A secure path for digital currency of central banks
At the latest when the company Meta Platforms - then still Facebook Inc. - announced in the summer of 2019 that it wanted to launch its own cryptocurrency, Libra, it was clear that digital currencies are not a passing trend. While the Libra project has since been shelved, central banks around the world are just getting started. In October 2021, for example, the European Central Bank (ECB) gave the green light for a two-year project on the "digital euro." This will examine how this could look and be made available to retailers and private individuals. "The main motivation is to enable access to central bank money digitally as well." The money that already goes back and forth electronically is not central bank money, but so-called fiat money, the researcher explains. Consumers have no direct access to it, and transactions always have to be carried out via the bank or institution. On the one hand, this entails the risk that the money could be lost in the event of a bank failure. On the other hand, the banks and credit institutions have deep insights into who sends money to whom, when, and where. "So-called central bank digital currencies (CBDC), of which the digital euro is one, can offer much more privacy and people have direct access to this money. It is like cash in digital form," Wüst says.
CBDCs must meet a number of requirements to function as a secure means of payment. For example, they must be able to guarantee privacy, be robust against attacks, and be both scalable and regulable. How these requirements can be molded into a system is Wüst's current research topic. "Most recent research on CBDCs has focused on blockchain technology. Yet it's not clear whether that's the optimal solution." For his approach, called Platypus, so-called e-cash systems play a role. These emerged as early as the 1980s and represented the first kind of at least partially anonymous digital currency. In the e-cash process, banks issue electronic coins with an encrypted serial number in exchange for bank balances, which are stored as files on the user's computer. When a purchase is made, the corresponding files are sent to the seller and the serial numbers are exposed, which makes it possible to check the validity of the coins. The seller can then exchange the coins at the bank for cash or banknotes.
Thus, only part of the transaction remains anonymous in the e-cash process. Since each coin is issued individually, the transaction volume also increases with each coin, i.e., the amount of data required. Blockchain-based systems also have to contend with this. So far, therefore, only a comparatively small number of transactions can be processed per second. Blockchain solutions are nevertheless in demand because they are very robust against attacks, says the researcher. "But if you have a trusted central authority, such as a central bank, in this case, security can also be guaranteed by using special security protocols." Still, blockchain-based approaches offer one advantage: instead of being coin-based, they are usually account-based. That's what Wüst adopted for Platypus because it means the size of a transaction is independent of its value, and funds are immediately deposited into the recipient's hidden account. "This guarantees the anonymity of the sender and the recipient, as well as the confidentiality of the transaction value. In addition, transactions cannot be linked to each other. Platypus thus combines the advantages of e-cash systems with those of blockchain-based cryptocurrencies," says Wüst.
Karl Wüst was born in Munich and has been living in Saarbrücken and Switzerland for some time. He completed his doctorate at ETH Zurich. In addition to digital currencies, the 31-year-old is also working on so-called smart contract systems. These are digital contracts based on blockchain technology. At CISPA, he will continue to advance his research on both topics and more. "Working at CISPA was particularly appealing to me because the research here is world-class. In Europe, you find very few institutions doing research at this level."
translated by Oliver Schedler