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COTI’s Privacy-Focused CBDC Solution Reshapes Israel’s Market

In the past decade, many central banks worldwide have implemented or are in advanced testing phases of their own Central Bank Digital Currency (CBDC) projects.

For instance, China’s Digital Currency Electronic Payment (DCEP) program has already undergone extensive testing and rollout across major cities like Chengdu and Beijing, while India has piloted the Digital Rupee initiative, which has garnered significant attention across its retail and wholesale sectors. Similarly, Brazil has also been actively developing its own CBDC, with several pilot projects underway. 

Furthermore, it is estimated that 86% of central banks are actively working with CBDCs in some capacity or another, with Middle Eastern nations like Saudi Arabia and the UAE having transitioned to a proof-of-concept stage recently.

In Israel, blockchain network COTI has pioneered an innovative privacy solution for the government’s Digital Shekel project to display how CBDCs can balance transparency with essential privacy protections.

However, this transition to a distributed ledger system has raised several significant privacy concerns. While the blockchain is often celebrated for its transparency, the implementation of CBDCs without proper privacy safeguards stands to usher in unprecedented levels of government surveillance over its citizens’ financial activities. 

This concern has been so pressing that it was even highlighted by US House Financial Services Committee representatives recently, who warned against the potential for CBDCs to become financial monitoring tools.

What’s COTI’s New Privacy Solution Brings?

COTI’s solution to this challenge relies on a unique privacy layer that uses “garbled circuits.” This technological innovation can conceal sensitive transaction details, such as token types, amounts, and wallet addresses, while still ensuring the operational efficiency required to support a national digital currency system.

What truly sets COTI apart from the rest of the fray is its practical applicability as its privacy layer is designed to run on any device, including mobile phones making it highly accessible to the general public. 

Not only that, the system’s implementation costs are notably lower than those of alternative privacy technologies, something that has been a critical concern (i.e. operational efficiency at scale) when it comes to CBDC deployment.

To demonstrate the practical utility of its privacy solution, the COTI team recently introduced a decentralized marketplace for event tickets, showcasing how privacy-protected CBDCs could function in real-world scenarios. 

The system draws inspiration from the BIS’s Icebreaker project, a cross-border CBDC payment system, and applies these principles to everyday consumer transactions.

Furthermore, COTI’s marketplace employs smart contracts to facilitate secure, private transactions while eliminating intermediaries and reducing costs. For instance, when international concert tickets are traded, the system enables buyers and sellers to transact in their local currencies while using the Digital Shekel as a mediating currency. 

As a result, the platform is able to maximize user privacy and streamline cross-border transactions by reducing fees and settlement times — all while maintaining a high level of security.

Lastly, the platform’s use of Hash Time-Locked Contracts (HTLC) ensures that the interests of every participant are protected throughout the transaction process as when a ticket is sold, the buyer’s funds are securely locked into a smart contract until all of the conditions associated with the sale are met (at which point the exchange occurs automatically and privately).

Final Thoughts

COTI’s involvement in the Digital Shekel Initiative highlights an important point: the development of Central Bank Digital Currencies (CBDCs) does not have to compromise individual privacy. As more countries adopt this innovative technology, COTI’s privacy-focused approach could offer a valuable model for achieving a balance between financial transparency and personal privacy in the CBDC landscape. Exciting times are ahead!

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