The Bank for International Settlements (BIS) said that digital cash can offer privacy properties similar to physical cash, but the institution also flagged remaining risks, including the possibility that bank data breaches could expose users' personal information.

In its Project Aurum Phase 2 report, published on Tuesday, the Basel-based institution wrote that while digital cash can achieve “cash-like privacy,” the underlying technology stack is not yet “production ready.” That caveat frames the findings as a research milestone rather than a blueprint for imminent deployment — privacy-enhancing technologies for digital money remain at the prototype stage, with further development required before any live system could adopt them.

Project Aurum builds on a first-phase study published in 2022 that examined privacy-enhancing technologies for digital cash. Headquartered in Basel, Switzerland, the BIS is often described as the central bank for central banks and conducts research on payment systems and financial technology for the global central banking community — a role that puts its privacy findings directly in front of the officials weighing similar trade-offs in their own digital money projects.

According to the BIS, the new phase implements a privacy-preserving digital cash prototype using the existing Aurum codebase, taking a balanced approach between complete anonymity and full transaction transparency.

The report's security analysis found that compromising a single bank may expose that bank's customer data, but would not expose the identities of customers at other counterparties. A validator-level compromise alone, meanwhile, would not be enough to expose end users, according to the report. Taken together, the findings indicate that user exposure depends on where a breach occurs, with risk concentrated at individual institutions rather than spreading across the wider network.

The study explores the technical features needed to establish a privacy-preserving central bank digital currency (CBDC) — a digital form of sovereign money issued by a nation's central bank. CBDC critics have previously raised concerns about the technology's potential financial surveillance capabilities, which has made privacy design a focal point in the broader debate over sovereign digital money.

Those concerns gained renewed attention in 2023, when Brazil's central bank published the source code for its CBDC pilot. Within days, observers noticed surveillance and control mechanisms embedded within the code, allowing the central bank to freeze or reduce user funds within CBDC wallets.

Earlier this year, US President Donald Trump banned federal agencies from issuing a CBDC in January, citing financial stability and privacy concerns.

Related: Republican lawmakers call for permanent CBDC ban as House vote approaches

Source: Cointelegraph