CBCDs on Ethereum as a Privacy Alternative
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Very pleased to launch this report. ◈ Fiat needs a fundamental redesign to preserve its status in the advent of crypto ◈ Next-gen digital fiat currencies (CBDCs) need privacy by design architecture and ought to be launched on Ethereum Why and How? 🧵
Central Bank Digital Currencies (CBDCs) will reshape global finance—but how can nations balance innovation, privacy, regulatory compliance, and user trust? ZKPs and Ethereum hold the key. Today, our General Counsel @punk6052, Cofounder @jaosef and Legal Counsel @TheOtherAmal, released a report exploring: • how ZKPs can facilitate compliance • benefits of issuing CBDCs on the Ethereum blockchain Read the report in full ⬇️ aztec.network/blog/privacy-f…
Dec 3, 2024 · 6:29 PM UTC
◈ Currently ~134 countries are exploring / developing CBDCs ◈ Every G20 country is exploring a CBDC ◈ All original BRICS members are piloting a CBDC ◈ All advanced retail CBDC projects are intermediated through banks, financial institutions Source: atlanticcouncil.org
CBDCs are on the rise, and the most pertinent example is the Chinese e-CNY; transaction volume is growing exponentially. There is a big problem, unfortunately...
Existing CBDC designs are just not good enough; most are: ◈ Intermediated - rely on existing banks to facilitate transactions ◈ Lack privacy - rely on existing banks to store sensitive personal financial information ◈ Lack interoperability - not interoperable with Ethereum
Our core thesis is that: ◈ A CBDC without privacy is a dystopia ◈ Future designs of CBDCs, need privacy by design architecture and ought to be launched on Ethereum. How do we achieve this? First we need to analyse the best privacy enhancing technologies. See our comp tables
Privacy Enhancing Technologies Comparison Table (1/3)
Privacy Enhancing Technologies Comparison Table (2/3)
Privacy Enhancing Technologies Comparison Table (3/3)
Summary table of PETs
Which ZKP tooling is best to unlock the power of ZKPs? @NoirLang is a clear winner. Check out our ZKP Tooling Comparison Table
In cryptography we trust.
Before we apply how ZKPs apply to CBDCs, let's take a look at the current AML / CFT Models, which are inefficient, ineffective and expensive: ◈ Manual Labour. A significant cost component of AML compliance spend for financial institutions is labour resources ◈ Expensive / Ineffective: • money laundering policy intervention has less than 0.1 percent impact on criminal finances • compliance costs exceed recovered criminal funds more than a hundred times over • banks, taxpayers and ordinary citizens are penalised more than criminal enterprises • It is estimated that in Europe, AML requirements necessitate compliance costs higher than the amount actually recovered from criminals by authorities. Source: tandfonline.com/doi/full/10.…
Cryptographic Compliance > Harold In speeding up and minimising the number of interactions required, ZKPs offer an alternate, more efficient and more secure way to satisfy AML/CFT.
In a ZKP model, a central bank could define a program, that checked if the following statements are true before a state update to the relevant balance ledger is made: ◈ each user is validly registered ◈ has valid proof of a KYC check ◈ neither party is on a sanctions list
But how do we comply with laws? ZKPs can be used to comply with standard AML/ CFT laws, including: ◈ Customer Due Diligence ◈ Enhanced Due Diligence ◈ Ongoing Transaction Monitoring ◈ Suspicious Activity Reporting ◈ Sanctions Screening Check out our analysis 👇
Jurisdictional Analysis We've analysed and have shown how a ZKP solution can be applied in the UK, Montenegro, Thailand and Switzerland, for all of the above laws. First up, Customer Due Diligence Laws (1/3):
Customer Due Diligence Laws (2/3)
Customer Due Diligence Laws (3/3)
Next up, Enhanced Due Diligence Laws (1/2):
Enhanced Due Diligence Laws (2/2)
Next up, Ongoing Transaction Monitoring Laws:
Next up, Suspicious Activity Reporting Laws:
And last but not least, Sanctions Screening Laws:
ZKPs can be enable automated and more efficient compliance but the last missing ingredient for CBDCs is launching on Ethereum, what would be the advantages?
The issuance of at least part of a CBDC supply on Ethereum would have a transformative impact on the development of such CBDC and the issuing country, including: ◈ Interoperability with DeFi ◈ Decentralised and Secure Infrastructure ◈ Programmability ◈ Global Liquidity
Summary of all key takeaways:
Our report is for discussion purposes only; we do not endorse, support and/or encourage/discourage the creation of CBDCs. We do, however, endorse, support and encourage the use of the best privacy enhancing technology and Ethereum, for any CBDCs or base layer government systems.