Hanna Halaburda, associate professor in the Technology, Operations and Statistics department at the NYU Stern School of Business and former senior economist at the Bank of Canada, shares her thoughts regarding the risks and benefits of central bank digital currencies (CBDCs).

Author: Andrew Singer

Global Finance: You noted recently that CBDCs could promote financial inclusivity by offering convenience and low transaction costs. But they also come with certain risks, including privacy loss and civil liberties erosion. Should privacy be a differentiator among the many government-issued digital currencies that are expected in the next 12 months?

Hanna Halaburda: Governments’ stated approach to privacy is a differentiator. Some don’t even attempt to claim privacy—China’s CBDC, for example. With the CBDCs already issued by the Bahamas and Nigeria, there was at least a desire for privacy and anonymity for smaller transactions. In our research, we focused on those countries that claimed that they want to preserve privacy.

We asked people on the ground to open digital payment accounts in those countries that advertise that they have anonymous accounts, and we never succeeded in opening an anonymous account. There was always a biometric requirement linking to an existing bank account or an identity number, so this promise of anonymity for small transactions is not being delivered upon.

GF: There’s talk that CBDCs could help central banks fight inflation. Your view?

Halaburda: When we first started thinking about CBDCs, the inflation rate was near zero in places, and the thought was: How do you remedy zero inflation? Do you do some quantitative easing? Maybe with CBDCs, you could parachute money into peoples’ wallets?

But this presumes a CBDC architecture that, in most cases, hasn’t been settled. Is the central bank going to be holding everybody’s debit card account? Well, that may not work at scale. Will CBDCs, then, be distributed through the banking system? Then how is that different from the current system? On the margins, yes, it could help with inflation, but not on a large scale.

GF: Many believe that China’s digital currency, the e-CNY, could be the first CBDC to market among large economies. If so, would that represent a threat to the US and other Western governments that use the USD as their reserve currency?

Halaburda: There are two tiers of currency. There is retail currency, and there are interbank transfers. When we talk about CBDCs, most of the discussion is about what central banks would call retail CBDCs. And this is different from settling interbank payments, which are already digital.

In most cases, when foreign countries keep US dollars in reserve, they have an account with the Fed. That’s already electronic. So, how exactly is a Chinese retail CBDC going to change that?

GF: What is the attitude of private financial institutions toward CBDCs?

Halaburda: What will be the impact on the banking sector? It depends on the architecture. Will the central bank issue CBDC directly to retail individuals, which means it could hold millions of debit cards? Or will it distribute digital currency through the banking system, as with banknotes and coins?

If the banking system distributes the CBDC, there is no major impact. It is just a third option, along with coins and banknotes. But it probably isn’t going to improve financial inclusion because if people don’t have bank accounts, it’s unclear how the CBDC will make them more likely to open a bank account.

Therefore, some say, let’s have debit cards with the central bank. But then how will you get a mortgage or a business loan, for instance? There’s less money to lend out because the central bank will not be lending this money; it will be just sitting there. Commercial banks would have fewer deposits, and loans would become more expensive.

GF: What about carbon footprint? Is there any analysis that CBDCs are greener or less green than cash, which has to be shipped around?

Halaburda: Yes, there is a carbon footprint with cash. There is shipping, printing that involves vast amounts of chemicals you don’t want in your water, and there’s the security. Highly armored trucks are required for shipping, and cash has to be stored in safes. And so on. So, there is a considerable cost in that. An electronic system may be cheaper.

We talk about the environmental impact of cryptocurrencies, especially those with proof-of-work [PoW] consensus mechanisms like bitcoin. Still, I have not seen one proposal where a central bank has said, “Let’s use a PoW blockchain platform for our digital currency.” CBDCs, if they use blockchain platforms, will employ permissioned chains that use a small fraction of the energy used to mine bitcoin.

GF: What other differentiators among countries’ CBDCs, besides privacy?

Halaburda: Another is whether the CBDC will replace cash or become a third type of cash with coins and banknotes. In Canada, we were worried about a small population in the North. They live in areas without very good technological infrastructure, where electricity doesn’t always run and people can lack an internet connection. So, if we were to implement CBDCs that take the place of cash, groups like that would be left out. This idea that everybody has a smartphone, and this is how we distribute digital money is very urban-centric.

GF: Are there any CBDC designs that you find particularly interesting—or worrisome?

Halaburda: I would watch out for discrepancies between stated and actual designs. This is sort of what we encountered with privacy. The stated design is: We’re going to have anonymous accounts. But then the actual design is: You can’t open anonymous accounts.

GF: Can you make any forecasts as to what lies ahead?

Halaburda: That’s not my specialty, but we will see that authoritarian governments will be quicker to apply CBDCs because they have more to gain. There is more advantage for China to do it than for the US. The democracies are going to mull and ponder and maybe nothing will come out of it.

GF: Your recent paper published in Nature seems to be a privacy call to action for consumers and consumer advocates. Many have been complaining about the lack of privacy from technology for decades. Maybe Europe got some traction with General Data Protection Regulation, but in the US, protections don’t seem to be forthcoming. What can anybody do?

Halaburda: We have laws in California that are becoming more and more strict. Why is California enforcing its rules and other states are not? California is closest to where people are developing social media technology, and they know they need to be shielded from it. So, maybe the pressure is greater there. A well-working democracy reflects the pressure from the population; honestly, only a small part of the population talks a lot about privacy. Most don’t care. And they don’t care until it’s too late.

Research shows that people willingly give up their email passwords for a candy bar; even worse, they don’t change their passwords even after they receive the candy bar. So, what do you expect from politicians if this is the response? 

If governments and central banks are not pressured, they will take the easy way out—unless the consumers pressure them in countries that want privacy for small-value transactions.