Designing a Central Bank Digital Currency with Support for Cash-Like Privacy
44 Pages Posted: 24 Jul 2021 Last revised: 14 Jan 2022
Date Written: July 22, 2021
Most central banks in advanced economies consider issuing central bank digital currencies (CBDCs) to address the declining use of cash as a means of payment and to position themselves against increased competition from Big Tech companies, cryptocurrencies, and stablecoins. One crucial design dimension of a CBDC 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 (ZKPs) to enforce 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 through interviews with leading economic, legal, and technical experts and find that a regulatorily compliant CBDC system based on ZKPs 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: Suggested Citation