Analyzing Issues of Privacy and Offline Transactions In Central Bank Digital Currencies

Abstract

With the popularity of cryptocurrencies like bitcoin and Ethereum, many central banks have begun to look into issuing their own digital currency. For many central banks, the goal of a central bank digital currency (CBDC) is to provide a user experience similar to paper money, but fully digital. The central bank also plays an important role in the system, namely acting as a source of trust. This source of trust is an important differentiator, as it incentivizes the use of alternative technologies to confirm transactions, rather than using inefficient consensus protocols such as a proof-of-work blockchain. In order to act as a true paper money alternative, two of the biggest hurdles that need to be overcome are privacy and offline transactions. In this thesis, we will examine these issues in more detail, discussing what problems they pose and what (if any) solutions have been presented in the existing literature. Additionally, we will be offering our own solutions, using hash chains to provide user privacy, and presenting a prototype CBDC system for offline transactions.