Privacy vs Security, the challenges of digital currencies

The owner of a virtual asset can’t see, touch or carry his belongings. For this reason, they can hide his ownership. Fit for privacy, more minor for security. It’s today’s challenge for digital currencies.

A broad definition of digital currency comprehends all money primarily managed, stored or exchanged on digital computer systems. It does not have a physical form; the owned value has a digital representation.

There are two main types of digital currencies:

  1. Cryptocurrencies
  2. Central Bank Digital Currencies (CBDCs).

Cryptocurrencies and Central Bank Digital Currencies (CBDCs)

Cryptocurrencies

Cryptocurrencies are currencies secured by cryptography. Each value has a digital representation: an encrypted sequence of characters (string) that denotes units held in a specific currency (a unit of Bitcoin, Ethereum, or others). The sums are stored in personal digital wallets, protected with passwords.
Every transaction among wallets is processed online. It is recorded in a shared ledger, usually a blockchain, making the amounts, starting point, and recipients visible. It should make it nearly impossible to counterfeit or double-spend, tracking every movement. It also controls the creation of a cryptocurrency’s additional units.
Yet, most cryptocurrencies’ transfers are anonymous: the blockchain registers only the origin and the destination wallets’ addresses but not the users’ data.
Cryptocurrencies pose two classes of problems. The first one is related to financial integrity: their anonymity could encourage money laundering and other crimes. The second is related to financial stability, as they aren’t usually anchored to a stable value.

Central Bank Digital Currencies (CBDCs)

Central Bank Digital Currencies (CBDCs) could solve this last issue. They are digital currencies backed by governments’ central banks, and they have an official legal tender status. Intelligence expert  Jessica Davis writes: “since they are tied to a state’s currency, CBDCs will fluctuate along with the traditional currency”.
As of February 2022, 9 countries have their digital currency: the Bahamas, Antigua and Barbuda, St. Kitts and Nevis, Monserrat, Dominica, Saint Lucia, St. Vincent and the Grenadines, Grenada, Nigeria. More countries are developing them (in distinct forms).
However, the currency issuer should also face the risk of money laundering: the central banks should implement identity verification for the users. The concern is problematic extensive surveillance because of removing the canonical barrier between personal finance and states.