Will Central Bank Digital Currencies (CBDC) and Blockchain Cryptocurrencies Coexist in the Post Quantum Era?

When considering CDBC and blockchain-based cryptocurrencies, the famous lines from the poem ’The Road Not Taken’ by Robert Frost come to mind: ’Two roads diverged in a yellow wood, And sorry I could not travel both and be one traveler, long I stood’ [1]. However, unlike the poem, in this paper, we will discuss the possibility of choosing both roads in the post-quantum era. Metaphorically, we can liken the practical aspects of this issue to those in quantum physics, known as ”quantum superposition”, where elementary particles exist in two parallel states simultaneously until their location is observed at a specific point [2]. The quantum world supports both digital currencies approaches, and it is up to the decision-maker to determine what to choose.

In this era, a notable trend is our significant progress towards the post-quantum era. This phase denotes the time following the advancement of quantum computing to a level where it can potentially compromise prevalent public-key cryptosystems like Rivest–Shamir–Adleman (RSA) and Elliptic Curve Cryptography (ECC) [3]. In parallel, we see a rise in popularity of CDBC [4] side by side to rise in usage of cryptocurrency [5]. Within this context, the importance of protocols such as Oblivious Transfer/Protocol (OT) and Multi-Party Computation (MPC) remains paramount in ensuring secure and private transactions [6]. OT is a cryptographic protocol where a sender transmits one of potentially multiple pieces of information to a receiver without knowing which specific piece the receiver obtains, enabling the receiver to access information from the sender without disclosing the chosen item’s identity [6]. The sender merely acknowledges the transfer but remains unaware of the item’s index. OT finds utility in scenarios such as privacy-preserving data mining and secure two-party computation. Notable examples encompass 1-out-of-2 OT, where the sender presents two data pieces for the receiver to select from discretely, and 1-out-of-N OT, where the sender offers N data pieces for selection without revealing the specific item index [7]. OT serves as a foundational element in secure two-party and multi-party computations, facilitating collaborative function computations over private inputs while maintaining confidentiality.
MPC extends privacy protection to scenarios involving multiple entities collaborating to compute functions over their respective confidential inputs [8]. For instance, banks can collectively calculate credit scores without disclosing individual customer data. In MPC, input data is partitioned and shared among distinct, non-colluding parties to prevent any single entity from accessing another’s confidential information. Subsequently, algorithms operate on these distributed data shares to produce outputs in a privacy-preserving manner. MPC methodologies commonly rely on secret sharing, garbled circuits, and cryptographic tools like Homomorphic Encryption (HE)¹¹1A cryptographic method enabling calculations on encrypted data without the need for decryption [9]. and Zero-Knowledge Proofs (ZKPs) ²²2A protocol where one party can prove the truth of a given statement to another party without revealing any additional information beyond the statement’s truth [10]., with OT serving as a fundamental component in many MPC protocols. The application spectrum of MPC spans privacy-centric technologies, blockchain ecosystems, and distributed analytics involving sensitive data, offering a secure framework for collaborative computation while safeguarding individual data privacy.

CBDC is a digital form of currency issued by a central bank that can be utilized by the general public [38]. It serves as the digital counterpart of physical cash, providing a convenient and secure means of conducting transactions. Distinguished from physical cash, a CBDC solely exists in digital form and represents a direct liability of the central bank on its balance sheet. This means that individuals and businesses can hold CBDC accounts directly with the central bank, enhancing accessibility and eliminating the need for intermediaries. CBDCs are primarily designed to ensure financial stability and uphold sovereignty over monetary policy. By offering citizens continued access to central bank money, even as the use of physical cash diminishes, CBDCs contribute to the preservation of financial systems.
One potential advantage of CBDCs is their ability to expedite domestic and international fund transfers while reducing transaction costs compared to physical cash and credit cards [39]. Moreover, CBDCs hold the promise of expanding financial inclusion by granting broader access to financial services. Nevertheless, the widespread implementation of CBDCs also entails certain risks. Technical failures could cause disruptions, and concerns arise regarding the privacy and anonymity of transactions, as well as the potential for increased surveillance powers of governments and central banks over individuals’ financial activities [40]. Cybersecurity poses a significant technical challenge that must be addressed comprehensively.
Many central banks, including the Bank of England, the European Central Bank, China’s central bank, and the Federal Reserve, are actively researching or piloting CBDCs [4]. However, it is important to note that most projects are still in the research or pilot phase, indicating that comprehensive implementation is still in progress. The extensive adoption of CBDCs could potentially disrupt the existing structure of the banking system and private payment systems such as credit cards. Thus, proper regulations and frameworks would need to be established to govern their usage effectively and maintain financial stability in the evolving landscape of digital currencies.

