Recent discussions on digital payments and privacy have taken center stage, as the importance of privacy-enhancing technologies (PETs) becomes increasingly recognized. A notable report from the Bank for International Settlements (BIS) recently delved deep, exploring the complex interplay between privacy advocates and law enforcement, particularly concerning payments and central bank digital currencies (CBDCs).
The BIS paper asserts there is no one-size-fits-all solution to address the privacy versus law enforcement debate. Instead, the report highlights the diverse interests of stakeholders involved, including users, merchants, banks, and payment service providers. Yet, it suggests only three groups truly matter when examining privacy: privacy advocates, law enforcement, and data holders.
Interestingly, the BIS does not portray privacy advocates as suspect; instead, it acknowledges their role as often law-abiding individuals who believe effective law enforcement should deter crime. Nonetheless, the report emphasizes the challenges law enforcement faces with maintaining access to payments data.
One of the report's key contributions lies in its taxonomy of privacy and auditability solutions, which are classified as either hard or soft. For example, the concept of soft privacy reflects current practices wherein payment data is protected but accessible upon authorization. Conversely, hard privacy suggests scenarios where users retain private keys to their transaction records, making data inaccessible even to data holders.
The report introduces technologies such as Zero Knowledge Proofs (ZKPs) to exemplify hard privacy; these allow verification without disclosing sensitive information, acting almost like playing twenty questions. The BIS acknowledges the challenges with ZKPs, particularly related to computational expenses and scalability, which remain hurdles for widespread adoption.
When it examines auditability, the report differentiates again between soft and hard auditability frameworks. Soft auditability implies law enforcement could acquire legal permission to access specific data, whereas hard auditability fully restricts access by default. Exploring what conditions could allow access is another captivating aspect of this study.
Examples of auditing configurations include designs where payer information is not openly available or instances where thresholds apply to specific transaction amounts. For example, transactions exceeding $10,000 might need to be disclosed to authorities, whereas smaller amounts remain private.
Cryptocurrency transactions reveal practical trade-offs between hard privacy and regulation—the so-called “travel rule” obliges transactions to be shared, introducing inefficiencies and privacy concerns. The BIS advocates for what it calls “a soft core with a hard shell” approach, encouraging rigorous data minimization alongside transparency protocols when data access is necessary.
The paper concludes by noting the underappreciated intricacies of the privacy technology spectrum, calling for continued exploration of hard privacy technologies and adding measures to track unauthorized data access. Importantly, it posits cash's residual role amid advancing digital payments.
Overall, the BIS report signals the urgent need for collaboration, research, and the development of innovative hard privacy solutions – all without overstepping the bounds of lawful access to payment information. The path forward requires balancing user needs for privacy against practical governmental oversight, all set against the rapid backdrop of technological advancements.