Privacy and Regulatory Compliance for Central Bank Digital Currency

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Liu, Yunke
Central Bank Digital Currency , Privacy , Regulation
Digital payment is becoming increasingly popular, especially in the context of the rapid decline in cash transactions due to the COVID-19 pandemic. Some mobile payment methods, which are also known as mobile wallets such as WeChat Pay, Apple Pay, and Google Pay make online purchases straight from an app or website. Mobile payment methods manage user wallet balances by using existing commercial bank-based accounting, based on cash exchange or lines of credit and loans. Central bank digital currency (CBDC) is a national digital currency issued by the central bank which has national credit and is equivalent to fiat money. Besides, CBDC is expected to be designed as an alternative peer-to-peer model that provides similar mechanisms for exchanging money between senders and receivers offline, which has a similar function to fiat money. CBDC has strong regulation due to the supervision of the government or the central bank, which leads to the emergence of research and developments on CBDC. Despite the appealing benefits, however, privacy in CBDC becomes a major concern for lawmakers and potential users, which may block its development. Due to the regulation, user privacy is being put at risk, which may disclose the spending habits or transaction information of the users. Therefore, how to realize user anonymity and protect user privacy in CBDC is an urgent problem to be solved. In this thesis, we conduct our research with a focus on privacy and regulatory compliance in CBDC based on the architecture of the digital payment system and existing CBDC. Specifically, the main contributions are: i) We proposed an anonymous and traceable CBDC system based on a two-tier architecture to improve the traditional bank-user electronic cash architecture. This system realized the user anonymity against commercial banks while enabling the central bank to support user tracking and prevent double-spending. As a trusted party, the central bank is responsible for currency issuance and financial regulation. ii) We proposed an anonymous and regulatory compliant CBDC system, which is also based on a two-tier architecture but more closely related to the everyday banking system. This system in mind to support strong anonymity and complete accountability in CBDC. The central bank is responsible for verification of transactions and identification of coins for double-spending. The blockchain in this system allows commercial banks to modify transactions recorded on the blockchain shared by the central bank and commercial banks.
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