Bank of England Evaluates Zero-Knowledge Proofs for Digital Currency Privacy

TLDR

• Bank of England is exploring zero-knowledge proofs and privacy technologies for digital pound implementation
• These technologies could give users greater control over personal data while maintaining privacy from both government and central bank
• Research conducted in collaboration with MIT’s Digital Currency Initiative shows promise but acknowledges limitations
• Privacy enhancement must be balanced with regulatory compliance requirements
• Bank has been studying digital currency since 2020 but hasn’t made final decision on launch

The Bank of England has released new research indicating that emerging privacy technologies, including zero-knowledge proofs, could be used to enhance user privacy in a potential digital pound system.

The research, detailed in a report titled “Enhancing the Privacy of a Digital Pound,” explores how these technologies might protect user data while maintaining the functionality of a central bank digital currency.

Zero-knowledge proofs, known as ZK-proofs in the technology sector, allow one party to prove they possess certain information without revealing the actual data. This technology has already found practical applications in several blockchain platforms, including Ethereum, Zcash, and Polygon, where it helps provide privacy features and scaling solutions.

The central bank’s research explores several privacy-enhancing technologies (PETs) beyond just ZK-proofs. These include pseudonymization and secure multiparty computing, which could work together to create a more private digital currency system. The bank’s report suggests these tools could minimize data sharing between payment intermediaries and the central bank itself.

In response to public concerns raised during its 2023 consultation, the Bank of England has made a clear commitment to protecting user privacy. Both the central bank and HM Treasury have stated that they would not have access to users’ personal data in the proposed digital pound system.

The research builds on a collaboration with the Massachusetts Institute of Technology’s Digital Currency Initiative. This partnership has helped the bank evaluate how emerging privacy technologies could be implemented in a central bank digital currency while maintaining necessary security measures.

According to the bank’s findings, these privacy technologies could make the digital pound “at least as private as current forms of digital money and potentially even more private.” This statement suggests the bank is aiming to match or exceed the privacy standards of existing electronic payment systems.

The bank began its digital pound exploration in 2020 when it established a dedicated task force. This group was charged with examining potential designs and implications of a central bank digital currency. The work has continued through various stages of research and public consultation since early 2021.

The latest research acknowledges several challenges that need to be addressed. One key issue is balancing privacy protection with regulatory compliance. The report notes that tensions may arise between regulations requiring data disclosure and the implementation of privacy-enhancing technologies.

Technical limitations of current privacy technologies present another challenge. The bank’s research team is working to understand how these limitations might affect the practical implementation of privacy features in a digital pound system.

The bank’s approach to privacy technology reflects broader changes in the payments landscape. With cash usage declining and digital payments increasing, the central bank sees a need to ensure that future payment systems maintain strong privacy protections.

Public feedback has played a crucial role in shaping the bank’s privacy-focused approach. The 2023 consultation revealed that privacy protection is a top concern for potential users of a digital pound.

The research includes detailed examination of how pseudonymization could be implemented. This technology would allow users to conduct transactions without revealing their full identity, while still maintaining the ability to comply with financial regulations.

Secure multiparty computing, another technology discussed in the report, could enable transaction processing without any single party having access to all transaction details. This approach could help prevent unauthorized access to user data while maintaining system functionality.

The Bank of England has emphasized that any implementation of these privacy technologies would need thorough testing and validation. The central bank continues to evaluate various technical approaches and their practical implications.

While the exploration of privacy technologies continues, the Bank of England has not yet made a final decision on launching a digital pound. The research into privacy-enhancing technologies represents one component of the bank’s ongoing evaluation process.