likely that countries with a restrictive view towards privacy rights of their citizens have a high chance to implement lower standards of privacy into their CBDCs as well,” said Faupel.

This is already evident in China, where the e-CNY (also known as the digital yuan) can be given an expiry date or can be made programmable such that it’s spendable only on certain items. Needless to say, all transactions are also fully transparent to the central People’s Bank of China.

“It is well known that the world’s first and recently launched CBDC, China’s [e-CNY] CBDCs will trace all transactions. This doesn’t stop the Chinese citizens from conducting transactions nor does it curb their freedom, unless there is an abuse of law that is serious enough to warrant the blockage of criminal individuals from using their CBDCs,” said Francis Souza.

Programmability is a feature also highlighted in the context of the Bahamas sand dollar, which had the distinction of being the world’s first CBDC when it launched in late 2020. Writing at the time in a blog for the OMFIF think tank, representatives from Norton Rose Fulbright and NZIA Limited — the two firms hired to help the Bahamas with the launch — talked about how the sand dollar could move into programmability, as well as become the basis for “a national identity scheme.”

Given that the only two CBDCs actually in use right now have been designed with programmability and ID at their forefront, there’s a good chance that future CBDCs could be used in similar ways. For cryptocurrency users and holders, this may come as a shock, but it’s arguably not surprising when central banks take pains to clarify that CBDCs aren’t cryptocurrencies.

Even with the ECB, which has begun considering privacy implications, there’s still a chance that privacy may not win the day.

“There needs to be a balanced approach between the right to privacy and AML/CFT concerns. At least for the ECB, user anonymity is not considered a guiding principle for the CBDC,” said Benedikt Faupel.

Why central banks are excited by CBDCs

Cynics may assume that governments and central banks are interested in CBDCs precisely because they aren’t likely to be privacy-friendly. That said, industry figures affirm that there are other big motivations for pursuing central bank digital currencies. 

“Stringent policies can be enacted by any central bank through CBDCs; however, restricting financial privacy and/or freedom of individuals would not be the absolute primary goal towards pursuing the CBDCs as there are much larger benefits to a nation’s economy,” said Francis Souza.

He highlights several benefits, including the reduction of corruption (through ear-marking CBDCs), increasing financial inclusion activities, the provision of government-targeted subsidies, as well as unforeseen advantages of digitalization and propagating financial innovation.

On top of this, Souza notes that CBDCs resolve securities settlement inefficiencies, credit, and liquidity risks, given that they provide significant scope to enable instant remote settlement for securities or forex. They also promise to reduce costs, for example through disintermediation by directly supporting domestic and alternative currencies for cross-border payments through new direct corridors with other nations using CBDCs.

Admittedly, not many central banks are entirely convinced that these benefits will be pronounced enough to commit to launching an official CBDC. But with nearly every major central bank in the world considering a digital currency in one form or another, it’s possibly only a matter of time before more CBDCs launch, and make the new digital economy a little less anonymous and private.
Learn more: 
CBDCs in 2022: New Trials and Competition with Crypto
Number of Central Banks Involved in CBDC Projects Almost Doubles in One Year

Central Banks Struggle With Privacy-Related CBDC Headaches
DeFi ‘Crucial’ for Financial Inclusion, CBDCs Still Welcome Despite Being Centralized

EU Decision-Makers Kick Off Negotiations On Controversial ‘Unhosted Wallets’ Regulation
Here’s How You Can Help Shape Digital Euro
(Updated on June 6 at 15:05 UTC: The spokesperson for Project New Era is Robert Courtneidge, not Scott Girling Heathcote, as previously stated.)