The Bank of England examines whether advanced privacy technologies such as zero-knowledge (ZK proofs) might help protect privacy while developing a digital pound, a prospective central bank digital currency (CBDC).
In the report entitled “Enhancing the privacy of a digital pound,” the report explores how new privacy technologies, with the use of privacy-by-design practices, can use these new technologies to protect user data in ways that support regulation and security requirements.
The results indicate that data sharing can be reduced using ZK proofs or other types of technology, such as pseudonymization and secure multiparty computation, which can give citizens some stake in how their information is used.
Zero-knowledge proofs (ZK proofs) are a key topic in the digital currency world. If accepted, they allow data to be verified without providing any information. ZK proofs add to the privacy and scalability of blockchain networks such as Ethereum, Zcash, and Polygon.
ZK-Proofs And Privacy Technologies For Digital Pound Development
Bank of England’s report says ZK proofs could allow the digital pound to be as private as current digital money, even becoming more private. Using such cryptographic techniques, we can create privacy in a digital financial ecosystem where a user can transact without revealing sensitive details.
The report highlights two other privacy-enhancing technologies: pseudonymization and secure multiparty computing. If pseudonymization were done, a user could participate in transactions without divulging identity information. Secure multiparty computing would allow you to process transactions without any entity having access to the details of all the transactions.
Both are essentially meant to enable data protection and reduce unauthorized gain from leverage. The Bank of England has joined with the Massachusetts Institute of Technology (MIT)’s Digital Currency Initiative (DCI) to assess the practical application of these technologies. In defining this digital pound, the Bank recognizes this delicate balance between user privacy and regulatory compliance as central to our approach.
Moreover, the report clarifies that digital currency privacy technology is only useful when integrated into the currency to comply with, rather than run counter to, regulators’ and law enforcement’s expectations around anti-money laundering (AML) and counter-terrorism financing (CTF) requirements. As such, this is a delicate challenge because those privacy enhancements can work against the need to provide data to regulatory authorities.
As digital transactions become more commonplace, privacy concerns have rapidly become the forefront of people’s minds. The ECB says all initial regulatory worries have been resolved, while the Bank of England’s 2023 public consultation into a digital pound flagged privacy as a key concern for potential users. Yet regulators remain a big hurdle to balancing privacy vs. regulations.
The report acknowledges that much more research and technology development is needed to refine privacy solutions and ensure compliance with the existing financial regulations, but AT&T wasn’t embarrassed by the effort.
Technical limitations (e.g., how to realize these technologies in practice in real-world applications) pose challenges. However, the Bank of England is still confident that standard engineering privacy technologies will usher in new standards of digital currency privacy.
Since the Bank of England first committed to a digital pound with the formation of its task force in 2020, it has been pushing to catch up with changing technology. This is another step in evaluating whether a digital pound could be possible, though no decision has yet been made on whether to launch the pound.
His foot is in the door of central bank digital currency development for Bank of England research, helping give his work gravitas in the race towards central bank digital currencies. Earlier this year, the Bank announced it would experiment with distributed ledger technology (DLT) and wholesale central bank digital currency (wCBDCs) to improve the efficiency and programmability of monetary systems.
As part of the Bank for International Settlements’ Project Agora, the Bank of England has been operating off of what the Bank of England calls a tokenized asset exchange on a unified platform over several different currencies. As part of its ongoing research and partnerships, the Bank continues to take a very clear line into the future of digital currency and its implications for the world of finance.
