The Bank of England, the U.K.'s central banking authority, is developing a proof-of-concept (PoC) examining how to maintain privacy over a distributed ledger-based network while still allowing a regulatory overview of the data.

Partnering for the project with Chain, a blockchain startup that develops infrastructure protocols, the Bank of England released a paper on Wednesday setting out how it is exploring how to maintain a high level of data privacy among participants over a distributed network, while at the same time facilitating transactions of different financial assets.

The ideal scenario, as pictured by the central bank, would be to design "a distributed ledger system in such a way that transactions remain private whilst keeping all data shared across the network, and at the same time maintaining a regulatory view of all transactions."

The PoC – which is aimed to build academic understanding, not as a practical solution – offers a window into the thinking of the U.K.'s central bank in advancing distributed ledger technology (DLT) development for existing business functions, while avoiding complete concealment of transactions from the authorities.

The paper comes just several days after the Bank of England released a plan to push a DLT solution as the basis for the next generation of its real-time gross settlement system, and for which the bank is currently testing a proof-of-concept.

That said, the primary hurdle, according to the central bank, is scalability, which is one of the top trade-offs as the institution considers its move towards the DLT system.

While arguing that the ideal scenario is "theoretically possible," the Bank of England stressed that the technology is still at a very nascent stage.

"The trade-offs would still need to be further explored, especially with respect to scalability, speed of transaction processing and risks around the security of the cryptographic techniques employed," the bank concluded.

Bank of England image via Shutterstock