The report raises privacy scenarios, always thinking of complying with KYC and AML protocols. The study contrasts with the Bitcoin and Zcash models.
Analysts from the Bank of Canada, the central financial institution of the North American country, are exploring privacy aspects for the launch of a hypothetical central bank digital currency (CBDC). The researchers consider that the privacy of payments with this type of cryptocurrencies looks good to the public.
Researchers Sriram Darbha and Rakesh Arorade highlighted the importance of considering privacy during the design phase itself. Doing a functional design first and adding privacy and compliance later, poses risks of unnecessary compensation, according to the analysts from the Bank of Canada.
The Bank of Canada recently published the analysis on its website. In the study, they focus on finding possible designs focused on privacy and regulatory compliance for CBDC. The text highlights that the most advanced privacy techniques are “immature”. It also alleges that they do not comply with the know-your-customer (KYC) or anti-money-laundering (AML) rules.
The researchers emphasize the difficulty of creating a system that ensures certain levels of privacy for citizens while complying with the aforementioned policies. The report adds that the need for proactive disclosure to prevent fraud further complicates this.
Risks and Possibilities
According to the analysts, the Central Bank could create a system around a CBDC “with higher levels of privacy than commercial products can offer, but with compensation in terms of regulations”. However, they qualify this aspect by indicating that the privacy of users would depend on many external factors. Among those aspects, they mention the privacy policies of “other entities in the CBDC ecosystem”.
In their report, Darbha and Arorade contrasted models such as that of Bitcoin, with public and verifiable transactions, and that of Zcash, whose model focuses on privacy. Regarding the Zcash design, they argued that it is very complex, since “it does not scale and is a computational overhead for users.”
Among the possibilities evaluated, the report includes group signatures, secret exchange schemes, zero-knowledge proofs, homomorphic encryption, multi-party computing, and differential privacy.
CBDC Boom as Next Step for Central Banks
Central Banks have insistently turned their attention to digital currencies. There has been an exploration of the idea in Canada, at least since 2017, as reflected in a study in which the Bank of Canada analyzed the issue.
In recent months, many central entities in the world have approached CBDCs. In Europe, the project has even received support from entities such as the Italian ones, while in Asia it is also gaining strength. China has already been maturing its digital currency plan for a while, and now both Japan and Cambodia are joining.
The USA has also focused its attention on CBDCs. The President of the Federal Reserve (Fed), Jerome Powell, has confirmed this. However, he has clarified that there should be no private participation in the development of these currencies. The Philadelphia Fed also recently assessed CBDCs as a risk to commercial banks.
This proliferation of plans from central banks seems to be an opportunity to increase the adoption of cryptocurrencies like Bitcoin. A study by the Grayscale firm indicates that central banks’ imposition of CBDCs would highlight the benefits of decentralized systems such as that of Bitcoin.
By Alexander Salazar