MIT and the German central bank are embarking on a new project to conduct research into the privacy aspects of central bank digital currencies (CBDCs).
The Massachusetts Institute of Technology (MIT) Digital Currency Initiative (DCI) has partnered with the Deutsche Bundesbank, making it the most recent monetary authority to collaborate on research into central bank digital currency (CBDC).
Joachim Nagel, President of the Deutsche Bundesbank, addressed the audience at the launch of the MIT-Deutsche Bundesbank project, expounding on the multifaceted hurdles that lie ahead in the journey towards the realization of a digital euro.
Nagel informed MIT students that the collaborative research will prioritize the development of security and privacy measures for a CBDC.2
Third-party services frequently rely on private digital payment solutions, granting them access to consumers’ payment data, which may be utilized 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 data.”
Nagel went on the say the current payment 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.
As digitalization increases, the Eurosystem is considering “a digital product that complements our analog product cash,” Nagel said.
He specifically mentioned the digital euro, though alternatives like the United States Federal Reserve’s FedNow service, launched in July, have also emerged.
While FedNow has faced significant criticism, CBDCs have encountered even greater opposition, particularly concerning privacy issues and potential impacts on the banking sector.
European Central Bank (ECB) officials are becoming more proactive in responding to these critiques, engaging in efforts to counter the criticism.
In September, ECB president Christine Lagarde highlighted that conspiracy theories had targeted the digital euro, while ECB officials have rebuked the banking sector for not adequately assessing the potential of CBDCs.
Nagel acknowledged to MIT students that the digital euro, characterized as a “riskless asset,” might heighten economic instability during periods of turmoil by weakening banks.
Nagel mentioned that implementing holding limits on the digital euro would be necessary to address this concern.
He mentioned that the digital euro project, currently in its preparatory stage, is poorly understood by the public, with only a vague comprehension.
In addition, the DCI has collaborated with the U.S. Federal Reserve Bank of Boston on Project Hamilton, which explores the possibility of a digital dollar, as well as with the central banks of Canada and the United Kingdom.
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