Zero-knowledge proofs could solve CBDC privacy concerns, research shows

Deploying zero-knowledge proof cryptography could allow for "trustless privacy" in a central bank digital currency (CBDC), according to new research, addressing a major area of concern for a state-backed crypto projects.

The report by Mina Foundation, a decentralized network, and Etonec, a crypto payments group, looks to show that CBDCs can provide the same privacy levels as cash while also being compliant to anti-money laundering regulations. 

“Providing anonymity for payments, while ensuring regulatory compliance, is not a technological question, but a policy question,” Jonas Gross, head of digital assets and currencies at Etonec and chairman of the Digital Euro Association, said in a statement to The Block.

To achieve cash-imitating levels of privacy, transaction details can be kept confidential between the sender and receiver using zero-knowledge (ZK) technology. A third party, like a financial authority, would not be able to access the details unless it hits certain preset thresholds. Then, the transacting pair will only be able to continue making payments after they are confirmed to be compliant with regulation, according to the study.

'Essential backbone'

"Zero-knowledge technology will be an essential backbone of the future of payments because it enables privacy preservation of confidential payment data in the digital realm,” Gross added. 

Privacy is a major concern when it comes to a state-backed digital currency. In a survey conducted in 2021 by the European Central Bank, the protection of privacy topped European citizens’ priorities in a future digital euro.

The findings of the research will be sent to central bankers, Gross confirmed. 

“We see that there is a strong demand for preserving privacy around CBDCs — even if there are cultural differences,” he wrote in the statement. “Some central banks are already experimenting with a CBDC that utilizes privacy-preserving technologies to satisfy this demand.”