Cryptocurrency, CBDC need to straddle data privacy and financial compliance, says finance executive

25 March 2022

Cryptocurrency, CBDC need to straddle data privacy and financial compliance, says finance executive

There is a real tension between data privacy and financial compliance.

Benedicte Nolens, head of the Hong Kong Centre at the BIS Innovation Hub whose project focus areas are central bank digital currency (CBDC), open finance and green finance made this statement during the China Conference: Southeast Asia 2022 virtual conference from March 23 – 24, 2022.

Speaking as a panelist at the session titled “How are digital currencies set to impact the region’s fintech ecosystem?” Nolens said she sees financial ecosystems of the future to be multifaceted, where digital currencies coexist with traditional financial instruments and methods of payment. These include wholesale CBDC, retail CBDC, cryptocurrency, stable coins, credit cards, wallets and bank accounts.

But, CBDC and cryptocurrency need to straddle data privacy and financial compliance and the tension between them due to anti-money laundering (AML) regulations governing crypto exchanges.

Nolens said she believes this tension between data privacy and financial compliance will be at the forefront of discussions on central bank digital currency because a lot of regions want CBDC; yet, they’re also leaning toward privacy.

“So now, data privacy actually in that sense, needs to be distinguished from anonymity. Let’s say data privacy regulations and ordinances, they don’t protect anonymity; they protect privacy which means they protect the giving out of your personal data so there probably is a balance that can be achieved there between financial compliance and data privacy. But let’s be clear,” said Nolens, “it’s not anonymity.”

About cryptocurrency and data privacy, she said: “Every single regulator that has actually allowed cryptocurrency or crypto asset trading has required that a crypto asset trading be subject to the AML ordinance of that jurisdiction. That means that if you are in crypto exchange, you have to do AML and Know Your Customer (KYC) processes and also sanctions processes. When you do that, the anonymity stops there.”

KYC processes were developed for financial institutions such as banks to protect themselves against various forms of criminal activities, serving as a foundation for financial compliance and risk management. These financial crimes include money laundering, fraud, corruption and financing of terrorist activities. KYC processes include steps for establishing a customer’s identity, generating information on the nature of the customer’s activities to determine the legitimacy of the source of funds and assessing money laundering risks in connection with the customer.

For Nolens, cryptocurrency is significantly more traceable than most other payment methods will ever be because of the public addresses.

A tool for securing transactions in the crypto world, a public address is a cryptographic code enabling an individual to receive cryptocurrency in his own account.\

“Most of the nascent tools for monitoring the crypto sector are in fact much more impressive than what I’ve seen in my past in the traditional sector,” Nolens said. “The only thing missing in cryptocurrency right now is that the identity is not attached to the address.” 

However, she added that these tools are now tapping on network analytics to eventually be able to attach an identity to a public address.

“I think we need to keep in mind that in fact, cash is the most anonymous instrument that exists today, right? So if cash goes digital, it’s actually easier to monitor than if cash is purely on paper or in the form of coin,” she said.

Serey Chea, assistant governor of National Bank of Cambodia, agreed with Nolens.

“If you want to keep anonymity,” she said, “then use cash.”

Chea added that, to be fair, banks have already captured the data or information in connection with many financial instruments in use today.

“I think we need to be clear that this is a central bank digital currency issue. In most jurisdictions, central banks are independent from the government. So that distinction needs to be clear. Even if the central bank captures the information, I think there must be some firewall between what can be used across government and central banks and different countries have different arrangements. This is also an important point to know as well,” said Chea.

Espie Angelica A. de Leon

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