- The Bank for International Settlements released a study examining privacy technologies in digital payments and CBDC implementation.
- The research identifies three key stakeholders in payment privacy: advocates, law enforcement, and data holders.
- Privacy solutions are analyzed across two dimensions: privacy (hard/soft) and auditability (hard/soft).
- Zero Knowledge Proofs and other privacy technologies face scalability challenges in practical implementation.
- The study recommends a “soft core with hard shell” approach to balance privacy and regulatory compliance.
The Bank for International Settlements (BIS) has published a new research paper analyzing privacy-enhancing technologies (PETs) in digital payments, presenting a framework that balances user privacy with regulatory oversight requirements.
Stakeholder Analysis in Digital Payment Privacy
The study identifies three primary stakeholders in payment privacy discussions: privacy advocates, law enforcement agencies, and data holders. Unlike previous analyses, this research acknowledges that privacy advocates can be law-abiding citizens concerned about data protection rather than individuals attempting to evade oversight.
Technical Framework for Privacy Solutions
The paper introduces a dual-axis analysis model for privacy solutions. "Soft privacy" refers to protected payment data with authorized access possibilities, similar to current banking systems. "Hard privacy" involves cryptographic protection where users control private keys, as seen in cryptocurrency systems.
Zero Knowledge Proofs (ZKPs), a cryptographic method allowing verification without revealing underlying information, receive particular attention. While ZKPs offer enhanced transaction privacy, their computational demands create scaling limitations. Additional technologies examined include homomorphic encryption and ring signatures, each presenting unique advantages and implementation challenges.
Practical Implementation Considerations
The research proposes implementing privacy thresholds based on transaction amounts, similar to the current $10,000 reporting requirement in traditional banking. This approach allows for privacy in smaller transactions while maintaining oversight of larger transfers.
The cryptocurrency sector demonstrates the challenges of balancing privacy and regulation. The implementation of the travel rule, requiring exchanges to share transaction information, has led to what the BIS describes as "an inefficient dragnet which neither meaningfully prevents crime nor protects the privacy of legitimate users."
The paper advocates for a "soft core with hard shell" strategy, combining strict data minimization with robust security measures for data transfers. The study also emphasizes that maintaining physical cash alongside digital payment options provides a fundamental privacy fallback for users.
The research concludes by highlighting the need for additional development in privacy technology solutions and improved traceability mechanisms for unauthorized data access attempts. These improvements would help create more effective privacy-preserving payment systems while maintaining necessary regulatory oversight.
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