Payments and identity company Nuggets recently announced that it’s working with the Bank of England (BoE) to develop an identity and privacy layer for its central bank digital currency (CBDC).
The balance between user privacy and the central banks’ need to know who is transacting for AML/CTF purposes is difficult, and Nuggets believe Zero-Knowledge Proofs (ZKPs) are a key piece of the puzzle.
A Zero-Knowledge Proof is a concept in cryptography that allows one party (the prover) to prove to another (the verifier) that it knows the value of x without revealing any information other than the fact that they know the value of x.
How Bitcoin Merkle Trees can help construct ZKPs
So far, Nuggets and the Bank of England have yet to go into any detail as to how ZKPs will work in their identity/privacy solution for CBDCs.
One method of enabling them at scale is to use Merkle trees on the original Bitcoin blockchain—BSV blockchain. Merkle trees are a type of data structure that can contribute to constructing certain types of ZKPs.
While Dr. Wright’s paper on Merkle trees is a must-read for anyone interested in learning more about them, in short, they are binary trees of hashes used for summarizing and verifying the integrity of data sets. The Merkle root represents all the data, but when it comes to constructing ZKPs, it’s possible to search a single branch (or path) to prove possession of a specific piece of data without revealing any other data in the tree.
Merkle trees alone do not construct ZKPs in the strictest sense (proving you know a piece of information without revealing it), but they can form part of the solution. Dr. Wright made them an integral part of Bitcoin for this very reason; he intended it as an electronic cash and data management system, but much of the original functionality has been stripped out of or deprecated on BTC and BCH.
Any solution has to be massively scalable
Whatever technology the Bank of England intends to use for its CBDC, it will have to be infinitely scalable. So far, the only public blockchain that has proven itself capable of running government and enterprise applications at the required scale is the BSV blockchain. Easily handling 100k transactions per second (before Teranode) with fees of fractions of a cent, BSV blockchain leaves other public blockchains in the dust.
Should the BoE or other central banks opt for private ledgers, many of the benefits of public blockchains will be lost, reintroducing costs, security vulnerabilities, losing the ability to conduct direct atomic swaps between currencies, and losing the benefits of an immutable, public ledger which creates total transparency.
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