On Monday, The Bank of Israel published the results of a laboratory experiment that examined user privacy and the use of smart contracts in payments. This is the central bank’s first technological experiment with a central bank digital currency (CBDC).
The first stage of the experiment modeled the sale of a car within a two-tier system with an intermediary payment service provider. The bank said the service provider has completed Know Your Customer/Anti-Money Laundering (KYC/AML) checks and provided the necessary blockchain addresses. A non-fungible token was issued to show ownership of the car in the absence of a Licensing Authority to effect the transfer. A smart contract exchanged the seller’s NFTs and the buyer’s money, with the seller retaining the right to cancel the transaction if conditions of the transaction, such as the price of the car, were not met.
The experiment called attention to two issues. The first was the amount of money held in digital form. To prevent banking disintermediation, i.e. the mass withdrawal of traditional shekels and their conversion to digital form, a daily limit was suggested that could be written into the smart contract. The second issue concerned the smart contract itself. To reduce the chances of intentional or unintentional misuse of smart contracts, it was suggested that the ability to write smart contracts on the blockchain be limited to the payment service provider, but the degree of oversight needed in that case remained unclear. decide.
The first stage of the experiment also highlighted the need to establish identity so that the KYC/AML process could be done through a centralized database. In the second stage, private digital shekels and ordinary digital shekels were created on the blockchain infrastructure in a zero-knowledge proofing environment to examine the Limited privacy based on eCash technology in a variety of circumstances.
In addition to purely technical issues, it was noted that the level of privacy digital shekel users will have will be a political issue. It is likely to fall somewhere between the total anonymity of cash and the lack of privacy that is characteristic of current electronic money transfers. Israel has been considering issuing a CBDC since 2017. It piloted it in 2021.
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