Privacy in payments: What a CBDC can do better than commercial bank money

Abstract This paper presents the privacy limitations inherent in existing real-time payment systems, such as Eurosystem’s TARGET Instant Payment Settlement (TIPS), and examines the potential of Central Bank Digital Currencies (CBDCs) to enhance privacy through a design-centric approach. By comparing the data flows in TIPS with the online and offline variants of the proposed digital Euro CBDC, we uncover significant privacy challenges within existing transactional systems. Our findings highlight the complex stakeholder interactions and the loose privacy framework currently governing TIPS. In contrast, with foundational privacy-by-design principles, the digital Euro offline CBDC emerges as a promising solution to bridge the privacy gap in digital transactions. This paper argues that adequately designed CBDCs could augment existing payment systems and transform the digital transaction landscape into one that prioritizes privacy. At the same time, we advocate for a nuanced approach to technology selection and implementation in the digital Euro, emphasizing the need for future research to explore the optimal balance between operational efficiency, privacy, and concise legal frameworks in the emerging era of digital central bank money.