Privacy and the acceptance of centralized digital currencies in the U.S., India and Germany

Global trends such as the digitalization of economic transactions and the increasing importance of data processing manifest themselves by a decrease of cash payments and are accompanied by ideas such as the introduction of new forms of electronic money. The push for new digital currencies is driven by private companies, national governments and central banks alike. While decentralized solutions like Bitcoin, innovations in the area of decentralized finance (DEFI) and private efforts to establish asset-backed stablecoins (e.g. USD Coin or USD Tether) have already put pressure on traditional financial entities to accelerate their investments in the area of financial technology innovations (Fintech), governments and central banks play a much more important role in rethinking potential new forms of money and the future of monetary supply. In particular, the idea of a Central Bank Digital Currency (CBDC) has gained traction among several central banks across the world, with 56 entities conducting research on the subject and two CBDCs already having been launched in the last year^1,2.

The potential for private consumers to directly open up central bank accounts—independently of commercial banks—might sound intriguing with regard to providing financial stability and enable financial inclusion. In the aftermath of the recent COVID-19 pandemic, governments around the world have to shoulder the burden of increasing budget deficits^3,4, high levels and unequal distribution of sovereign debts, rising pressures from high inflation and concerns about potential credit defaults^5,6. In times of crisis, central banks serve the role of last-resort lenders, providing liquidity and third party trust for the participants of credit and financial markets. Still, central bank mandates usually remain restricted to maintain price stability and do not involve direct interference with consumers.

Amongst others, the European Central Bank (ECB) recently unveiled a plan to introduce a pilot for a CBDC that provides a potential blueprint for how central banks worldwide might enable citizens’ access to a new digital currency through secondary payment channels. In fact, Christine Lagarde presented the case for a CBDC in a speech in November 2018 by emphasizing its positive effects on “…financial inclusion, security and consumer protection; and to provide what the private sector cannot: privacy in payments”⁷. Surprisingly, one key difference in the announced pilot project of the ECB is the involvement of the private multinational company Amazon to conduct the pilot study with regard to the technical feasibility of a digital euro. Next to the regulatory uncertainty about the impact of a CBDC on competition and financial stability⁸ and questions on the integrity and technical implementations of a CBDC, the announcement of the joint venture with a large and globally operating private company emphatically raises questions about data privacy.

Current research on new forms of digital currencies in general and CBDCs in particular are mainly focused on welfare and policy implications, in particular how the introduction of a CBDC would affect competition in the banking sector and on the credit and lending markets^8,9. Next to the largest economy in the world and the largest economy in Europe, we choose India as an additional population to account for the rising criticism on conducting experiments only on populations from so-called WEIRD countries (Western, Educated, Industrialized, Rich, and Democratic¹⁰). Crucially, only some scholars have studied the interplay of privacy-preserving techniques along with the introduction of digital currencies. For instance, economists have argued that under an optimally designed and privacy-preserving solution, a digital currency would increase social welfare by allowing optimal inferences about consumer preferences on the basis of observed consumer choices^11,12. Based on the assumption that a privacy-preserving architecture can actually be established, they underscore the key requirement for the success of electronic cash: The individual burden of preserving privacy has to be lower than the perceived benefit of using new electronic forms of cash¹¹.

Against this background, there remains a research gap regarding under which conditions citizens would actually accept and use new forms of digital currencies instead of cash. These questions tap into the area of privacy value research, where studies have assessed the monetary values individuals assign to the preservation of privacy of different data types by means of conjoint analysis or discrete choice experiments^13,14. For instance, a recent comparative study across six countries investigated different data types and found that respondents value the privacy of bank balances and fingerprints the highest, while females and older respondents assign higher monetary valuations for the preservation of privacy¹⁵. These studies often apply the concepts of willingness-to-pay (WTP) and willingness-to-accept (WTA) for a valuation of privacy, hence they assign monetary values to the value of privacy¹⁶. Instead, we are interested in behavioral measures to investigate the conditions under which actors would use new digital currencies and whether they are more concerned with possible privacy violations, despite being incentivized to give up their privacy rights for long or short term benefits¹⁷.

Our study addresses these questions by means of an experimental factorial design that we embedded in a cross-country online survey conducted in the summer of 2022 in the United States (U.S.), India and Germany. We use data from 3532 interviews and 10,592 choice situations to investigate the conditions under which citizens decide in favor of a digital currency instead of cash. In particular, we model the introduction and subjective benefits of a digital currency in two distinct ways. First, we address the open question of how an optimal design would look to convince consumers to adopt a digital currency in practice by making its usage conditional to a windfall gain: a monthly payment of a universal basic income (UBI). Second, we model the conditions under which the UBI can be spent digitally or paid out in cash by varying the monetary incentives to use the UBI digitally: We tie spending of the UBI to the adoption of an app that is used for payment where consumers either (a) do not receive any special benefits (except of convenience), (b) they can receive a rebate on their VAT payment, or (c) consumers receive an automatic payment to a private mutual pension fund. The design enables us to investigate whether consumers accept digital currencies given short-term (VAT rebate) or long-term benefits (consumption based retirement saving). Together, both approaches come with the advantage that the utility derived from the adoption of the digital currency remains independent of the adoption of others, therefore we can model the perceived benefits from individual adoption independent of network effects. Third, we vary the proximity as to how feedback on consumptions patterns is communicated to private consumers. In addition to no feedback about such data processing, the app provider within the experiment either processed the consumption data remotely or provided feedback via a monthly overview about all things purchased via the app. The closer proximity of the information via a postal letter can be considered more invasive with regard to privacy rights since the home address is involved more prominently in the app adoption, touching upon privacy concerns related to locality and place¹⁸.

Additionally, we scrutinize the role of the app provider and its influence on the acceptance of a digital currency as well as the importance of descriptive norms on the adoption of the UBI app. The former covers the question as to whether consumers perceive the introduction of the UBI app by a private, governmental or supra-governmental differently by presenting the app provider as either the nation’s ministry of finance, the local central bank or a multinational internet corporation. The latter inspects whether the social expectations about the behavior of other consumers affect the decision to use the UBI app for payments in contrast to choosing the privacy-preserving option by cashing out the monthly UBI payment. The power of social norms on consumer choices has already been demonstrated in other research contexts^19,20 and we consider it an important antecedent for whether consumers will pick up new digital payment solutions.