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Friday, February 3, 2023

Bank of Israel experiments with central bank digital currency smart contracts and privacy

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On Monday, the Bank of Israel launched the outcomes of a lab experiment that examined person privacy and the use of smart contracts in funds. This was 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 automobile inside a two-tier system with an middleman fee service supplier. The bank stated that the service supplier accomplished Know Your Customer (KYC)/Anti-Money Laundering (AML) checks and supplied the required blockchain addresses. A nonfungible token (NFT) was issued to point out possession of the automobile within the absence of a licensing authority to impact the switch. A smart contract exchanged the vendor’s NFT and the client’s cash, with the vendor retaining the suitable to cancel the transaction if the circumstances on it, corresponding to the value of the automobile, weren’t met.

The experiment drew consideration to 2 questions. The first was the quantity of cash held in digital kind. To keep away from bank disintermediation — huge withdrawal of conventional shekels and their conversion to digital kind, a day by day restrict was prompt that could possibly be written into the smart contract. The second query involved the smart contract, itself. To scale back the probabilities of intentional or unintentional misuse of smart contracts, it was prompt that the flexibility to put in writing smart contracts on the blockchain be restricted to the fee service supplier, however the extent of supervision required in that case remained undecided.

The first stage of the experiment additionally highlighted the necessity to set up identification in order that KYC/AML could possibly be carried out by means of a centralized database. In the second stage, personal digital shekels and peculiar digital shekels have been created on blockchain infrastructure in a zero-knowledge-proof environment to examine limited privacy based on eCash technology in a range of circumstances.

Besides purely technical points, it was famous that the extent of privacy digital shekel customers shall be a coverage subject. It possible falls someplace between the entire anonymity of money and the shortage of privacy attribute of present digital cash transfers. Israel has been considering the issuance of a CBDC since 2017. It conducted a pilot test in 2021.