A digital version of the British pound may feature a way to verify the holder's age and citizenship status, potentially smoothing the purchase of alcohol and tobacco and transactions with government agencies.
The Bank of England has hired digital payments platform Nuggets to develop the digital currency's privacy and identity features as policy makers step up preparations for the currency dubbed "Britcoin."
Nuggets Chief Executive Officer Alastair Johnson said that its technology would allow verification of a person's citizenship and for purchasing age-restricted products such as alcohol and cigarettes. His remarks offer a glimpse into how the BOE could attract consumers to use a central bank digital currency, or CBDC.
He said Nuggets's technology could also reduce companies gathering and using data from purchases and also help enable so-called micro-payments, where people use the digital pound to pay for small items such as an individual newspaper article rather than a full subscription.
The Bank of England and Treasury are now weighing whether to press ahead with launching "Britcoin" after finishing a public consultation in June. Officials think a digital pound is likely to be needed but will only decide whether to move from designing to building it in two to three years' time. The earliest that an eventual CBDC could appear is in the second half of this decade.
The BOE is one of a number of central banks looking at digital currencies that would keep government-backed money in circulation as contactless card and online payments become more popular.
Features such as verifying age or citizenship, would be done using the infrastructure around the digital pound rather than the token itself. Nuggets said it would use a decentralized identity that wouldn't reveal the underlying data of the individual, such as their date of birth.
Work on CBDCs has drawn critics including the former BOE Governor Mervyn King, who dubbed it a "solution without a problem." However, Johnson's remarks hint at the possible features that would make a digital currency more attractive than more cumbersome alternatives like cash and using ID cards to verify age and citizenship.
"You can proof-of-age without demonstrating age," he said. "There's other assets that you can demonstrate — are you a U.K. citizen on your passport, and so on. There's numerous scenarios that you could demonstrate for that."
Experts have warned that CBDCs pose a privacy risk because of the amount of data that could be gathered from everyday transactions.
Nuggets specializes in decentralized identity systems that give individuals control over how their data is used with each transaction. To enhance privacy, the technology employs zero-knowledge proofs that enable users to verify information without revealing the underlying data.
"Decentralized digital identity is probably the most private by design that can do that role," said Johnson. "This is more about a fundamental change of ownership and control to the individual and the privacy of individuals."
Nuggets said that the ability for the individual to choose to verify age or citizenship without revealing their underlying data would be possible through the use of a so-called "self-sovereign decentralized identity." The CBDC token system itself would have no knowledge of any personal information or activity, it added.
