Report Identifies Risks of Digital Currencies: Surveillance and Vulnerability Highlighted
A central bank-issued digital currency could be misused in several ways, including loss of privacy and increased surveillance, as outlined in a recent report.
The report by the Justice Centre for Constitutional Freedoms (JCCF), a Canadian legal advocacy organization, highlights the risks associated with Ottawa introducing its own government-controlled digital currency and Canada transitioning into a cashless economy.
The Bank of Canada states that while it currently has no plans to launch a central bank digital currency (CBDC), it has conducted research on related technologies and implications for contingency planning. The exploration of digital currency began in 2017.
The report warns that without proper frameworks to safeguard Canadians’ privacy and autonomy, central bank-controlled digital currencies could make all transactions traceable and grant the government access to sensitive data. This could lead to targeting individuals by restricting access to or freezing their accounts, as witnessed during the 2022 Freedom Convoy in Ottawa.
CBDC
Canadians are increasingly opting for digital payments, with cash accounting for only 11 percent of total payment volume in 2023, according to Payments Canada.
A Bank of Canada report suggests that a CBDC could offer the security of cash along with the convenience of modern electronic payments, providing consumers with more options. It emphasizes that payments would remain private between parties, like cash, but traceable to law enforcement, similar to bank accounts.
The central bank indicates readiness to launch such currencies if the use of cash declined significantly or alternative digital currencies gained widespread adoption as substitutes for the Canadian dollar.
The Bank of Canada has recently shifted its focus away from CBDCs, stating that it is concentrating on broader research into payment systems. It believes that its study of digital currency will be crucial when Canadians, through elected representatives, decide on a digital Canadian dollar.
Privacy Risks
The report raises concerns about the risks of making all transactions digital and traceable with government-controlled digital currency. It suggests potential privacy threats to Canadians depending on the recording and management of user account and transaction data.
If the system mandated the central bank to record and verify such information, it could grant unrestricted access to data for both the central bank and the government. However, utilizing traditional banks as intermediaries for activities like distributing digital currency and managing user data could offer some protection.
The report highlights concerns about traditional banks yielding to government pressures in crises, as seen during the 2022 Freedom Convoy when protesters had their bank accounts frozen.
“The willingness of commercial banks to comply with government demands to freeze the accounts of protesters and donors… jeopardizes Canadians’ privacy and financial security,” the report states.
The Bank of Canada has indicated that a CBDC would offer some privacy but not the anonymity of cash, potentially leading to misuse in transactions like money laundering and tax evasion.
“Our initial research indicates that it would be possible to achieve both a high degree of privacy and well-controlled disclosure of information, for example, only with the presentation of a court warrant,” the central bank stated in a 2020 document on contingency planning.
“Any acceptable design for a CDBC will need to include controls that ensure adherence to current laws while offering a sufficient level of privacy.”
Control Risk
Another concern addressed in the report is the potential authoritarian use of CDBCs due to their programmability, allowing for automated money transfers and targeted financial policies that could impact individual purchasing decisions.
“A CBDC has the potential to empower government to reward and punish the behaviors and lifestyle choices of individual Canadians…,” the report underscores.
“Allowing the government to peer into and influence Canadians’ purchasing behaviors… could have a profoundly damaging impact on their privacy and autonomy.”
Additional Concerns
The report also mentions increased cybersecurity risks and reduced government accountability due to the introduction of CBDCs. It suggests that digital currencies could exclude cash-dependent populations, undermining their economic participation.
The authors caution that governments could implement CBDCs under the guise of crisis or emergency measures, potentially impacting citizens’ financial autonomy.
Despite these concerns, a significant portion of Canadians have expressed a preference for their current payment methods over a digital Canadian dollar, as indicated in a 2023 Bank of Canada survey.
The central bank underscores that any decision to launch a CBDC must have government approval and public acceptance.
“The design choices made in building a CBDC would be crucial to achieving policy goals while minimizing risks,” the central bank emphasizes.
