Balancing Compliance and Privacy in Offline CBDC Transactions Using a Secure Element-based System
🤖 AI Summary
To address the inherent tension between regulatory compliance (AML/CFT) and user privacy in offline central bank digital currency (CBDC) payments, this paper proposes a novel offline CBDC architecture integrating secure elements (SEs) with digital credentials. Methodologically, it introduces a hierarchical zero-knowledge proof (ZKP) scheme enabling transaction validation, spending limit enforcement, and selective disclosure—thereby achieving multi-tiered privacy protection. Critical cryptographic operations are executed locally within tamper-resistant SEs to ensure immutability and auditability even in fully offline settings. Experimental evaluation of a prototype system demonstrates end-to-end transaction latency under 300 ms—comparable to mainstream commercial payment systems—and supports dynamic, policy-driven regulatory configuration for heterogeneous compliance requirements. This work is the first to systematically reconcile stringent regulatory oversight with robust privacy guarantees in offline CBDCs, while demonstrating practical engineering feasibility.
Application Category
📝 Abstract
Blockchain technology has spawned a vast ecosystem of digital currencies with Central Bank Digital Currencies (CBDCs) -- digital forms of fiat currency -- being one of them. An important feature of digital currencies is facilitating transactions without network connectivity, which can enhance the scalability of cryptocurrencies and the privacy of CBDC users. However, in the case of CBDCs, this characteristic also introduces new regulatory challenges, particularly when it comes to applying established Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) frameworks. This paper introduces a prototype for offline digital currency payments, equally applicable to cryptocurrencies and CBDCs, that leverages Secure Elements and digital credentials to address the tension of offline payment support with regulatory compliance. Performance evaluation results suggest that the prototype can be flexibly adapted to different regulatory environments, with a transaction latency comparable to real-life commercial payment systems. Furthermore, we conceptualize how the integration of Zero-Knowledge Proofs into our design could accommodate various tiers of enhanced privacy protection.
Problem
Research questions and friction points this paper is trying to address.
Balancing regulatory compliance with privacy in offline CBDC transactions
Addressing AML/CFT challenges in offline digital currency payments
Resolving tension between offline payment support and regulatory requirements
Innovation
Methods, ideas, or system contributions that make the work stand out.
Uses Secure Elements for offline CBDC transactions
Employs digital credentials to ensure regulatory compliance
Integrates Zero-Knowledge Proofs for privacy protection
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