RDP 2024-02: Valuing Safety and Privacy in Retail Central Bank Digital Currency 1. Introduction

Policymakers in Australia and elsewhere are considering the potential benefits and costs associated with introducing a retail central bank digital currency (CBDC). This is a digital version of physical currency issued by the central bank, which would complement, not replace, the circulation of physical currency in the form of notes (and coins). It would be available for use by all consumers and businesses, as opposed to ‘wholesale’ forms of CBDC, which would typically be restricted to transactions between large financial entities.

An obstacle to forming a position on the merits of a retail CBDC is uncertainty about the value that consumers and businesses would place in having access to one. The main concern here is the potential to introduce a retail CBDC that few people would want. A strong CBDC value proposition could also create challenges, if the resulting take-up displaces a lot of commercial bank funding. While some of these challenges could be addressed with policies that restrain CBDC holdings (Bank of England and HM Treasury 2023; European Central Bank 2023), it remains unclear as to how many potential CBDC benefits would be foregone by restricting its use.

In this paper we aim to deepen policymaker understanding of the CBDC value proposition by investigating how much Australian consumers value two features that could differentiate CBDC from other existing or emerging forms of digital money. In particular, we investigate:

1. How much would Australian consumers value access to a digital form of money that represents a claim on the Reserve Bank of Australia (RBA), rather than a commercial bank? This is one of the main value propositions of a CBDC, since money issued by the RBA has no credit risk.
2. How much does the perceived value proposition of a CBDC depend on design choices about privacy? Policymakers probably could not introduce a retail CBDC with complete anonymity, on account of the financial crime implications. But it could be designed in such a way that it restricts data sharing to different entities compared to existing forms of digital money, or even allow for anonymity for small transactions (European Central Bank 2023).

The available evidence from other jurisdictions on the first question is mixed. For example, most consumers in recent CBDC focus group consultations conducted for the European Central Bank did not see a difference between central bank and commercial bank money (Kantar Public 2022), a view that Brainard (2022) opines would also be true for the average US consumer. Evidence from a Dutch survey, however, shows that many consumers there do see the difference and would value it (Bijlsma et al 2021). Cash holdings in advanced economies do increase during times of economic uncertainty (Guttmann et al 2021), but it is unclear to what extent that owes to confidence derived from the physical nature of cash, as opposed to its status as a claim on the central bank.

Existing research has also investigated the strength of privacy preferences for CBDC, again with mixed results. For example, people responding to CBDC consultation papers have generally expressed strong preferences for complete anonymity (Bank of England 2021; European Central Bank 2021; RBNZ 2022), while focus group consultations, which use more representative samples, tend to reveal far weaker preferences (Kantar Public 2022). A more consistent message emerges from research on the topic of potential CBDC uptake, with privacy settings often arising as important determinants (see a survey by Chapman et al (2023), and extensions by Choi, Kim, Kim and Kwon (2023) and Choi, Kim, Kim, Kwon and Park (2023)). Moving beyond only CBDC, participants in a representative Australian survey state that they put high importance on privacy when choosing goods or services and are generally more comfortable sharing data with government agencies than with financial institutions (Office of the Australian Information Commissioner 2023). But the broader privacy literature also shows that people regularly forego privacy even when stating strong preferences for it. For example, Acquisti, Taylor and Wagman (2016) explain that, while surveys repeatedly highlight privacy as a major concern for internet users, most consumers continue to use information technologies that track personal information, even when more private alternatives exist. This paradox makes privacy a challenging area to study.

A novel feature of our work is that we use a discrete choice experiment to estimate people's willingness to pay for the potential safety and privacy characteristics of CBDC. Although more commonly used in applications of health and environmental economics, the discrete choice experiment technique has been designed explicitly for the purpose of assessing public valuations of goods or services that do not have markets. It does so in such a way that addresses common concerns with analyses of stated preferences, which matters in our application because no advanced economy has introduced a CBDC that might generate data relating to revealed preferences. Moreover, the few CBDCs that do exist are in their infancy and have a way to go before reaching informative levels of maturity. We favour the willingness-to-pay metric not because we take a position on whether CBDCs would or should have fees, but because the metric has an objective interpretation and a format that is useful for cost-benefit analysis.

A second key feature of our work is its focus on CBDC attitudes of Australians. These attitudes might resemble those in other jurisdictions, but the available evidence suggests generalisations would be risky. For example, European Central Bank (2021) shows that stated preferences for privacy can differ materially even across culturally similar, neighbouring countries. Moreover, regarding safety, data from the OECD shows that trust in government differs markedly across OECD countries (with Australia around the middle of the distribution).^[1] We run our experiment using the 2022 RBA Consumer Payments Survey (CPS), which is a large, nationally representative survey of payments behaviour in the Australian household sector. As it is a consumer survey, we are unable to comment on the CBDC attitudes of businesses.

Overall, our work is closest to the research of Choi, Kim, Kim, Kwon and Park (2023), which was conducted concurrently with ours. They too use a discrete choice experiment to examine valuations of CBDC characteristics. Their focus is, however, on South Korea, and in many other respects our research designs are very different. Notably, we study the safety benefits of CBDC as they would be perceived by the public, rather than attempting to specify any risks of losses ourselves, and we explore the extent to which consumers differentiate between the types of entities that could have access to transaction information, rather than only on the degree of information access overall. We also focus on consumers' willingness to pay for different safety and privacy characteristics in a CBDC account (or ‘wallet’), rather than in specific payment scenarios.

Our results suggest that Australians on average are not willing to pay anything for the added safety of digital central bank money (Figure 1). This is consistent with the range of government measures already in place in Australia to make commercial bank deposits safe, such as deposit insurance, depositor preference, bank supervision (all described in Turner (2011)), and the RBA's role as lender of last resort (Jones 2023). For Australians to value a retail CBDC enough to justify issuance, our results suggest the CBDC would need to deliver a value proposition other than safety.

Privacy settings appear a more consequential issue. The average consumer values transaction anonymity and, to the extent that transaction data do need to be shared with other entities, the average consumer cares about who those entities are. For example, we estimate that Australian consumers are willing to pay an average of $5 (roughly US$3) per year more for access to an account that makes transaction data available to the RBA instead of a commercial bank, assuming that Australia's financial crime authority, AUSTRAC (Australian Transaction Reports and Analysis Centre), can access transaction data in both cases (the difference between the final two bars in Figure 1). Aggregated over the adult population, this equates to $100 million (roughly US$60 million) per year, a figure that would rise a little further if the account also offered anonymity for small transactions.^[2] Though material, we do not judge this to be an amount that would easily overwhelm the range of other considerations relevant to the CBDC issuance decision. There is also an open question about whether this privacy configuration is compatible with other policymaker expectations that central banks would ‘develop the technology to issue CBDC to private sector entities with those entities then responsible for all customer-facing activities’ (Richards, Thompson and Dark 2020).

When investigating the heterogeneity of preferences, we find that valuations of safety and privacy are stable across ages and common ranges of cash usage. Lower income individuals do appear to put slightly higher valuations on safety than higher income individuals though.

Footnotes

See the OECD data site for the indicator ‘Trust in government’, available at <https://data.oecd.org/gga/trust-in-government.htm> and accessed on 2 December 2023. [1]

We estimate that the Australian consumer is willing to pay a further $5 (aggregated to another $100 million) for full anonymity. We assume that partial anonymity would deliver part of this estimated benefit. [2]