Bank of England studies ZK-proofs to enhance user privacy for digital pound

New research from the Bank of England suggests that emerging privacy technologies such as zero-knowledge proofs could increase user control over data in a digital pound.

The Bank of England has suggested that zero-knowledge proofs and other privacy-enhancing technologies, also known as PTEs, could be viable components of a potential digital pound.

In its latest report, “Enhancing the Privacy of the Digital Pound,” the central bank said technologies such as pseudonymization, ToM proofs and secure multiparty computing “could feasibly be applied to digital currency systems such as the digital pound to minimize “Sharing data both with the central bank and between payment intermediaries, giving users more control over their data and increasing user privacy.”

“This opens up opportunities for the digital pound to be at least as special as existing forms of digital money, and potentially even more special; “But as with any technology, there are limitations to what emerging types of PET can achieve.”

Bank of England

Following public feedback from the 2023 consultation, the Bank of England and HM Treasury have reaffirmed their commitment to protecting user privacy, providing assurances that neither the government nor the central bank will be able to access users’ personal data.

ZK-proof is an encryption protocol that allows a party to prove that they know something without revealing the actual information. The technology is actively used on blockchains such as Ethereum (ETH), Zcash (ZEC) and Polygon (POL) for privacy and scaling solutions.

The British central bank, collaborating with the Massachusetts Institute of Technology’s Digital Currency Initiative, has explored the potential of emerging PETs but still recognizes their limitations and trade-offs, particularly in balancing privacy and regulatory compliance.

The report stated, “Tensions may also arise between regulations requiring the disclosure of data and the freedom to deploy PETs,” and underlined that more research is needed to overcome these challenges.

The Bank of England began research into a digital pound in 2020, when 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, with the central bank emphasizing the importance of adapting to technological advances in payments and reducing the use of cash. The bank has not yet made a final decision on launching the digital currency.