MIT, German central bank will research CBDC privacy in new project

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The Deutsche Bundesbank is the latest monetary authority to team up with the Massachusetts Institute of Technology (MIT) Digital Currency Initiative (DCI) to study central bank digital currency (CBDC). President of the German central bank Joachim Nagel spoke at the launch of the project about challenges ahead for the digital euro.

Nagel told MIT students that the joint research will focus on designing security and privacy measures in a CBDC. The problem is that private digital payment solutions often use third-party services that gain access to consumers’ payment data, which they can use for commercial purposes. In contrast:

“A digital euro would offer the highest possible level of privacy. The Eurosystem would not have access to digital euro users’ personal information. Consumers would gain more control over their personal data.”

Nagel went on the say the current payments system does not work well. “German bank cards, for example, don’t always work in other euro area countries, even if they contain a payment scheme operated by an international company,” he said.

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As digitalization increases, the Eurosystem is considering “a digital product that complements our analogue product cash,” Nagel said. He was referring to the digital euro specifically, although other options have appeared, such as the United States Federal Reserve’s FedNow service that was launched in July.

FedNow has been the target of harsh criticism, but CBDCs have fared even worse. Privacy and potential effects on the banking industry are big talking points for CBDC opponents. European Central Bank (ECB) officials are increasingly going on the offensive against the criticism. ECB president Christine Lagarde said in September that the digital euro was the subject of conspiracy theories, and ECB officials have criticized the banking community for failing to give CBDC reasonable consideration.

Source: Digital Currency Initiative

Nagel conceded to MIT students that the digital euro, as a “riskless asset,” could contribute to economic instability in times of stress by undermining banks. Holding limits will be placed on the digital euro to counteract that threat, Nagel said. He added that the public has only a vague understanding of the digital euro project, which is now in its preparatory stage.

The DCI has also partnered with the U.S. Federal Reserve Bank of Boston in its Project Hamilton looking at a potential digital dollar, and with the central banks of Canada and the United Kingdom.

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