Research conducted by the European Central Bank (ECB) claims that it is possible to issue a central bank digital currency that protects user privacy.
The report titled “Exploring anonymity in central bank digital currencies,” saw the European System of Central Banks (ESCB) join hand with R3 and Accenture to create a proof of concept (PoC). The PoC enabled the ESCB to conduct experimental research regarding central bank digital currencies (CBDCs) and their potential benefits to the public.
The ESCB used R3’s Corda platform to develop the PoC. The PoC involved four parties including two intermediaries, a central bank and an Anti-Money Laundering (AML) agency. The participants were represented by nodes that operated a Corda Distributed App (CordApp).
How would the central bank digital currency ensure user privacy?
The bank developed a solution that would hide users’ transaction history and their identities. This meant that only those entities selected by the individual could view these records, and the bank and the intermediaries would not have access to these.
ECB highlighted that many other solutions could be deployed to increase the privacy provided by the system. Methods such as zk-SNARKs (zero-knowledge proofs), rotating public keys and enclave computing are some examples.
Although the PoC proved that a central bank digital currency could provide a private financial payment system, there was still a lot to improve. ECB observed an array of issues that needed to be catered. These improvements included the amount of data accessible to other parties. Another issue was to maintain the network’s functionality when an intermediary was not available.