Surveillance and Vulnerability: Report Outlines Risks of Digital Currencies

People pass the Bank of Canada building on Wellington Street in Ottawa on May 31, 2022. The Canadian Press/Justin Tang

A central bank-issued digital currency could be misused in several ways, including loss of privacy and increased surveillance, a new report says.

The report by the Justice Centre for Constitutional Freedoms (JCCF), a Canadian legal advocacy organization, outlines the risks if Ottawa introduced its own government-controlled digital currency and Canada transitioned into a cashless economy.

The Bank of Canada says it currently has no plans to launch a central bank digital currency (CBDC), but it has completed research into related technologies and their implications as part of what it describes as contingency planning. It began exploring digital currency in 2017.

If the right framework to protect Canadians’ privacy and autonomy is not in place, central bank-controlled digital currencies would make all transactions traceable, with the government having access to this data, the report says. It would also give the government powers to target individuals by restricting access to or freezing their accounts, the report adds, citing the government’s measures during the 2022 Freedom Convoy in Ottawa as an example.

CBDC

Canadians are increasingly shifting to digital payments, with cash accounting for only 11 percent of total payment volume in 2023, according to Payments Canada.

A Bank of Canada report says a CBDC would “provide the safety of cash, with the convenience of modern electronic payments,” while giving consumers more choice, adding that payments would remain “private to the parties involved, just like cash; but traceable to law enforcement, just like bank accounts.”

The central bank says it would be ready to launch such currencies if, for example, the use of cash declined to the point Canadians no longer had the option of using it, or if other digital currencies, like bitcoin, became widely adopted as alternatives to the Canadian dollar.

The Bank of Canada recently scaled down its work on CBDCs, saying it is now focused on broader payments system research. It says its study of digital currency will be instrumental when Canadians, through their elected representatives, “decide they want or need a digital Canadian dollar.”

Privacy Risks

Making all transactions digital, and therefore traceable, is one of the risks of implementing government-controlled digital currency, the JCCF report says. The report says Canadians’ privacy could be at stake, depending on how user account and transaction data are recorded and managed.

If the system requires the central bank to record and validate this type of information, it would give both the central bank and the government unrestricted access to data, says the report. However, using traditional banks as intermediaries, such as for handling the distribution of digital currency and managing user data, could provide some degree of protection.

Concerns arise if traditional banks give in to pressure from governments in times of crisis, says the report, citing the 2022 Freedom Convoy in which protesters had their bank accounts frozen.

“The willingness of commercial banks to comply with government demands to freeze the accounts of protesters and donors, without providing any opportunity for customers to defend themselves against unfounded allegations, serves as a stark reminder of how susceptible the banking system is, and how that jeopardizes Canadians’ privacy and financial security,” the document says.

The events of 2022 illustrate “how vulnerable any form of digital banking is to political influence, interference, and control, regardless how privacy-protective the system might be,” it adds.

The Bank of Canada has said a CBDC would offer some level of privacy, but not provide anonymity the way cash does, as it could become “a vehicle for abusive transactions, facilitating money laundering, terrorist financing, criminal activity and tax evasion.”

“Our initial research indicates that it would be possible to achieve both a high degree of privacy and well-controlled disclosure of information, for example, only with the presentation of a court warrant,” said the central bank in a 2020 document on its contingency planning.

“Any acceptable design for a CDBC will need to include controls that ensure adherence to current laws while offering a sufficient level of privacy.”

Control Risk

Another concern regarding CDBCs is their potential for use for authoritarian reasons.

The report says such currencies are seen as beneficial due to their programmability, allowing built-in rules for automatic money transfers like point-of-sale tax collection.

But programmability can also be used by government or external actors to determine where, when, and what each person is allowed to purchase, or to implement targeted financial policies, the report says.

It argues digital currencies could be programmed, for example, to “support ‘green’ agendas” by limiting what foods and how much gasoline a person could purchase.

“A CBDC has the potential to empower government to reward and punish the behaviours and lifestyle choices of individual Canadians, as Communist China does with its ‘social credit’ system,” said the authors in a March 17 press release.

“Allowing the government to peer into and influence Canadians’ purchasing behaviours could have a profoundly damaging impact on their privacy and autonomy,” the report cautions.

Additional Concerns

The report outlines additional risks, including increased cybersecurity vulnerabilities. It says a fully digital currency system would be an “attractive” target for malign actors, increasing the risk of data breaches that lead to lost funds and privacy.

CBDCs could also reduce government accountability, the report says. It argues this would allow governments to bypass traditional banks and conduct transactions directly at the Bank of Canada, allowing fund transfers to be concealed.

“With this, combined with the added capability of creating money ‘out of thin air,’ governments could finance large-scale partisan agendas without public awareness,” the report says.

In addition, a digital currency system would undermine the economic participation of cash-dependent populations, such as the elderly, people living in rural communities, the homeless, and people with low technological literacy.

The authors say that even if citizens oppose CBDCs, governments could implement them an under structural changes to the financial system in times of “crisis” or during an “emergency.” A government could, for instance, prompt citizens to adopt digital currencies to access government subsidies, the report says.

Meanwhile, 92 percent of Canadians have said they would not prefer using a digital Canadian dollar over their current payment methods, according to in a 2023 Bank of Canada survey on CBDCs, which polled 89,423 participants.

The central bank has said the decision to launch a CBDC would require “the full support and approval of the Government of Canada and acceptance by the Canadian public.”

“The design choices made in building a CBDC would be crucial to achieving policy goals while minimizing risks,” the central bank said.