When comparing CBDC to cryptocurrencies and blockchains, several key distinctions arise as can be seen in Table 1. Firstly, CBDCs are issued and backed by a central bank, representing the authority of a particular country, whereas cryptocurrencies operate in a decentralized manner and are not issued by any central authority [41]. In terms of use cases, CBDCs are primarily intended as legal tender for retail transactions, aiming to replace physical cash. On the other hand, cryptocurrencies are often used as speculative assets or for facilitating borderless payments. Stability is another differentiating factor. CBDCs are designed as sovereign currencies with the objective of maintaining price stability. In contrast, cryptocurrencies are known for their volatility and lack of stability.
Privacy features also differ between CBDCs and cryptocurrencies. While CBDCs may incorporate higher privacy standards compared to physical cash, they typically provide less privacy than many cryptocurrencies, which often strive for anonymity. Central banks often seek oversight capabilities and regulatory compliance. Technologically, CBDCs are likely to utilize permissioned distributed ledgers tailored to the specific requirements of central bank operations. This stands in contrast to the permissionless blockchains commonly associated with cryptocurrencies. Accessibility is another aspect to consider. CBDCs are designed for widespread retail use by citizens, functioning as a digital representation of cash. Cryptocurrencies, on the other hand, tend to cater more to early adopters and tech-savvy individuals.
Regulation plays a significant role as well. CBDCs can enforce strong compliance measures and adhere to anti-money laundering rules set by governments and regulators. In contrast, cryptocurrencies currently operate with minimal regulation. Finally, when it comes to adoption, CBDCs aim for universal domestic usage within their respective countries, while cryptocurrencies still face challenges in achieving mass-market diffusion and widespread acceptance by merchants. In summary, CBDCs prioritize stability, control, and oversight over innovation, while offering familiar attributes of sovereign fiat currencies in a digital format.

Oblivious Transfer (OT) and Multi-Party Computation (MPC) play essential roles in enhancing privacy within blockchain systems [43]. While blockchain provides a decentralized trust infrastructure, on-chain computations often lack privacy. However, OT and MPC offer solutions to incorporate privacy into blockchain applications. OT and MPC enable decentralized protocols to evaluate functions and perform transactions over private inputs from multiple participants, preserving privacy. This opens the door to valuable use cases such as private smart contracts, and decentralized finance. Within blockchain, OT finds applications in private coin shuffling/mixing, creating anonymity sets for wallet addresses, mixing outputs of coinjoins, and facilitating private coin issuance and transfers. MPC empowers decentralized exchanges and oracles to compute order books, process trades, and query off-chain data while safeguarding the privacy of user inputs and outputs. By utilizing MPC and OT to generate zero-knowledge proofs, blockchain transactions and computations can be validated without revealing unnecessary private details [44]. Decentralized voting protocols and identity systems leverage OT and MPC to protect user privacy during interactions within the blockchain. Research is actively exploring the integration of efficient OT and MPC with blockchain consensus mechanisms. This integration aims to enable trustless and permissionless execution of private smart contracts and decentralized Applications (dApps). Standardizing secure blockchain primitives such as OT, MPC, and Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARKs) ⁴⁴4A zk-SNARK is a protocol that enables a prover to demonstrate to a verifier the truth of a statement regarding confidential data without disclosing the data itself. is an ongoing endeavor [45]. This standardization work aims to facilitate the development of privacy-enhanced decentralized applications on a larger scale.

