The spiked interest in CBDCs and automation in finance may soon lead to the death of cash. What does it mean to privacy and which blockchain anonymity solutions deserve attention today?
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The latest trends in fintech - Central Bank Digital Currency and automated finance - are paving the way for a cashless society. Experts point out that in combination with the Internet of Things (IoT) and 5G technology the digital Utopia may turn into financial Panopticon for regular citizens.
In its recent statement, the Bank of China confirmed that the Digital Yuan is being tested in four cities already. Earlier they revealed that although built on a distributed ledger just like decentralized cryptocurrencies, CBDC is a very centralized project fully controlled by the government to prevent inflation and the fiat system collapse. Several European central banks are currently fighting for the right to pioneer the Digital Euro project.
The modern financial world is entering the era of automation, in which the human factor of decision making is reduced to almost zero. Taking tax payment as an example, soon enough tax collection will become nothing but a script. Tax will be automatically collected with each transaction made. Digital finance and online banking are breakthroughs that are meant to simplify everyday human life, but why talks about privacy and anonymity evolve around them?
None of the smart technologies are possible without a sufficient database. To build the finance of the future it’s inevitable to collect personal financial information. Human life is circulating around money. An average person makes around 10 money transactions per average workday. Each time the digital transaction is made, it is on the record and can be easily tracked. That’s how Uber knows where you want to go before you take the phone out of your pocket to open the app, and Amazon knows what you want to buy even before you want it. Centralized digital money will know even more! Why does privacy even matter? Anonymity maximalists say that life without cash means life without choice.
Wait a moment, we heard Bitcoin is the solution! Well, yes and no. What makes Bitcoin an extremely secure technology is all the transactions are made on the blockchain which is public and open, so all the participants of the network have to verify a transaction for it to happen. Bitcoin indeed was designed to conduct anonymous transactions, but modern blockchain analysis tools record and store all the transactions, which can be linked to a person relatively easily today. In many ways, blockchain technology made it much easier to track the money flow than tracking cash.
One category of cryptocurrency has the power to bring back the balance and overcome the surveillance of Big Brother in our pockets. Privacy coins. Projects like Monero, Zcash, ZCoin, Beam, and Grin, which mimic the untraceable flow of cash. There are technologies that solve catch-22 of how to verify the transaction without logging in to a central system. They are zero-knowledge proofs, ring signatures, and MimbleWimble protocol.
The popular way to simplify the notion of privacy coins is to visualize the following trick:
“You have a color-blind friend. You hand him two balls, one green, and one red. He can’t tell they’re different but you can. They look the same to him. And you actually don’t want him to know which is which, but you do want to prove that you know. To prove they’re different you tell him to put the balls behind his back and shuffle them or don’t shuffle them. His choice. Then he shows you the two balls. You correctly tell him every time that the balls were shuffled or not. He repeats this enough times that it’s impossible for you to have guessed them all correctly. ”
The zero-knowledge in this case means that your friend knows the fact that the balls are of different colors but can’t tell which one is which. Similar tricks can be performed with codes in protocols on blockchains. Though the technology is at its development stage it promises to enhance the privacy of our digital lives and deserves to keep an eye on.
Please note, that the article is a part of BTCMEX Blog, the views and opinions expressed here are the contributing author’s only, and do not necessarily represent the views of the company.
Julia Bulakh for BTCMEX