Published within the fourth issue of ‘InFocus’ – a periodical paper from the European Central Bank was published in December 2019, titled ‘Exploring anonymity in central bank digital currencies’).
‘Exploring anonymity in central bank digital currencies’ features in-depth analysis of preliminary testing and research which had taken place towards a proof-of-concept blockchain project being worked on by the ‘EUROchain research group.
The as yet unnamed proof-of-concept is based on four main principles…
- “It is assumed that CBDC has cash-like features: a strong emphasis on users’ privacy for lower-value transactions, and balances are not remunerated.”
- “The design is built around intermediaries in a two-tier model: rather than on-boarding and servicing CBDC users directly, the central bank relies on intermediaries that have access to central bank 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.”
- “The central bank is the only entity that is allowed to issue CBDC units and remove them from circulation.
- “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.”
Additionally, the paper claims that an ongoing “digitalisation of the economy represents a major challenge for the payments ecosystem” which demands:
“a balance be struck between allowing a certain degree of privacy in electronic payments and ensuring compliance with regulations aimed at tackling money laundering and the financing of terrorism (AML/CFT regulations)”
European Central Bank’s proof-of-concept is for a new form of digital cash that falls under the term ‘CBDC’ (AKA ‘central bank digital currency’ / digital fiat currency). It forms just “part of the ECB’s ongoing technical research on CBDC” which is claims is “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 paper also, boasts that the proof of concept (overall) “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.”
Furthermore, the organisation claims that the project contains “several novel features developed by the ESCB’s [(‘European System of Central Banks’)] EUROchain research network.” – supported by Accenture and R3 – which use Distributed Ledger Technology (DLT).
According to the paper, the Proof of concept “will be instrumental in any assessment of:
- How CBDC could work in practice
- How the specific technical features of such an initiative will affect its potential implications for the economy”
This ongoing DLT project from the European Central Bank has been built upon R3’s Corda 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 (without that information being shared with other users)”
It would be managed by four entities: two intermediaries, one central bank and an AML ’anti-money laundering’ unit: each of which represented in the network by a node that operates a CorDapp.
Another key feature to the proof-of-concept is ‘anonymity vouchers’, which exist to “enforce AML / CTF limits on the amount that a user can spend without the AML authority seeing transaction data”. These are time-limited states, issued by the AML authority to “every CBDC user at regular intervals”.
“Although vouchers are technically “spent”, they are issued free of charge and are not transferable among users. They are simply a technical tool used to limit the amount of CBDC that can be transferred anonymously.
This means that limits on anonymous CBDC transfers can be enforced without recording the amount of CBDC that a user has spent, thereby protecting users’ privacy.”
Finally, the paper concludes that:
“The proof of concept shows that it is possible, using the Corda platform, to build a simplified CBDC payment system that safeguards users’ privacy for lower-value transactions, while still ensuring that higher-value transactions are subject to mandatory AML/CFT checks. However, that proof of concept also highlights a number of areas where there is room for improvement.”