Recent research by the European Central Bank (ECB) claims that it is possible to develop a central bank digital currency (CBDC) payment system that protects user privacy.
Per the report dubbed “Exploring anonymity in central bank digital currencies,” the European System of Central Banks (ESCB) established a proof-of-concept (PoC) for anonymity in CBDCs, which came as part of its ongoing research of CBDCs and their potential benefits to the public. The dedicated PoC was developed in collaboration with tech companies R3 and Accenture.
The ESCB used R3’s open-source blockchain platform Corda to develop a PoC featuring four parties such as two intermediaries, a central bank and an Anti-Money Laundering (AML) authority. Each party was represented in the network by a node that operated a CorDapp, which enables assets to be transferred between the entities.
Within the PoC, the bank built a solution for AML/combating the financing of terrorism (CFT) compliance procedures, which kept user identities and transaction histories anonymous i.e. neither the central bank nor intermediaries other than those chosen by the user could see the data.
“To protect users’ privacy, the notary has no access to data such as transaction values, users’ addresses or states’ histories,” the report read, adding:
“The proof of concept shows that it is possible, using the Corda platform, to build a simplified CBDC payment system that safeguards users’ privacy for lower-value transactions, while still ensuring that higher-value transactions are subject to mandatory AML/CFT checks.”
Issues to be improved
However, the bank noted an array of issues that purportedly needed to be improved including reducing the amount of information visible to parties that are not involved in the transactions, and users’ ability to access or spend CBDC balances when the intermediary is unavailable.
The ECB stated that privacy could be further improved by applying mechanisms such as rotating public keys, zero-knowledge proofs and enclave computing.
The bank further noted that issues of scalability were not addressed or tested in the PoC and that interoperability with a real-time gross settlement system must also be researched.
Regulator concerns abound regarding CBDCs
The ECB’s research seems to nominally address concerns previously expressed by world regulators regarding digital currencies. Earlier in December, European Union authorities outlined multiple risks and issues associated with the adoption of stablecoins, arguing that if adopted on a global scale, stablecoins pose a threat to monetary sovereignty, privacy and cybersecurity.
Just recently, the president of the ECB, Christine Lagarde, said that the financial institution should be ahead of the curve regarding the demand for stablecoins. In late August, the ECB released a paper in which is stated that stablecoins with a clear governance framework may be hampered by uncertainty coming from a lack of regulation.