A Digital Currency Architecture for Privacy and Owner-Custodianship

TL;DR

This paper proposes a government-backed digital currency system that ensures privacy, owner-custodianship, and accessibility, aiming to replace cash in electronic transactions while maintaining systemic stability and privacy protections.

Contribution

It introduces a novel digital currency architecture combining privacy-enhancing technology with government backing, enabling private, owner-controlled transactions without banking relationships.

Findings

Ensures privacy through blind signatures or zero-knowledge proofs.

Supports owner-custodianship and fungibility similar to cash.

Facilitates efficient clearing and systemic risk management.

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 internet 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.