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The Government is mulling over ways to provide a mechanism to ensure the anonymity of users in Central Bank Digital Currency (CBDC) just like paper or metal-based fiat currency. Experts have called for an approach that strikes a balance between adoption and privacy.
“One option could be inclusion of a specific provision, while passing the finance bill, to ensure the anonymity of users,” a source said. Anonymity means the central bank does not keep a record of users on the basis of a particular series of currency. Banks would have records about the value of the transaction, but not details about the specific series of currency with a particular customer.
This year, the Budget proposed introduction of CBDC using blockchain and other technologies, which will be issued by the RBI during the next fiscal. The Government claims it will give a big boost to the digital economy, besides leading to a more efficient and cheaper currency management system. According to the RBI, CBDC will be a legal tender in a digital form. It will be the same as fiat currency and will be exchangeable one-to-one with fiat currency.
The Finance Bill has provisions for amendments in the RBI Act, 1934, for the introduction of CBDC. An amendment needs to be made in Section 2 and 22 of the Act, which will ensure that CBDC is regarded as bank notes. It is further proposed to insert a new Section 22A relating to the non-applicability of Sections 24 (denomination of notes), 25 (form of bank notes), 27 (re-issue of notes), 28 (recovery of notes lost, stolen, mutilated or imperfect) and 39 (obligation to supply different forms of currency) of the said Act for the digital form of the bank note.
As on date, there is nothing mentioned about how to maintain the privacy of CBDC users. However, sources said this can be done at any time through law or with the help of technology.
Kanwal Prakash Singh, a Quant, says while the Right to Privacy is a fundamental right of users, the State has an important duty to protect its citizens from Unlawful Activities (terrorism, insurgency, violence, frauds). Thus, a balanced approach is required to achieveadoption of CBDC, he said.
Anonymity Voucher
He suggested an ‘Anonymity Voucher’ as a possible solution to privacy. This voucher has been developed by the Eurochain Research Network (a collaboration between a large group of central banks setup by the European Central Bank). Each user can be provided with Anonymity Vouchers that could be spent by them while making small transactions using CBDCs. These vouchers could be spent by users, but will have no monetary value, and will sbe non-transferable amongst users. AThe larger transactions (based on criteria set by authorities) may have to mandatorily reveal information. More work is required to reduce the information visible to parties not involved in transactions
“As an enhancement to this proof of concept, the Indian version of CBDC may have an arrangement for a Dedicated Independent Body / Court Order, which should reveal the details of the user’s transaction. Such Intervention may go a step further in boosting confidence by informing the user about the access of his transaction data - this would go a long way in establishing transparency. With blockchain solutions, such functionalities can be implemented efficiently,” he said.
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