tl;dr
The Bank of England, in collaboration with the Massachusetts Institute of Technology Digital Currency Initiative, has published a paper exploring privacy enhancing technologies (PETs) for a potential digital pound. This comes amidst global interest in central bank digital currencies (CBDCs) and conc...
The Bank of England, in collaboration with the Massachusetts Institute of Technology Digital Currency Initiative, has published a paper exploring privacy enhancing technologies (PETs) for a potential digital pound. This comes amidst global interest in central bank digital currencies (CBDCs) and concerns about state surveillance and citizen privacy. The paper outlines PETs such as pseudonymity, Zero-Knowledge Proofs (ZKPs), and multi-party computation (MPC) as potential solutions to enhance user privacy in a digital currency system. The BoE and MIT DCI emphasize the importance of these technologies in safeguarding consumer information and building trust in a digital pound, while also acknowledging their limitations. The research aims to inform public dialogue on CBDCs and privacy-enhancing solutions.
According to the Atlantic Council’s CBDC tracker, as of December 2024, 35 retail CBDCs are already in the pilot stage, with 13 more in development. Additionally, 25 wholesale CBDCs are also in the pilot stage, with 11 further in development. CBDCs can be broadly broken down into two main categories, ‘retail’ and ‘wholesale’. A retail CBDC is a digital currency issued by a central bank for public use, enabling individuals and businesses to make everyday transactions. A wholesale CBDC, on the other hand, is designed for financial institutions to conduct large-scale interbank transactions, improving efficiency in the financial system. The former of these two forms of CBDC seems to inspire the greater fears around ‘big brother’ and the insidious overreach of government surveillance.
In response to a previous consultation on a retail CBDC, in which respondents emphasized concerns around privacy, the BoE and the British government committed that any proposed digital pound would not give them access to users’ personal data and that legislation introduced by the U.K. government for a digital pound would guarantee users’ privacy. However, the BoE was keen to point out that laws and regulations require financial services providers to use data to verify customers’ identities and understand spending patterns to help mitigate the risk of facilitating financial crime. The BoE/MIT DCI research paper, published December 6, explored the latter of these two means.
Specifically, the paper outlined three potential PETs: pseudonymity, Zero-Knowledge Proofs (ZKPs), and multi-party computation (MPC). Pseudonymity is a system that avoids using a person’s name, phone number, or social security number to attempt to obfuscate a person’s identity. Zero-Knowledge Proof (ZKP) is a cryptographic technique that can be used alongside blockchain to allow one party to prove to another that a statement is true without revealing any details about the statement itself, ensuring privacy and security in a transaction. Multi-party computation (MPC) allows multiple parties to access data for use by an algorithm without releasing the underlying data. The paper emphasized the benefits and limitations of each of these technologies.
The BoE and MIT DCI concluded by emphasizing that the goal of the research was to help inform public dialogue on a digital pound, seeking to safeguard consumers’ private information, enable compliance with existing regulations, and strengthen trust and confidence in a digital pound, should one be launched in the future.