Quantum Oblivious Transfer (QOT) and Quantum Multi-party Computation (QMPC) offer exciting prospects for secure computation and privacy in distributed systems [53, 54]. These protocols utilize principles of quantum information and entanglement to enable computations on private inputs from multiple parties, potentially providing even stronger privacy guarantees than classical MPC. In quantum OT, the sender encodes inputs using non-orthogonal quantum states that the receiver can distinguish but cannot perfectly clone or copy due to the fundamental laws of quantum mechanics [55]. Protocols based on quantum teleportation or dense coding have been developed to realize quantum OT, although practical implementations present challenges that need to be addressed.
Quantum MPC allows for the secure evaluation of quantum or classical functions using private quantum inputs. This has applications in areas such as private database queries and financial computations. Achieving secure quantum OT and MPC in the presence of dishonest parties requires building blocks like quantum bit commitment and coin flipping. Currently, quantum OT and MPC are active areas of research, focusing on designing efficient protocols, overcoming noise and errors, and implementing them using quantum technologies such as trapped ions or photons. Once these challenges are overcome, they could pave the way for entirely new forms of multiparty applications, including blind quantum computation, which is impossible to achieve using classical methods.
Significant theoretical progress has been made in quantum OT and MPC, but there are still hurdles to address. Scalability, noise, and integration with classical distributed systems are among the challenges that need to be overcome for practical implementation. In summary, quantum OT and MPC protocols leverage the principles of quantum mechanics to provide stronger privacy guarantees in distributed computing. However, it is crucial to address the technical obstacles and challenges associated with these protocols to fully realize their potential in enhancing privacy and security in distributed systems.
Quantum OT and MPC have the potential to significantly impact blockchains and cryptocurrencies, introducing new possibilities and challenges: One area of impact is privacy-enhanced transactions. By leveraging quantum OT and MPC, blockchain transactions can be conducted with full privacy. This means computations can be securely performed on private inputs, such as wallet balances, without revealing transaction amounts on the public ledger. The use of quantum OT in cryptocurrencies can lead to the development of anonymous digital assets. Similar to CoinJoin on traditional blockchains, quantum OT can facilitate private coin mixing or shuffling, resulting in cryptocurrencies with stronger anonymity sets. Quantum MPC enables the execution of smart contracts with private inputs and outputs. This opens up opportunities for private Decentralized Finance (DeFi) applications, including private loans, betting markets, auctions, and more.
To maintain security over long time scales, the implementation of quantum-safe cryptosystems and protocols may require specialized quantum hardware for key generation and storage. Trusted hardware becomes crucial in ensuring the security of quantum-resistant systems. In terms of consensus mechanisms, post-quantum solutions need to incorporate digital signatures, commitments, and other quantum-safe elements to resist both classical and quantum computers [56]. Compliance challenges arise with the introduction of quantum protocols. Traceability and monitoring requirements for Anti Money Laundering (AML) and Know Your Customer (KYC) regulations become more complex compared to transparent blockchains [57, 58]. The design of cryptocurrencies can be upgraded with concepts from quantum money, such as the authentication of quantum coin states. These concepts can influence the design of digital assets issued on permissioned quantum-resistant ledgers.
However, there are research challenges that need to be addressed. Significant progress is still required to scale quantum computation for real-world systems and to effectively interface quantum technologies with existing blockchain architecture and decentralized networks. In the long term, the practical implementation of quantum secure computing has the potential to fundamentally change the assumptions underlying blockchain and crypto security design. It opens up new avenues for privacy, anonymity, and secure computation, but also presents challenges that must be overcome to realize its full potential in the blockchain and cryptocurrency landscape.

