A Digital Currency Architecture for Privacy and Owner-Custodianship

Abstract

In recent years, electronic retail payment mechanisms, especially e-commerce and card payments at the point of sale, have increasingly replaced cash in many developed countries. As a result, societies are losing a critical public retail payment option, and retail consumers are losing important rights associated with using cash. To address this concern, we propose an approach to digital currency that would allow people without banking relationships to transact electronically and privately, including both e-commerce purchases and point-of-sale purchases that are required to be cashless. Our proposal introduces a government-backed, privately-operated digital currency infrastructure to ensure that every transaction is registered by a bank or money services business, and it relies upon non-custodial wallets backed by privacy-enhancing technology, such as blind signatures or zero-knowledge proofs, to ensure that transaction counterparties are not revealed. Our approach to digital currency can also facilitate more efficient and transparent clearing, settlement, and management of systemic risk. We argue that our system can restore and preserve the salient features of cash, including privacy, owner-custodianship, fungibility, and accessibility, while also preserving fractional reserve banking and the existing two-tiered banking system. We also show that it is possible to introduce regulation of digital currency transactions involving non-custodial wallets that unconditionally protect the privacy of end-users.

A Scalable Architecture for Electronic Payments

“…In this section we propose a method for creating a retail central bank digital currency (CBDC) that supports private payments wherein the owner maintains custody of her digital assets. It achieves the necessary properties for a general purpose payment system described in the previous section by extending the approach proposed by Goodell, Nakib, and Tasca [2] with a new asset model that eliminates the need for global consensus with regard to every transaction. While our new approach requires that the central bank must operate some realtime infrastructure, we show that this requirement can be addressed with a lightweight, scalable mechanism that mitigates the risk to resilience and operational security.…”

“…• Open architecture. The system must fully support the semantics for digital currency specified by Goodell, Nakib, and Tasca [2]. Specifically, we assume that retail users of digital currency have access to non-custodial wallets that satisfy certain privacy and accessibility requirements described in Section 2.2, specifically requirements ( 6), ( 9), (10), and (13).…”

“…We assume that the recipient of any payment that Alice makes will require one or more valid tokens from a trusted issuer I containing content k that has been signed using signature function s(k, I). We further assume, following the arguments made in earlier proposals for privacy-preserving retail CBDC [2,4], that she will be able to use a blinding function b, known only to Alice, to request a blind signature on b(k) to which she can apply an unblinding function b −1 , also known only to Alice, to reveal the required signature:…”

“…However, unlike transferring blinded assets in a classical ledger system, whether distributed [2] or not [4], transferring USO assets from one party to another explicitly leaves behind an audit trail that can be used by the bearers of an asset to recognise the asset when it is inspected, transacted or seen in the future. A USO asset's proof of provenance is permanently updated each time it is transferred it to a new recipient.…”

The Determinants of PayTech’s Success in the Mobile Payment Market—The Case of BLIK

“…In this case, the majority of studies focuses on innovation drivers and barriers of adoption, as well as on the relationship between mobile innovations and their impact on regions, financial inclusion, customers' well-being (Nejad 2016 1 ;Weichert 2017;Górka 2018;Szumski 2020;Tang et al 2021). In the case of payment innovations, the extant literature characterizes particular types of new developments: e-wallets (Górka 2016;Yang et al 2021;Daragmeh et al 2021), online and mobile payments (Li et al 2020;Hwang et al 2021;Zhao and Bacao 2021) and digital currencies (Goodell et al 2021;Civelek et al 2021). These analyses are conducted mostly for selected countries or geographical locations, as cultural and demographic factors are important drivers of innovation adoption.…”