Paper 2022/974

PEReDi: Privacy-Enhanced, Regulated and Distributed Central Bank Digital Currencies

Abstract

Central Bank Digital Currencies (CBDCs) aspire to offer a digital replacement for physical cash and as such need to tackle two fundamental requirements that are in conflict. On the one hand, it is desired they are private so that a financial “panopticon” is avoided, while on the other, they should be regulation friendly in the sense of facilitating any threshold-limiting, tracing, and counterparty auditing functionality that is necessary to comply with regulations such as Know Your Customer (KYC), Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT) as well as financial stability considerations. In this work, we put forth a new model for CBDCs and an efficient construction that, for the first time, fully addresses these issues simultaneously. Moreover, recognizing the importance of avoiding a single point of failure, our construction is distributed so that all its properties can withstand a suitably bounded minority of participating entities getting corrupted by an adversary. Achieving all the above properties efficiently is technically involved; among others, our construction uses suitable cryptographic tools to thwart manin-the-middle attacks, it showcases a novel traceability mechanism with significant performance gains compared to previously known techniques and, perhaps surprisingly, shows how to obviate Byzantine agreement or broadcast from the optimistic execution path of a payment, something that results in an essentially optimal communication pattern and communication overhead when the sender and receiver are honest. Going beyond “simple” payments, we also discuss how our scheme can facilitate one-off large transfers complying with Know Your Transaction (KYT) disclosure requirements. Our CBDC concept is expressed and realized in the Universal Composition (UC) framework providing in this way a modular and secure way to embed it within a larger financial ecosystem.