As mentioned above, quantum money, originally proposed by Stephen Weisner back in 70s of the previous century, offers a unique way to leverage the principles of quantum mechanics for the secure generation and verification of monetary notes or bills [23, 30]. Each quantum banknote is composed of qubits prepared in a special quantum superposition state. According to the no-cloning theorem of quantum mechanics, these states are theoretically impossible to clone or counterfeit. One of the key advantages of quantum money is that users can verify the authenticity of a bill by measuring its quantum state without disturbing it. This is made possible by the properties of quantum measurement. If a bill is counterfeited, it would collapse to eigenstates during the measurement process, revealing its fraudulent nature. Subsequent schemes have built upon Weisner’s original concept by encoding money states in multidimensional subspaces entangled across many particles. This approach enhances the security of quantum money by leveraging the complexities of entanglement.
The goal of quantum money is to achieve stronger security than what is possible with classical cash-like currencies by leveraging the power of quantum physics [63]. Counterfeiting quantum money would essentially require solving computationally difficult problems. However, quantum money relies on unproven conjectures about the limitations of quantum computers and the effectiveness of proposed cryptographic schemes against future threats [64]. It remains an active area of research with ongoing challenges, such as the development of long-term quantum memory, large-scale implementation, and the revocation of spent notes. In the future, the insights from quantum information science could potentially influence the design of currencies, payments, and digital assets. If the technological hurdles associated with quantum money can be overcome, it holds great promise as a highly secure monetary instrument.
There are potential connections between quantum money and CBDC that could shape the future of monetary systems [65]. One significant aspect is security. Quantum money schemes aim to leverage the principles of quantum physics to achieve unprecedented levels of security against counterfeiting [66]. If these schemes mature, the generation and verification of quantum states could enhance the security of a CBDC system, providing robust protection against fraudulent activities. Anonymity is another area where quantum money concepts align with the objectives of CBDCs to some extent. Certain quantum coin schemes offer statistical anonymity similar to physical cash. This aspect of privacy aligns with the goals of CBDCs, although central banks still require oversight abilities to maintain regulatory control. The conceptual model of individual banknotes or coins in quantum money schemes could influence the design of a digital currency beyond a centralized digital ledger of accounts [67]. This means that the principles and ideas behind quantum money could shape the overall structure and presentation of a CBDC, potentially introducing innovative design elements. The issuance mechanism of quantum money introduces new paradigms for how currency units are produced, distributed, and authenticated. These mechanisms could complement or enhance a CBDC issuance scheme run by the central bank, opening up possibilities for more efficient and secure methods of creating and distributing currency units.
Revocation is another area where quantum money poses challenges. The need to revoke or blacklist spent coins in quantum money links to the necessity for CBDC protocols that dynamically update based on spending while still preserving consumer privacy. Finding solutions to this issue could inform the development of CBDC systems. The technology gap between the current state of quantum money and the implementation of CBDCs provides an opportunity for research and development. CBDCs can be introduced while allowing quantum money concepts to mature, addressing immediate concerns about phasing out physical cash.
Furthermore, the interfaces and standards developed in quantum cryptography and quantum money could contribute to the adoption and interoperability of CBDCs enabled by post-quantum technologies [68]. These standards can ensure compatibility and facilitate the integration of quantum-resistant security measures into CBDC systems. While quantum money concepts are still in their early stages, they play a role in influencing the design and properties that central bank digital currencies may adopt in the future, depending on the progress made in quantum technologies. The potential of quantum money offers valuable insights that can shape the development of CBDCs as quantum technologies continue to advance.

