Exploring Privacy and Quantum Security for Digital Currencies: Current Solutions and Future Challenges

As countries across the globe explore increasingly move towards digital currencies, ensuring privacy and security remains paramount. Privacy-friendly solutions are emerging, with research highlighting promising cryptographic approaches to protect both user information and transactional data. Quantum computing, however, presents new challenges that could eventually compromise current cryptographic methods. This post by Daniel Szego, delves into the dual objectives of safeguarding privacy and building resilience against quantum threats.

1. Privacy-Preserving Solutions for CBDCs

Protecting user privacy while satisfying regulatory requirements is a central challenge in digital currency development whether it be central bank digital currencies or stablecoins. Studies by Gross et al. (2021) and Lee et al. (2021) suggest employing cryptographic techniques like zero-knowledge proofs (ZKPs) and zkSNARKs. These methods effectively shield sender and receiver details and transaction data, meeting privacy demands while adhering to compliance standards.

2. Quantum Attack Resistance

The rise of quantum computing poses significant threats to traditional cryptographic systems. Unlike classical computers, quantum computers solve complex mathematical problems much faster, potentially undermining current cryptographic protocols. Designing a future-proof framework for cryptographic security is challenging, as rapid advancements in technology outpace existing solutions. Rather than relying on a single “bulletproof” system, a flexible, technology management approach is necessary to regularly assess and mitigate risks from evolving quantum threats.

2.1 Crypto-Agility for Quantum Resistance

Cryptographic agility, or crypto-agility, refers to designing systems capable of adapting their cryptographic methods in response to emerging threats. While post-quantum cryptographic protocols exist, many remain experimental and unproven against classical computers. For a robust digital currency infrastructure, a modular system design could enable replacement of cryptographic primitives, allowing adaptation as needed. However, this approach is technically challenging—particularly for blockchain systems, where cryptographic components are deeply integrated into the ledger.

One approach involves dual signatures that combine traditional signatures like ECDSA with post-quantum alternatives. Ethereum’s use of zero-knowledge STARK proofs exemplifies a step towards quantum-resilient cryptography. However, drawbacks include increased computational costs and complexities in implementation.

3. Key Quantum Algorithms and Their Impact

Two quantum algorithms pose particular threats to cryptographic security:

1. Shor’s Algorithm (1995) can quickly factor large integers, breaking RSA and ECC-based cryptography widely used in public-private key encryption, digital signatures, and key exchanges. Although current quantum computers cannot yet break RSA systems, the “harvest now, decrypt later” threat suggests that today’s encrypted data could be compromised in the future.

2. Grover’s Algorithm (1996) accelerates unstructured data searches, posing risks to symmetric encryption algorithms like AES and cryptographic hash functions such as SHA-256. Although the threat is less severe than Shor’s algorithm, adjusting key sizes could help mitigate risks, albeit with significant planning and testing.

4. Quantum and Post-Quantum Cryptography

Efforts to develop quantum-resistant cryptography focus on post-quantum and quantum cryptographic protocols. Post-quantum cryptography aims to create protocols for classical computers that withstand quantum attacks. Quantum cryptography, though still experimental, offers promising techniques, including Quantum Random Number Generation (QRNG) and Quantum Key Distribution (QKD). The U.S. National Institute of Standards and Technology (NIST) has initiated a standardization challenge, with lattice-based and hash-based algorithms among the first post-quantum cryptographic standards.

5. Framework for Quantum Security in Blockchain-Based Systems

Designing a secure digital currency framework involves ongoing assessment and adjustment. Below is a proposed quantum risk evaluation process to identify and manage risks.

Quantum Risk Evaluation Framework

1. Threat Model: Identify potential attack methods and cryptographic vulnerabilities in the system.
2. Impact Analysis: Assess the potential impact of a quantum-based attack, considering financial and data integrity consequences.
3. Quantum Readiness: Estimate how soon quantum threats might materialize.
4. Risk Mitigation: Evaluate preventive measures, including key size adjustments, post-quantum cryptography, and blockchain-specific considerations for data immutability.
5. Overall Risk Evaluation: Rank risks by severity to focus on high-impact threats with shorter timelines.
6. Ongoing Assessment: Reevaluate threats and update strategies regularly to keep up with advancements.

Moving Forward

As digital currencies like CBDCs continue to evolve, addressing privacy and security in the face of quantum advancements is a complex, ongoing task. Central banks and other issuers must proactively adopt adaptable cryptographic solutions, maintaining a balance between privacy, security, and compliance. A resilient, future-proof digital currency requires agile cryptography, robust quantum-resistant standards, and a dynamic, vigilant approach to technological advancement.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the Digital Euro Association.