The Bank of England recently released a report stating that emerging privacy technologies, such as zero-knowledge proofs (ZK-proofs), could play a significant role in enhancing user control over data in a potential digital pound. These privacy-enhancing technologies, also known as PTEs, could minimize the sharing of data both with the central bank and between payment intermediaries, giving users greater control over their data and enhancing user privacy. The report acknowledges the limitations of these technologies but sees the potential for a digital pound to be as private as, or even more private than, current forms of digital money.
In response to public feedback from a 2023 consultation, the Bank of England and HM Treasury have reaffirmed their commitment to safeguarding user privacy, ensuring that neither the government nor the central bank would have access to users’ personal data. Zero-knowledge proofs, a cryptographic protocol that allows one party to prove they know something without revealing the actual information, are actively used in blockchains like Ethereum, Zcash, and Polygon for privacy and scaling solutions. The British central bank has been collaborating with the Digital Currency Initiative at the Massachusetts Institute of Technology to explore the potential of emerging PETs, while also acknowledging the trade-offs in balancing privacy with regulatory compliance.
The report highlights the tensions that may arise between regulations that require data disclosure and the deployment of PETs, emphasizing the need for further research to address these challenges. The Bank of England began exploring the concept of a digital pound in 2020, forming a task force to evaluate the potential design and implications of a central bank digital currency. Public consultations and detailed assessments have been ongoing since early 2021, with the central bank stressing the importance of adapting to technological advances in payments and the decline in cash usage. While a final decision on launching a digital currency has yet to be made, experts have supported the bank’s privacy-focused approach in its digital pound proposal.
Overall, the use of privacy-enhancing technologies like zero-knowledge proofs could pave the way for a digital pound that offers enhanced user privacy and control over data. As the Bank of England continues to explore the potential of these technologies and evaluate the regulatory implications, further research will be needed to address the challenges that may arise in implementing PETs. With ongoing public consultations and detailed assessments, the central bank is taking a proactive approach to adapting to the evolving landscape of payments and digital currencies, emphasizing the importance of protecting user privacy in a potential digital pound.
