ARC-CBDC: Enhancing Anonymity and Regulatory Compliance in Central Bank Digital Currency

In this paper, we propose a novel Central Bank Digital Currency (CBDC) system based on a two-tier architecture, named ARC-CBDC, where the central bank issues digital currency to commercial banks, which in turn manage transactions among anonymous users throughout the currency's lifecycle. Unlike existing systems that offer only conditional anonymity, ARC-CBDC extends traditional electronic cash to provide full user anonymity, even against commercial banks, despite their ability to observe coin accumulation during withdrawals and reductions during deposits. By utilizing BBS+ signatures, users can open bank accounts, withdraw coins, and deposit received coins without revealing their real identities. A distinctive feature of ARC-CBDC is that commercial banks are allowed to modify a recorded transaction only once within a permissioned blockchain shared between the central bank and participating commercial banks. As the trusted authority, the central bank handles coin issuance and enforces financial regulations. To prevent double spending, the central bank performs batch verification of transactions, enabling efficient detection and tracing of double-spent coins. ARC-CBDC is specifically designed with CBDC architectural requirements in mind, introducing novel mechanisms to support strong anonymity and full traceability. Through formal security proofs and performance analysis, we demonstrate that the security of ARC-CBDC relies on standard cryptographic assumptions and that it is both efficient and practical, suitable for implementation on a range of devices, including laptops and mobile phones.