With the rapid progress of quantum computing, there is a growing concern that adversaries could eventually exploit its power to compromise currently secure cryptographic systems such as RSA and elliptic curve cryptography [69]. The implications for banks and financial institutions are significant. Encrypted banking records, passwords, financial transactions, and other sensitive data that were once considered secure could be exposed. Additionally, the integrity of digital signatures used to verify transactions could be compromised, potentially enabling fraudulent activities like double spending in cryptocurrencies [70].
To mitigate these risks, banks must proactively transition to post-quantum cryptographic algorithms that can withstand quantum attacks. Promising options include lattice-based and multivariate signature schemes, which offer resistance against quantum computers. The National Institute of Standards and Technology (NIST) is taking the lead in standardizing new public-key encryption and signature algorithms that are quantum-resistant [71]. Banks should closely monitor these efforts to stay informed about the latest developments.
In addition to algorithmic upgrades, banks need to upgrade their secure hardware, such as Hardware Security Modules (HSMs), to support quantum-safe algorithms as they become standardized [72]. Furthermore, data requiring long-term storage, such as financial records, should undergo encryption upgrades or migration to ensure they remain secure even in the face of future quantum adversaries. By adopting quantum-safe practices, banks not only prepare themselves for potential quantum threats but also build customer trust in the security of their data and transactions. It is crucial to stay ahead of the curve and be proactive in implementing these measures before quantum computers become a practical threat. Furthermore, ongoing research is exploring the broader impact of quantum computing on banking beyond cryptography. This includes assessing optimization and artificial intelligence (AI) applications, which could revolutionize various aspects of banking operations and decision-making.
In summary, the rise of quantum computing poses serious challenges to the security of banks and financial institutions. Transitioning to post-quantum cryptographic algorithms, upgrading secure hardware, and addressing the long-term storage of sensitive data are crucial steps. By embracing quantum-safe practices, banks can mitigate future risks, protect customer information, and remain at the forefront of technological advancements in the financial sector.

This paper examined questions around whether CBDC and blockchain-based cryptocurrencies could coexist in a post-quantum computing era. Through analyzing the implications of quantum algorithms and techniques like MPC and OT, several key findings were discussed.
Regulatory frameworks and international collaboration can play pivotal roles in mitigating risks stemming from quantum computing advancements in the context of digital currencies.
Coordinated disclosure efforts between regulators and industry stakeholders can establish responsible guidelines for disclosing quantum vulnerabilities, and allowing for thorough testing of solutions. Jurisdictions can synchronize transition roadmaps with clear upgrade deadlines to bolster preparedness and standardization across currency systems.
Cross-border research initiatives led by regulatory bodies can facilitate efficient development and assessment of post-quantum solutions tailored to diverse currency frameworks. International collaboration through standard-setting organizations can speed up the vetting and adoption of quantum-safe standards.
Regulators can play a key role in providing essential policy guidance on transition management, incentive structures, and maintaining trust during upgrades. They also oversee compliance monitoring to ensure that financial entities meet quantum-safety benchmarks by designated deadlines. Additionally, regulators collaborate on developing crisis contingency plans, implementing public education campaigns to raise user awareness, and conducting economic impact analyses to estimate vulnerability mitigation costs.
By aligning internationally, regulators have the potential to streamline efforts in managing quantum risks for digital currencies at a global level, leveraging their mandates to facilitate effective and timely transition management.
On the technical side, it appears CBDCs and cryptocurrencies may be able to adapt and incorporate measures like post-quantum cryptography to withstand quantum attacks on their core protocols. Technologies like blockchain, MPC and OT also show promise to be upgraded to quantum-secure variants that could still enable distributed, privacy-preserving applications. Yet, significant challenges remain regarding transitioning legacy systems and achieving widespread integration of new quantum-resistant schemes. Open questions also persist around performance tradeoffs compared to classical assurances. Further theoretical and experimental research is still needed to fully evaluate real-world viability.
Moving forward, central banks and blockchain teams should actively pursue strategies to retrofit or future-proof their designs. Hybrid public-private ledger models combining the strengths of different approaches merit investigation. Standards bodies could aid dissemination of quantum-secure best practices. Regulators must balance support for innovation with protections against quantum risks. Facilitating cooperation between sectors may help reconcile technical and policy developments. International collaboration will likewise be important as quantum technologies become increasingly global in nature.
While long-term coexistence seems plausible if challenges are addressed, the field remains in flux. Continued monitoring and theoretical work testing integration into live systems over time will be key to validate viability. Overall, a prudent yet optimistic approach is warranted, given the unprecedented opportunities - and uncertainties - that quantum computing may eventually usher in for financial technologies and beyond. Further advances on both the research and policy fronts will play a crucial role in shaping outcomes.