Bank of Canada Explores Digital Dollar: Privacy-Focused CBDC Design Revealed

Bank of Canada Unveils Privacy-Centric CBDC Blueprint

The Bank of Canada has released a research paper detailing a potential technical design for a retail Central Bank Digital Currency (CBDC). The focus is on a system designed for simple, everyday transactions with a strong emphasis on user privacy.

The research team analyzed OpenCBDC 2PC, a model co-developed with MIT's Digital Currency Initiative. This model aims for privacy, speed, and decentralization, allowing users to directly hold digital funds similar to physical cash.

Privacy First

Privacy concerns surrounding CBDCs have been a major talking point globally. Unlike cash, a CBDC could theoretically enable state surveillance. This report addresses these concerns head-on.

The proposed system separates personal identity from transaction data. Unregistered users could hold funds in self-custodied wallets and transact without sharing their identity with a bank or payment processor. Even registered users' identifying information and transaction histories would remain inaccessible to the central bank.

Enhanced protection measures, such as zero-knowledge proofs to obscure transaction amounts, are also being explored. This level of privacy, the authors suggest, could exceed that of existing electronic payment systems.

Bitcoin-Inspired Structure

Instead of traditional banking account structures, the design incorporates "unspent transaction outputs" (UTXOs), a mechanism used by Bitcoin.

Transactions involve updating a core ledger and transferring funds directly between user wallets. This supports real-time settlement and enhances privacy from banks and government institutions.

Challenges Ahead

While the report presents a detailed technical solution, it also acknowledges potential challenges:

• Integrating the architecture with existing retail payment infrastructure requires significant technical upgrades.
• While scalable in theory, performance dips during audits and system recovery operations require further engineering.

Key Takeaways:

• The Bank of Canada is actively researching a CBDC with a strong focus on user privacy.
• The proposed design uses a Bitcoin-like UTXO structure to enhance privacy and enable real-time settlement.
• Integrating the proposed system with existing payment infrastructure presents technical challenges.

This research doesn't commit the Bank of Canada to launching a CBDC. However, it provides a tangible technical framework that balances user privacy, institutional control, and operational resilience. Mark Carney has previously expressed support for CBDCs.