As digital payment usage increases worldwide, and more central banks explore the use of central bank digital currencies (CBDCs), privacy is becoming more top-of-mind. In its latest report, the Bank for International Settlements’ (BIS) Innovation Hub set out to explore how CBDCs can still keep the consumer’s anonymity intact.
To gauge how that would work, two CBDC prototypes—EC1 and EC2—were developed and tested, and each was measured for three critical features: privacy, security, and scalability. The study found that both prototypes were scalable to manage a growing number of transactions. In addition, quantum-safe blind signatures, or a cryptographic method that ensures anonymity, can be used.
In its findings, BIS Innovation Hub revealed that it is possible to create a CBDC that can ensure payer anonymity. For example, when a consumer pays a merchant using a CBDC, they don’t have to disclose any personal data to the merchant. But the merchant’s information is disclosed privately to the merchant’s bank. The central bank is only able to monitor CBDC circulation.
CBDCs and Their Risks
Although the race to develop CBDCs continues worldwide, it has not been without challenges. Security remains top-of-mind and is something that needs to be addressed by the various governments exploring their own digital currencies.
However, there are more potential challenges that should be explored.
With any new digital payments system, the potential for fraudulent abuse is close behind. As CBDCs are more centralized versus their cryptocurrency counterparts, they are potential targets for cyber criminals.
Banks have also been historically undergirded by legacy systems, which can prove inefficient if their infrastructure isn’t ready to receive an uptick of transaction volume.
As CBDCs and other digital currencies become a mainstay within the payments landscape, there will be more regulatory frameworks to contend with. Governments and other players in the space will need to stay vigilant and compliant with the existing regulatory requirements, including anti-money laundering and counter-terrorist financing (CFT).
“In terms of project development, regulations, and overall favorable stance towards blockchain technology, Switzerland leads the pack and it’s no surprise that they continue to set the bar high,” said Joel Hugentobler, Cryptocurrency Analyst at Javelin Strategy & Research. “Their PQC/quantum safe cryptography approach is rather unique and demonstrates their forward-thinking proactive attitude.”
“Privacy is a huge concern across the globe when it comes to CBDCs. Each central bank has a different approach, but it’s clear that they understand privacy is a priority if citizens are to use their digital currency. Switzerland’s approach of ‘privacy anonymity’ is unique when using the quantum-safe cryptography.”
“While it’s a great start, they still have a lot of work to do in terms of scalability. Due to the hash function of their approach, the TPS (transactions per second) has drastically been hindered by a factor of 200 times. Paying attention to developments over the coming months will be important as central banks around the world are racing to present a legitimate product. They’re walking a fine line – if they rush to have the “first” to market there is a higher probability that they will face more risks. Whereas if they take too long, the general public may lose trust or faith in their execution (from the general public) which has already been deteriorating. It’s more important to get it right than to be first, but again it’s a fine line,” he said.