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Democracy at stake if digital currencies trample over privacy, says ex-central banker

The digital euro will need safeguards in place to stop governments from snooping on people’s online spending habits, according to the architect of the world’s first central bank-backed digital currency.

Andrés Arauz, the former general director at Ecuador’s central bank, issued the warning as eurozone policymakers ramp up plans to mint a digital euro within the next four years. If not, European democracy will suffer, he warns.

“Mass surveillance suffocates free thought and civil rights,” the 37-year-old said, citing experience that he has gathered over his career as a central banker, academic and government minister. “There have to be some safeguards … the money flows of average citizens need to be private to ensure civil movements can be crowdfunded.”

In his most recent stint, Arauz joined up with U.S. whistleblower Chelsea Manning as an advisor to Nym Technologies — a computer platform that prevents companies and governments from tracking people’s online activity. It has gotten financial support from the European Commission, which ramped up research funding into privacy after another notorious U.S. whistleblower, Edward Snowden, revealed how the U.S. spooks had spied on ordinary citizens and world leaders.

Arauz’s concern is that the digital euro could become the latest tool in governments’ spy kits.

Central banks across the world are experimenting with central bank digital currencies (CBDCs) as people’s growing appetite for online transactions and cryptocurrencies threatens their raison d’être. They’re also closely watching internet giants like Facebook, which tried and failed to issue its own virtual currency.

At issue are the digital fingerprints that CBDCs will leave behind, a prospect that has some privacy advocates sounding the alarm despite the European Central Bank’s repeated efforts to allay their concerns. Without the right protections in place, the digital euro could become a gold mine of information for secret services, Arauz told POLITICO.

For those seeking anonymity, there’s still cash. But with online transactions on the rise, people are leaving digital fingerprints wherever they shop, providing data that can be very telling. Companies and governments can use that data to paint an accurate picture of a person’s lifestyle, hobbies, eating habits and political leaning by tracking where money goes.

The ECB, which would mint these virtual versions of euro banknotes or coins, has rubbished the notion that its CBDC would be used to spy on people. The debate has been front and center ever since a consultation last year showed 43 percent of respondents highlighting privacy as the most important feature of the digital euro. Digital records will be kept, but only to prevent criminals from abusing the digital euro to launder dirty money or finance terrorism, the central bank says.

Surveillance system

Good intentions offer little protection in a world that’s hurtling toward mass surveillance, according to Arauz, who last year suffered a narrow loss in the country’s presidential elections.

Arauz ran on a platform that included privacy and data protection in a country that has built up a comprehensive surveillance system to fight crime with technology designed in China and exported across the world. Media reports have also accused Ecuador’s former president, Rafael Correa, of using state surveillance to keep an eye on political opponents and undermine critics of his regime.

Arauz, who served a two-year stint as Minister of Knowledge and Human Talent in Correa’s third and last term, said that Ecuador’s surveillance system was aimed at curbing criminal activity. In his eyes, the real threat of surveillance lies in the U.S., which he said keeps tabs on people and companies beyond its borders by accessing the data vaults of banks, credit card giants and SWIFT — an international messaging platform for 1,000 financial firms in over 200 countries.

SWIFT rejected the accusation, saying that messages between its members are encrypted. The platform only keeps records of so-called meta data, which records what companies communicated with each other and when.

“Privacy is a fundamental commitment at SWIFT, an essential component of our core services and integral to the SWIFT environment,” a spokesman said in statement. “We do not share customers’ data with any third party unless we are authorized by our customers to do so or compelled to do so by applicable law.” That includes an EU-U.S. agreement to share information on terrorist financing under specific terms and conditions.

But it’s this kind of agreement that paves the way for U.S. mass surveillance, according to Arauz.

“What they’re saying is a lie, because the EU is allowing SWIFT to share not only the meta data, but personal data, too,” he said. “Imagine the scandal if China had access to people’s Visa card transactions?”

After its own six-year experiment, Ecuador discontinued its CBDC in 2017, and that initiative shouldn’t be the blueprint for central bankers when it comes to privacy, Arauz noted. The technology was simple and only served some 100,000 people, as opposed to the eurozone’s population of 342 million. Ecuadorian users would type *153# on their dial pads to open a so-called USSD messaging menu with six options, one of which included sending the CBDC to a bank account. Mobile phones made no receipt of transactions in their memory, but the central bank did keep track of CBDC data on a central ledger.

“The principle had not been fully developed,” Arauz said. “My concern is going forward for future initiatives.”

These days, much more sophisticated tech is needed to keep payments private. One option Arauz champions is so-called zero knowledge proof (ZKP) technology, which verifies a piece of information without exposing the data underpinning it.

ZKP software acts as a fact-checking middleman between a person and an authority requesting information. A company, for example, could ask the ZKP application whether a potential client is 18 years old and a resident in a particular country. The software would then answer “yes” or “no” without disclosing the date of birth or exact address.

Some banks are examining ZKP, but because it’s still in early stages of development, mass adoption remains unlikely in the near future.

Private to a point

The ECB’s top official on the digital euro, Fabio Panetta, has dismissed the idea that the Frankfurt-based institution plans to monitor what people spend their money on.

Payment data, in itself, is not a new phenomenon, he notes. Banks, credit card companies and fintechs all record and collect people’s purchases and are obligated to flag suspicious activities. The ECB would follow a similar line.

“Full anonymity is not a viable option from a public policy perspective,” Panetta said during a European Parliament hearing in March. “It would raise concerns about the digital euro potentially being used for illicit purposes.”

Some policymakers have raised similar concerns, notably the French, who are scarred from the 2015 Paris terrorist attack, which was financed in part with anonymous pre-paid cards. Those concerns will factor in when EU legislators start working on the digital euro bill that the Commission plans to present early next year.

Crooks are more likely going to make full use of the “gray areas of the conventional financial system to do their shady activities” through offshore companies rather than exploit CBDCs, Arauz said. These concerns should not give authorities the ability to circumvent the courts to gain access to people’s individual data.

“They don’t have to have access to [full personal] information,” he said. “They can get access to the smartphone of a criminal suspect, for example. Not looking at the entire populations’ data.”

The ECB has yet to go public on what privacy standards it has in mind for the digital euro, which will still need formal approval from eurozone governors once a prototype is ready.

A slideshow that the ECB presented to finance ministers in March, obtained by POLITICO, ruled out giving citizens the same level of anonymity that cash offers. But full transparency isn’t an option, either.

The current baseline scenario would require people to give up their personal details to an institution like a bank, which would hold onto their “transaction data and users’ profiling data” to stop money laundering and terrorist financing, according to the slides. That doesn’t make Arauz feel much better: Keeping data with banks and companies would do little to prevent the U.S. and other governments from getting hold of it through SWIFT and other payment companies. SWIFT, again, denies this.

“We have to start thinking not in terms of patching up a flawed system, full of embedded surveillance, but in terms of a new internet that is founded on privacy and human rights,” he said.

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