Privacy protection is becoming an increasingly important and scarce resource in today’s “Information Age”, especially in financial transactions.
The rise of Central Bank Digital Currencies (CBDC) has been proposed to create a more secure, accessible and efficient method for financial transactions.
However, privacy concerns surrounding CBDC remain. This is due to the underlying caveat that faster and more efficient transactions can be monitored.
Zero-knowledge proofs (ZKPs) — cryptographic techniques that prove the truth of a statement without revealing details — have emerged as a potential solution to these concerns.
CBDC: The Rise of Digital National Currencies
The European Central Bank (ECB) and Australian Central Bank (ACB), among many other central banks, have already begun investigating and adopting CBDCs as a solution to the evolving digital financial landscape.
ECB President Christine Lagarde warned central banks that they “could lose the anchor role we have played for decades.”
“Where do we central bankers stand? We have acted as currency anchors in relation to commercial banks and private money.”
Streamlined, Safe and Cost Effective
CBDCs can reduce transaction costs, streamline payment systems, and improve financial inclusion.
In addition, CBDCs minimize reliance on intermediaries, enable real-time transactions, and improve the security and resilience of payment systems.
Big Brother “Maybe”
teeth i’m looking at you
Despite the benefits CBDCs offer, they also raise speculation and significant concerns around privacy and economic dependence on the system.
CBDC introduces a channel for financial institutions and governments to monitor financial transactions. Individuals using CBDC may lose their privacy.
This increased access handed over to centralized entities makes it possible to monitor and control the finances of certain individuals, potentially suppressing dissent or targeting political opponents.
Eradicating privacy and enforcing economic dependence on the system is possible via CBDCs, especially in authoritarian and, worse, totalitarian regimes.
While some of these concerns may seem dire, ZKP offers a remedy to the CBDC privacy dilemma.
ZKP: Trust without sacrificing privacy
ZKP allows transactions to be validated without exposing the details of the transaction itself (such as the identity of the parties/parties and the amount of the transaction).
In the realities of CDBC and surveillance technology, ZKP helps maintain the privacy of digital transactions while ensuring their validity and security.
An example of a popular ZKP: “Alibaba’s Cave”
ZKP eliminates the need to reveal sensitive information to prove the validity of a claim. To illustrate how it works, we’ll use the popular “Alibaba’s Cave” example.
- John enters the cave through Entrance A or B — out of Sally’s sight.
- Waiting outside the cave, Sally randomly chooses either entrance A or B and calls John to come out through the chosen entrance.
- John uses a secret password to open the door and emerges through the entrance requested by Sally.
- The pair repeat the process to increase Sally’s confidence in the validity of John’s claims.
- Eventually, Sally becomes increasingly convinced that John knows the password—he always leaves through the entrance she requests.
In this example, John’s argument proves increasingly valid — he consistently exits the requested entrance — yet John never reveals his password.
In short, John can prove his knowledge without revealing the password. This means you can protect John’s privacy and verify his claims.
Monero (XMR) and Zcash (ZEC) cryptocurrencies already incorporate ZKP to enhance user privacy.
What happens when you combine ZKP and CBDC?
Let’s take a step back and look beyond the contrasting perspectives of ZKP and CBDC. The combination of the two can strike a relatively harmonious balance.
CBDC combined with ZKP technology offers the accessibility and efficiency of digital currency and the privacy offered by cryptocurrencies that employ ZKP.
Using these cryptographic techniques, CBDCs can utilize ZKP to provide users with financial privacy while retaining all the benefits of CBDCs, removing the main concerns currently surrounding CBDCs. .
regulation, regulation, regulation
Combining ZKPs and CBDCs could provide a symbiotic relationship for the future of digital finance, but finding the right balance between regulatory oversight and privacy is difficult.
Regulators and privacy do not offer a smooth symbiotic relationship, mainly due to regulations on money laundering, terrorist financing and tax evasion.
Avoiding such illegality requires a careful tradeoff between user privacy and selective transparency. Transaction information is made accessible to regulatory authorities.
who will win?
In the information age, the battle for privacy remains an ongoing and complex battle.
ZKPs and CBDCs can evolve financial transactions and improve privacy, but finding the right balance between regulatory oversight and privacy remains a challenge for CBDCs.
Further research and collaboration between privacy solutions, governments and central banks are needed to develop solutions that leverage all the benefits of CBDC while preserving privacy for the upcoming digital age.
The post Zero-Knowledge Proofs vs. CBDC: The battle for privacy first appeared on CryptoSlate as central banks battle for control.