Will CBDCs reduce or increase corruption and crime?

Will CBDCs reduce or increase corruption and crime?

Czech Republic’s ongoing development of Central Bank Digital Currency (“CBDC”) faces concerns over potential abuse amidst corruption and privacy issues as noted by the Human Rights Foundation.

Yesterday we published an article introducing the Human Rights Foundation’s (“HRF’s”) CBDC Tracker website.  We outlined the risk associated with CBDCs as identified by HRF and highlighted the status of CBDCs in the UK.  Below we highlight the status of CBDCs in the Czech Republic, or Czechia, as summarised by HRF.

The Czech Republic is exploring the idea of a CBDC, with leadership proposing the concept of a digital wallet, claiming to offer anonymity and no transaction tracking. The actual design and operation of this proposed CBDC is yet to be determined, primarily due to potential regulation and anti-money laundering requirements.

Tomas Holub, a member of the Czech National Bank board, said that he has not seen anyone adequately address how a CBDC will operate. For example, Holub noted that it’s unlikely to be anonymous given anti-money laundering requirements.

Czechia is not yet a member of the euro area and does not have a target date to adopt the euro.  As such it is not among the countries that would adopt the European Central Bank’s CDBC called the digital euro.

However, as Bloomberg reported in October last year, although the Czech government, public and central bank have an aversion to joining the euro, companies’ executives are slowly taking the country into the single currency anyway.

“The koruna is only a part-time currency because the big businesses dominating the economy have mostly switched to the euro,” said Tomas Kolar, chief executive officer of Linet Group SE, a maker of high-tech hospital beds and other equipment.

Despite scoring 92 out of 100 in Freedom House’s 2023 Freedom in the World‘ report the country is grappling with corruption, raising concerns that a Czech CBDC might exacerbate it.

“Corruption remains a problem in Czech politics,” Freedom House wrote. Corruption has taken the form of bribery, subsidies, and politically motivated investigations. The existence of pervasive corruption is a major concern with CBDCs because it calls into question any promises that might be made by the government to limit surveillance, control, or other risks of CBDCs. Furthermore, the existence of corruption calls into question whether CBDC policies might be designed to exert political favouritism through subsidies, price controls, or other targeted restrictions.

Read the full article by selecting “Czech Republic” in the country drop-down box on the Human Rights Foundation CBDC Tracker website HERE.

Freedom House also noted that human trafficking remains a problem in the country as organised criminal groups use the country as a source, transit, and destination point; women and children are particularly vulnerable to being trafficked for sexual exploitation.

If CBDCs were adopted, would they inhibit human trafficking or enable it to proliferate?  That would depend on who is involved in and collaborating with the traffickers’ network and who controls the CBDCs.  If there are the same or similar persons involved with both, crime will flourish.

The more centralised the control, the higher the risk that crime and corruption thrive without the ability of the public to expose it or obtain sufficient evidence to bring guilty parties to account.

The digital euro will be a single CBDC used by the 20 countries within the Eurozone and will be under the centralised control of a few bureaucrats who are appointed and unaccountable to the public, and who for all extents and purposes operate behind closed doors. How much more is the risk of crimes proliferating when a single CDBC is used across multiple nations?