CipherTrace Wants to Guide Central Banks on Their Digital Currency Projects

CipherTrace, a blockchain analytics partner of governments and cryptocurrency exchanges, is pitching itself to a fresh clientele: central banks.

The crypto investigations firm announced Tuesday it is establishing a central bank digital currency (CBDC) initiative. As described by Chief Financial Analyst John Jefferies, the outreach effort will seek to place CipherTrace in the growing conversation around designing and securing CBDCs.

Part of the initiative will center on business outreach, Jefferies said. Partnering with even one central bank would be a lucrative business proposition for CipherTrace. With 80% of central banks polled by the Bank for International Settlements reporting they are studying CBDCs, and with research and development by and large still in the early stages, now is a good time for the firm to get a foot in the door. 

Influencing the values guiding that development process is another objective, according to Jefferies. The initiative will focus on bringing privacy, anti-money laundering safeguards and security into CBDCs – three design pillars that also have ramifications on day-to-day use.

Digital currency carries none of the inherent privacy safeguards of physical cash, which Jefferies said he favored “because I don’t like to be tracked.” But that preference died with the coronavirus pandemic, he said. He doesn’t use cash anymore.

COVID-19 is changing how people view money in a quite radical way. First at the user level, with consumers including Jefferies eschewing hand-to-hand exchange, but also at the decision-making level, with monetary authorities including the European Central Bank announcing that it will consider the lessons of the pandemic in its CBDC debate.

But when the digital future of money arrives, Jefferies said he and CipherTrace CEO Dave Jevans “both believe in transactional privacy for people.” Neither want a situation where governments with a digital fiat currency can flip anonymity on and off like a switch, a possibility Jefferies raised as a concern with China’s digital yuan project.

“In a modern, free society that’s not really acceptable,” he said. “Like, I’m personally not going to be eager to carry a digital dollar, a digital euro, if I knew that there’s a back door.”

A third goal of the CipherTrace initiative will be to lobby for including blockchain tech in CBDC design.

Some CBDC projects already live on a blockchain. The e-krona trials in Sweden run on R3 Corda, for example. But Sveriges Riksbank is an outlier – many other central banks remain skeptical of a design choice they see as antithetical to centralized control.

This could be a make-or-break CBDC design choice for the company. CipherTrace is a blockchain analytics firm: its tools crawl distributed ledgers, not centralized ones. 

As such, CipherTrace will pitch the banks on the “security attributes that distributed ledgers bring to the table that they may not be aware of or may not fully appreciate,” Jefferies said. 

That’s not to say the firm will rule out non-blockchain-based CBDC projects, though. It will work with central banks regardless of their architecture choice and pose the same questions it otherwise would, on security, anti-money laundering and user privacy. 

CipherTrace would also remind central banks of what “blockchain analytics itself can bring to the party” from a monitoring standpoint. 

“It takes a little while for people to understand that the traceability you get with digital currencies is far beyond what you can have with traditional fiat,” Jefferies said.