The evolution of electronic payment systems has brought significant advancements but also heightened concerns about privacy. In response, the Bank of England (BoE) and the Massachusetts Institute of Technology (MIT) Digital Currency Initiative (DCI) have embarked on a collaborative research journey to explore privacy-enhancing technologies (PETs) for a potential digital pound. Their findings shed light on the challenges, opportunities, and trade-offs associated with ensuring privacy in central bank digital currencies (CBDCs). Download the full paper here.
Context and Motivation
Electronic transactions generate extensive data, which can be instrumental for improving services, reducing financial crime, and enhancing customer experience. However, they also pose privacy risks, particularly when personally identifiable information is involved. The 2023 Consultation Paper on the digital pound, published by the BoE and His Majesty’s Treasury (HM Treasury), emphasised that rigorous privacy standards would be critical to public trust and confidence in any prospective CBDC.
Feedback from the consultation highlighted privacy as a dominant concern. The BoE and HM Treasury assured stakeholders that users’ personal data would remain inaccessible to the government and the central bank. Moreover, any potential implementation of the digital pound would include legislative guarantees of user privacy.
Research Objectives
To address privacy concerns, the BoE and MIT DCI focused on how PETs could bolster privacy in a digital pound. The research aimed to identify technical challenges, evaluate emerging PETs, and consider their application in a system aligned with the BoE’s digital pound proposal. Three PETs were examined in detail:
- Pseudonymization: A method of obscuring personal data by replacing identifiable information with pseudonyms, reducing the risk of exposing sensitive information.
- Zero-Knowledge Proofs (ZKPs): Cryptographic protocols that allow one party to prove they know certain information without revealing the information itself.
- Secure Multiparty Computation (SMPC): Techniques enabling multiple parties to compute a function collaboratively without disclosing their individual inputs.
These technologies could potentially allow transactions to remain private while adhering to anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations.
Key Findings
The study revealed that emerging PETs could feasibly enhance privacy in CBDCs. PETs could:
- Minimise the sharing of personal data with the central bank and payment intermediaries.
- Provide users greater control over their information.
- Offer privacy protections comparable to or exceeding those of current digital payment systems.
However, implementing these technologies is not without challenges. Regulatory requirements for data disclosure may conflict with privacy-enhancing mechanisms. Additionally, technological limitations and the evolving nature of PETs necessitate ongoing research.
Broader Implications
The collaboration aligns with the U.K. government’s National Payments Vision, which reaffirms its commitment to exploring a privacy-respecting digital pound. Beyond technical exploration, the research contributes to a broader dialogue on safeguarding democratic principles—accountability, transparency, and privacy—in the digital economy.
MIT DCI’s involvement underscores the importance of building digital currency systems for the public good, grounded in rigorous research. While no decision has been made on implementing a digital pound, the findings provide a foundation for informed policymaking and innovation.
Future Directions
As the BoE and MIT DCI continue their exploration, several critical questions remain. How can PETs balance privacy with regulatory compliance? What role will legislation play in protecting user data? And how can public trust in digital currencies be maintained?
This collaboration represents a pivotal step toward addressing these challenges and shaping a privacy-centric approach to CBDCs. By fostering public dialogue and technological innovation, it paves the way for a secure, inclusive, and privacy-preserving digital future.
Download the full paper here.
