Designing a Central Bank Digital Currency with Support for Cash-Like Privacy

44 Pages Posted: 24 Jul 2021 Last revised: 26 Jul 2021

See all articles by Jonas Gross

Jonas Gross

University of Bayreuth

Johannes Sedlmeir

Project Group Business & Information Systems Engineering of the Fraunhofer FIT; University of Bayreuth; FIM Research Center

Matthias Babel

FIM Research Center; Project Group Business & Information Systems Engineering of the Fraunhofer FIT; University of Bayreuth

Alexander Bechtel

University of St. Gallen - School of Finance

Benjamin Schellinger

FIM Research Center, University of Bayreuth; University of Bayreuth; Project Group Business & Information Systems Engineering of the Fraunhofer FIT

Date Written: July 22, 2021

Abstract

Most central banks in advanced economies consider issuing central bank digital currencies (CBDCs) to address the declining use of cash and to position themselves against increased competition from Big Tech companies, cryptocurrencies, and stablecoins. One crucial design dimension of a CBDC system is the degree of transaction privacy. Existing solutions are either prone to security concerns or do not provide full (cash-like) privacy. Moreover, it is often argued that a fully private payment system and, in particular, anonymous transactions cannot comply with anti-money laundering (AML) and countering the financing of terrorism (CFT) regulation. In this paper, we follow a design science research approach (DSR) to develop and evaluate a holistic software-based CBDC system that supports fully private transactions and addresses regulatory constraints. To this end, we employ zero-knowledge proofs (ZKP) to impose limits on fully private payments. Thereby, we are able to address regulatory constraints without disclosing any transaction details to third parties. We evaluate our artifact in interviews with leading economic, legal, and technical experts and find that a regulatorily compliant CBDC system that supports full (cash-like) privacy is feasible.

Keywords: Anonymity, CBDC, Compliance, Design Science, Digital Identity, Digital Wallet, Electronic Cash, Payment System, Privacy by Design, Regulation, Self-Sovereign Identity, Zero-Knowledge Proof

JEL Classification: E42, E51, E52, E58

Suggested Citation

Gross, Jonas and Sedlmeir, Johannes and Babel, Matthias and Bechtel, Alexander and Schellinger, Benjamin, Designing a Central Bank Digital Currency with Support for Cash-Like Privacy (July 22, 2021). Available at SSRN: https://ssrn.com/abstract=3891121 or http://dx.doi.org/10.2139/ssrn.3891121

Jonas Gross (Contact Author)

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Johannes Sedlmeir

Project Group Business & Information Systems Engineering of the Fraunhofer FIT ( email )

Wittelsbacherring 10
Bayreuth, Bavaria D-95444
Germany

HOME PAGE: http://https://www.fit.fraunhofer.de/en/business-areas/information-systems-engineering.html

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

FIM Research Center ( email )

Wittelsbacherring 10
Bayreuth, Bavaria 95444
Germany

HOME PAGE: http://https://www.fim-rc.de/en/

Matthias Babel

FIM Research Center ( email )

Wittelsbacherring 10
Bayreuth, Bavaria 95444
Germany

HOME PAGE: http://https://www.fim-rc.de/en/

Project Group Business & Information Systems Engineering of the Fraunhofer FIT ( email )

Wittelsbacherring 10
Bayreuth, 95445
Germany

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Alexander Bechtel

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Benjamin Schellinger

FIM Research Center, University of Bayreuth ( email )

Wittelsbacherring 10
Bayreuth, Bavaria 95444
Germany

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Project Group Business & Information Systems Engineering of the Fraunhofer FIT ( email )

Wittelsbacherring 10
Bayreuth, 95445
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
900
Abstract Views
2,626
rank
32,798
PlumX Metrics