Scalability Meets Regulation: UTXO-based Sharding and Zero-Knowledge Proofs for Regulated Digital Currencies

FinTech and RegTech integration is essential for developing regulated digital currency (RDC) systems that are scalable and compliant. This paper proposes an unspent transaction output (UTXO)-based sharding method to address scalability challenges in RDCs. Results show UTXO-based sharding delivers linear throughput increase and consistently low latency by minimizing cross-shard transactions as the shard count grows. However, frequent user onboarding across shards under UTXO-based sharding models complicates know-your-customer (KYC) processes, highlighting regulatory inefficiencies. We demonstrate that zero-knowledge proofs seamlessly integrate with UTXO-based sharding to streamline customer onboarding and overcome regulatory burdens. Overall, this research pioneers FinTech-RegTech integration with practical implications for deploying high-performance, compliant RDC systems by synergistically combining UTXO-based sharding for scalability and zero-knowledge proofs for efficient regulation.