How To Design a Private and Compliant Central Bank Digital Currency?

Abstract

Many central banks worldwide are considering issuing a retail central bank digital currency due to the decreasing use of cash and the emergence of new forms of digital money. One of the main topics of debate is the level of transaction privacy. While technology allows for complete privacy or transparency, a high degree of privacy is necessary for a central bank digital currency for economic, regulatory, and socioeconomic reasons. The private sector has failed to provide a privacy-preserving payment solution. This chapter proposes a software-based central bank digital currency approach that uses zero-knowledge proofs to ensure complete transaction privacy while adhering to anti-money laundering regulations. Experts from central banks, corporations, associations, and academia have evaluated the approach and found it to be a feasible and promising solution for a privacy-preserving and compliant central bank digital currency.