A way forward for privacy in CBDC’s.
In a world where digital transactions are becoming increasingly prevalent, ensuring privacy and data protection has emerged as a critical concern.
As governments and financial institutions explore the development of central bank digital currencies (CBDCs), we at Aztec Labs aim to stand at the forefront of educating decision makers on the privacy revolution in digital transactions.
We hope our cutting-edge approach to Privacy-Enhancing Technologies (PETs) will be considered by the Bank of England, particularly in response to the recent consultation on the digital pound.
In February, 2023 the Bank of England and His Majesty’s Treasury published a consultation paper titled “ The digital pound: a new form of money for households and businesses?”
Read the Bank of England and Treasury’s consultation paper and accompanying technology working paper here.
In this blog post, we delve into the context of the consultation and highlight Aztec Labs’ responses that we hope have shift the digital pound’s design toward incorporating blockchain-based privacy.
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Consultation on the Digital Pound
The digital pound, a proposed central bank digital currency (CBDC) by the Bank of England, has sparked considerable discussion about its design, functionality, and associated privacy implications.The Bank of England has sought feedback and ideas through an open consultation process, and as a leading provider of Privacy-Enhancing Technologies, we at Aztec Labs are proud to present our vision for a privacy-enhancing digital pound that aligns with the highest standards of data protection.
Aztec: A Paradigm Shift in Privacy and Data Protection
Aztec Labs’ response to the consultation underscores our commitment to incorporating advanced PETs into the digital pound’s infrastructure.Our privacy-centric approach centers around the use of Zero-Knowledge Proofs (ZKPs) — a powerful cryptographic tool that enables the verification of statements without revealing sensitive underlying data. At Aztec Labs we’re focused on researching at the forefront of ZKP’s, which have significant advantages over other PETs in terms of technical feasibility, production use, compliance, interoperability, and data protection.
ZKP Tooling: Empowering Practical Implementation
To facilitate the practical implementation of ZKPs within the digital pound, Aztec Labs is funding the development of Noir, an open-source programming language.Noir streamlines the development of ZKP applications, making it accessible for developers to integrate compliant privacy solutions to blockchain applications without extensive knowledge of cryptography.This user-friendly tooling eliminates the need for developers to focus on circuit-building complexities and empowers them to concentrate on designing the logic behind ZKP applications. Additionally, Noir’s compatibility with various proving systems ensures future-proof integration and scalability.
Applicability of ZKPs to the Digital Pound: Privacy and AML-CTF Measures
There is an inherent tension between ensuring Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) measures while safeguarding consumer data privacy. Previous solutions are either airtight, forgoing compliance, or involve installing data backdoors, compromising user privacy.
ZKPs offer a solution that allows the Bank to perform the necessary AML and CTF checks without compromising individuals’ privacy. By leveraging ZKPs, the digital pound can maintain robust compliance measures while protecting users’ personal data, surpassing the privacy levels of traditional digital money systems.
ZKPs for Compliance and User Privacy: A Win-Win Solution
We illustrate the practical application of ZKPs in verifying compliance with regulatory requirements. Through ZKPs, end consumers can provide proofs of fulfilling various conditions, such as valid Know Your Customer (KYC) checks, absence from sanctions lists, and adherence to transaction limits.These proofs can be verified in milliseconds, ensuring efficient and secure transactions. Furthermore, ZKPs empower the Bank to oversee the digital pound’s operation while mitigating risks associated with relying solely on compliance from payment interface providers (PIP’s).
Tiered Access and User Control: Fostering Financial Inclusion
Aztec Labs recognizes the importance of tiered access to the digital pound based on user identity information. By implementing ZKPs, the digital pound can link the level of user identification with specific account features and transaction limits.This approach enables financial inclusion, allowing users with limited identification documents or means to access the digital pound and enjoy its benefits. ZKPs’ role in tiered access ensures both privacy and compliance, providing users with control over their personal transaction data.
Privacy-Enhancing; Future-Proof
Without base-layer privacy protection, digital currencies risk headwinds to adoption, as they may be even more privacy exposing than current encrypted financial systems.Aztec Labs firmly advocates for embedding privacy-enhancing techniques into the digital pound’s design to offer users greater control over their privacy preferences. We strongly believe zero-knowledge protocols as a category are the most effective technology for achieving the digital pound’s policy objectives while protecting privacy.Furthermore, we believe deployment of the digital pound on the Ethereum blockchain harnesses its broadly recognized benefits of transparency, innovation, and global integration. This approach would not only bolster privacy and security but also position the pound as a prominent fiat currency in the digital economy.
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Conclusion
Aztec Labs’ responses to the consultation on the digital pound present an innovative and transformative approach to privacy in digital transactions. By harnessing the power of Zero-Knowledge Proofs and their proprietary tooling, Noir, Aztec Labs offers a practical and efficient solution to address privacy concerns while ensuring compliance with AML, CTF, and KYC requirements. Our vision for a privacy-enhancing digital pound, coupled with potential deployment on the Ethereum blockchain, heralds a new era of secure, inclusive, and forward-looking digital currency.As the world moves toward digitalization, we are leading the charge in protecting individual privacy and data security for digital assets.Read our full response here:
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