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Digital Pound paper explores privacy enhancing technologies for CBDC
December 10, 2024
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In the West there has been significant resistance to the concept of retail central bank digital currencies (CBDC) based on ‘Big Brother’ concerns. In other words, privacy fears that the government can monitor personal payment transactions. Or sometimes, even concerns that they might attempt to control behaviors. Hence, the Bank of England and the Massachusetts Institute of Technology Digital Currency Initiative (MIT DCI) published a paper exploring privacy enhancing technologies (PETs) for a possible digital pound.

Before delving into the paper, there’s an overlap with another topical subject. In the United States, the FBI has suggested that people should use encrypted messaging apps instead of texts and normal calls, because allegedly China has hacked the major phone networks. WhatsApp provides end-to-end encryption, and even Meta does not have access to the data.

However, in recent years law enforcement has repeatedly requested back doors to encrypted messaging solutions, including Apple and Google messaging. Even if law enforcement has a warrant, Meta, Apple and Google can’t help them decrypt the data. Private cybersecurity personnel resist backdoor access because it can be used by hackers and others with bad intentions.

There’s a parallel with the digital pound, which is not for anonymous payments. The aim is to prevent the government from having all the private identity data, both in legislation and by using technical means.

However, as the paper highlights, if payments are not anonymous, then there is data to hack. The data might sit with payment providers rather than the central bank, but it’s still there and could be mis-used.

What the paper does not mention is the existence of the data also means that a future government could change the law. Of if there’s a Canada-style COVID trucker revolt, it could tell PIPs to block certain wallets (or bank accounts).

Privacy enhancing technologies

Meanwhile, the paper explores three PETs: pseudonymity, zero knowledge proofs (ZKP) and multi-party computation. One of the most interesting aspects is how pseudonymity affects wallet holding limits.

Pseudonymity avoids using a person’s name, phone number or social security number to attempt to obfuscate a person’s identity. Blockchains use pseudonymous identifiers, yet several service providers can identify wallet holders. That’s in part because wallet addresses often persist across multiple blockchain transactions, but different wallet addresses can also often be linked. Hence, pseudonymity won’t guarantee privacy.

The digital pound and other CBDCs often impose holding and transaction limits. If someone has CBDC accounts with multiple payment providers which use different pseudonymous identifiers, that makes it harder to police limits.

However, the paper makes three suggestions. One is for the user to have a personal wallet that connects to multiple payment provider balances and gives an aggregate proof of the total holdings or transactions to an automated auditor. But what if the person has more than one digital wallet?

Another solution is for each payment provider to provide a daily total for each user and that data is aggregated across payment providers. This clearly raises privacy issues. The authors suggest using additional PETs.

A third path is additionally to use pseudo-random identifiers. Based on a person’s name or national insurance number, a pseudonymous hash would be inserted into all their transactions for a specific day, but the hash would change every day and not be linkable.

While some of these seem viable, they appear to have privacy trade offs.

ZKP and MPC

Moving on to the other privacy technologies, Zero Knowledge Proofs (ZKPs) will provide a proof, giving an answer to a narrow question. For example, whether this person has passed KYC or do they have a sufficient balance for the transaction? It can provide a yes/no answer without revealing the person’s name or the actual balance.

Multi-party computation (MPC) allows multiple parties to access data for use by an algorithm without releasing the underlying data. This could be used for sanctions screening.

Each of them has benefits and drawbacks. ZKP and MPC are both relatively new, although a particular type of MPC is widely used to safeguard cryptocurrency keys. ZKP is also heavily used for cryptocurrencies but can have performance challenges depending on design. Both technologies require specialist skills to implement properly. There are potential legal issues about whether payment firms can rely on them for compliance.

The paper is written in a way that makes it quite accessible to people who don’t want to delve into the technical details. Some suggestions for future work relate to enhancing privacy for very small transactions. Earlier this year MIT DCI also partnered the Bundesbank for privacy work.

 

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Source: The Dinarian ⚡ Claude AI

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Since launch, the Soroban Security Audit Bank has successfully conducted over 40 essential audits, deploying over $3 million to support security of the smart contracts on Stellar. Check it out!

 

Ecosystem Success Stories: How the Soroban Audit Bank Drives Security Forward

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Leading projects within the Soroban ecosystem have highlighted the impact of the Audit Bank

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The audit firms we worked with deeply understood the full ecosystem and the underlying protocols used. Their expertise and the tools from the Audit Bank strengthened our security and supported user and investor trust. Esteban Iglesias Manríquez, Co-Founder of Palta.Labs

What's New in 2025: Enhanced Audit Support for Soroban Builders

Teams building financial protocols, high-dependency data services, high-traction dApps funded by the Stellar Community Fund are able to request an audit and will typically be matched with a reputable audit firm within two weeks. We recently restructured the program for this year to enhance audit efficiency and incentivize accountability, and rapid and complete vulnerability remediation:

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Get Started Today

If you're already funded through the Stellar Community Fund, meet the criteria and ready to secure your smart contracts, check your email for an invitation to submit an audit request–if you haven’t received one, contact [email protected].

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Also, we’re organizing an exciting series of workshops–join us for the kick-off on Soroban Security Best Practices on Friday, May 30, 2025 at 2 PM ET on @StellarOrg. Together, we're shaping a secure and resilient future for smart contracts on Stellar.

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Santander mulls stablecoin, crypto offering

Bloomberg reported that Banco Santander is mulling introducing euro and dollar stablecoins, or potentially making a third party coin available to clients, citing sources. This move aligns with broader crypto ambitions, as its digital bank, Openbank, has reportedly applied for a European cryptocurrency license under the Mica Regulations and may enable retail access to digital assets.

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Santander’s involvement could extend beyond an individual initiative. The bank is a shareholder in The Clearing House, where the Wall Street Journal reported that US banks are exploring the potential to create a joint stablecoin. If a US initiative took that route it could involve nine more G-SIBs including Bank of America, Barclays, BMO, BNY Mellon, Citi, HSBC, JP Morgan, TD Bank and Wells Fargo.

Apart from these initiatives, our research shows that more than 20 other banks have been involved in stablecoin projects.

Until recently stablecoins were mainly used to settle cryptocurrency transactions and by residents in countries with volatile domestic currencies. During the last year stablecoin infrastructure has been expanding, especially for mainstream cross border payments. Plus, President Trump issued an executive order prioritizing stablecoins. One of the administration’s motivations is this increases demand for US Treasuries, lowering the interest rate the government pays on the Treasury bills.

Santander as an early digital assets mover

Santander’s stablecoin consideration builds on years of blockchain experience. The bank was an early Ripple investor and previously used Ripple’s permissioned network for payments (not XRP), while also embracing permissionless blockchain activities including issuing a digital bond on Ethereum in 2019. This dual approach led to collaborations with other major players – alongside Societe Generale FORGE and Goldman Sachs, Santander participated in the European Investment Bank’s first digital bond, also on Ethereum. Currently, the bank’s most significant digital money initiative involves Fnality, the wholesale blockchain-based settlement network, where Santander ranks among 20 institutional backers and is part of the early adopter group alongside Lloyds Bank and UBS.

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If you find value in my content, consider showing your support via:

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