ECB developed a “proof of concept” that explores anonymity in a CBDC

The European Central Bank (ECB) has developed a proof of concept (POC) for a partially anonymous central bank digital currency (CBDC) that seeks to merge privacy with compliance, according to report of ECB on Dec, 17.

The ECB outlines details of the initiative, which was developed on the DLT platform Corda and built on past proofs-of-concept based around the technology.

POC has been developed using R3’s Corda. Corda is a DLT platform which is designed to ensure that the information that is held locally by two users, which store details of their bilateral transactions, is consistent with the overall information stored in the system.

“POC is part of the ESCB’s ongoing technical research on central bank digital currency, and the aim is to contribute to the broader discussion on the topic. The work carried
out is not geared towards practical implementation and does not imply any decision to proceed with CBDC. The European Central Bank will continue to analyze CBDC with a view to exploring the benefits of new technologies for European citizens and in order to be ready to act should the need arise in the future. The prospect of central bank initiatives,
however, should neither discourage nor crowd out private market-led solutions for
fast and efficient retail payments in the euro area,” the report says.

The POC drawn up by the European System of Central Banks (ESCB) demonstrates that it is possible to construct a simplified CBDC payment system that allows users some degree of privacy for lower-value transactions, while still ensuring that higher-value transactions are subject to mandatory AML/CFT checks.

CBDC is the digital form of a fiat of a nation or territory and is issued and regulated by the competent monetary authority of that country. Theoretically, CBDC creates a new digital mechanism to solve the problem of real-time transferring of money between two parties, thus helping international transactions to happen easily without intermediate steps like in traditional bank transactions.

The POC is based on four main principles

• First, it is assumed that central bank digital currency has cash-like features. There is a strong emphasis on users’ privacy for lower-value transactions, and balances are not rewarded.
• Second, the design is built around intermediaries in a two-tier model. Rather than onboarding and servicing CBDC users directly, the central bank relies on intermediaries that have access to accounts and can draw on reserve balances held at the central bank to provide CBDC to users. Intermediaries process transactions on behalf of their clients and offer them custodial services.
• Third, the central bank is the only entity that is allowed to issue central bank digital currency units and remove them from circulation.
• Fourth, a dedicated “AML authority” performs AML/CFT checks. That authority checks the identities of users involved in large-value transactions and prevents CBDC from being transferred to embargoed users.

Regulatory first

It has long been debated whether the European Central Bank should issue its own digital currency so that the public can enjoy a cheap and easy way to make payments. Last week, the new President of ECB Christine Lagarde said during a press conference that the ECB should accelerate its efforts in digital currency and get “ahead of the curve” on stablecoins or tokens that are intended to be tied to the value of government-issued currencies.

But there has also been considerable resistance from EU authorities.

China has been considering central bank digital currency issuance for six years. It recently launched a joint project with large commercial banks and tech firms to explore possible implementation this year based on a two-tier system where the central bank will issue digital currency indirectly through them.

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