Introduction
Former Spanish Prime Minister Felipe González once said, “Fiscal consciousness begins with fiscal fear.” This article discusses Project Hertha, an initiative by the London Innovation Center of the Bank for International Settlements (BIS) in collaboration with the Bank of England, focusing on AI supervision in retail payment systems while balancing privacy concerns. The project aims to create a digital currency for circulation in cyberspace, registered and controlled to prevent counterfeiting or misuse. As transactions become increasingly digital, the need for robust fiscal oversight and supervision grows.
The Rise of Digital Transactions
Billions of electronic money transactions occur daily worldwide, though they are not yet considered digital currency due to their reliance on electronic means and accounting records. As countries develop, these transactions replace cash usage, making the topic essential. Governments must determine their right to know exactly what, where, and how individuals spend their money.
The Challenge of Digital Currencies
Digital currencies, or Central Bank Digital Currencies (CBDCs), exist in cyberspace and are registered and controlled to prevent counterfeiting or misuse. Each transmission is recorded, raising ethical concerns about the balance between privacy and oversight. CBDCs could be restricted by governments in authoritarian states, altering their fundamental nature as currency.
Project Hertha: A Unique Approach
Project Hertha aims to enhance efficiency using AI tools while addressing privacy concerns. Key differences include:
- (i) Real-time operation, enabling immediate identification of unusual transaction patterns and active financial system surveillance;
- (ii) Reduced false positives through advanced analysis techniques, focusing resources on genuinely suspicious cases and minimizing operational costs;
- (iii) Employing synthetic datasets to extract minimal necessary data for analysis, ensuring privacy protection and limiting unnecessary exposure.
As these supervision models are approved, regulatory changes will follow to reflect each country’s conducive measures.
Balancing Privacy and Oversight
Following a recent power outage in Spain, some argued for the superiority of physical currency. However, in a deep crisis, practical goods like water, antibiotics, canned food, knives, or shoes hold more value than cash. The challenge remains determining the extent of state authority versus individual privacy rights with new technologies, whether through CBDCs, cryptocurrencies, or conventional electronic money transfers.
