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

44 Pages Posted: 24 Jul 2021 Last revised: 14 Jan 2022

See all articles by Jonas Gross

Jonas Gross

Frankfurt School of Finance & Management

Johannes Sedlmeir

University of Luxembourg - Interdisciplinary Centre for Security, Reliability and Trust (SnT)

Matthias Babel

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

Alexander Bechtel

University of St. Gallen - School of Finance

Benjamin Schellinger

Blockchain Research Lab

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 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

Gross, Jonas and Sedlmeir, Johannes and Babel, Matthias 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)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Johannes Sedlmeir

University of Luxembourg - Interdisciplinary Centre for Security, Reliability and Trust (SnT) ( email )

JFK Building
29, Avenue J.F Kennedy
Luxembourg, L-1885
Luxembourg

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

Blockchain Research Lab ( email )

Colonnaden 72
Hamburg, 22303
Germany

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