BIS and seven Central Banks explore CBDC system design: New technologies such as Zero-Knowledge Proof can provide greater flexibility for privacy protection

On December 1st, the Bank for International Settlements (BIS) and Central Banks from various countries recently published a paper on legal issues and CBDC system design. The participating Central Banks include the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve Board, the Central Bank of Sweden, and the Swiss National Bank. One of the debates is whether the CBDC system adopts a centralized or Decentralization model. In a two-tier system, one option is to adopt a hub-and-spoke model, where the update is controlled by the Central Bank, but the data ownership is decentralized. Alternatively, a peer-to-peer design can be used to share update permissions. The paper points out that centralized systems have weaker resilience, single points of failure, and may even become bottlenecks. However, they do not believe that decentralizing the core Settlement power of the CBDC system is appropriate. In modular design, the core Settlement can be centralized, while other aspects (such as identity) can be decentralized. In addition, privacy is a major concern for CBDC. Although privacy can be achieved using existing technologies, some newer privacy-enhancing technologies (PET), such as secure multi-party computation (SMPC) or Zero-Knowledge Proof (ZKP), can provide greater flexibility. However, according to the experience of the innovation centers of two Central Banks and the Bank for International Settlements, they are not yet convinced that PET is ready, and question its real-time execution capability, complexity, and reliability. Other topics discussed in the paper include network security, offline CBDC, and compatibility with existing point-of-sale systems.