A Prototype for Privacy-preserving and Compliant Offline CBDC Transactions

Abstract

The emergence of blockchain technology has spawned a broader discussion of designs for digital currencies, with Central Bank Digital Currencies (CBDCs) - digital forms of fiat currency - being one of them. An important feature of digital currencies is facilitating transactions without network connectivity, which can enhance the scalability of cryptocurrencies and the privacy of CBDC users. However, in the case of CBDCs, this characteristic also introduces new regulatory challenges, particularly when it comes to applying established Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) frameworks. This paper introduces a prototype for offline digital currency payments, equally applicable to cryptocurrencies and CBDCs, that leverages Secure Elements and digital credentials to address the tension of offline payment support with regulatory compliance. Performance evaluation results suggest that the prototype can be flexibly adapted to different regulatory environments, with a transaction latency comparable to reallife commercial payment systems. Furthermore, we conceptualize how the integration of Zero-Knowledge Proofs into our design could accommodate various tiers of enhanced privacy protection.