Key Points
The Bank of England has proposed that zero-knowledge proofs and other privacy-enhancing technologies (PETs) could be useful components of a potential digital pound.
Enhancing the Privacy of a Digital Pound
In their recent report titled “Enhancing the Privacy of a Digital Pound,” the central bank suggested that technologies such as pseudonymization, ZK-proofs, and secure multiparty computing might feasibly be applied to digital currency systems like the digital pound.
This could reduce the data sharing with the central bank and between payment intermediaries, providing users more control over their data and improving user privacy.
The Bank of England stated, “This presents opportunities for a digital pound to be at least as private as current forms of digital money and potentially even more private, although as with any technology, there are limitations to what emerging types of PETs can achieve.”
Following public feedback from its 2023 consultation, the Bank of England and HM Treasury confirmed their dedication to protecting user privacy.
They reassured that neither the government nor the central bank would have access to users’ personal data.
ZK-proof is a cryptographic protocol that allows one party to prove they know something without revealing the actual information.
This technology is actively used in blockchains like Ethereum (ETH), Zcash (ZEC), and Polygon (POL) for privacy and scaling solutions.
In collaboration with the Massachusetts Institute of Technology’s Digital Currency Initiative, the British central bank has explored the potential of emerging PETs.
However, they also recognized their limitations and trade-offs, especially when balancing privacy with regulatory compliance.
The report stated, “Tensions may also emerge between regulations that require the disclosure of data and the latitude to deploy PETs,” highlighting the need for more research to tackle these challenges.
The Bank of England started investigating a digital pound in 2020.
It set up a task force to assess the potential design and implications of a central bank digital currency.
However, public consultations and detailed assessments have been ongoing since early 2021.
The central bank underscored the importance of adapting to technological advances in payments and the decreasing use of cash.
The bank has not yet made a final decision on launching its digital currency.