- The European Central Bank (ECB) states that it is possible to implement a payment system for CBDCs without violating users’ privacy.
- The system would be partially anonymous and would require the participation of 4 parties in the transactions. Two parties are represented by a government authority.
The European Central Bank and the European Union are institutions with a high interest in implementing a central backed digital currency (CBDC). France will be the first country to test the Digital Euro in 2020. One of the problems that a CBDC faces is to secure the information of its users.
Recently the new president of the European Central Bank presented plans to set up a task force for the Digital Euro. The aim of the group would be to keep the European Union at the forefront of the CBDC competition. A recient new development could boost their efforts.
Transactions with the Corda blockchain and limitations of the system
The European Central Bank issued a report called “Exploring anonymity in central bank digital currencies”. In the document the financial institution presents its solution to carry out anonymous transactions with a future Digital Euro. The European Central Bank seeks to find a balance between allowing a certain level of privacy for electronic payments and maintaining compliance with regulations.
According to the report, the financial institution established a Proof of Concept (PoC) in coordination with the European System of Central Banks (ESCB). The PoC was established for anonymity in digital currencies (CBDC) and uses the open-source Corda blockchain.
The system established by the ESCB uses the distributed ledger technology (DLT) and involves the participation of four parties. The sender and receiver of the transaction plus a representative of the central bank and one of the Anti-Money Laundering Authority (AML). Therefore, the transactions are partially anonymous, although the report outlines that government entities cannot see the identity of the user or transaction history.
Each party is represented by a node that uses the CorDapp to complete transactions. To ensure privacy, according to the report, the system uses “anonymity vouchers”. However, users can only transfer limited amounts for a pre-established period of time.
In addition, operations within the system will use solutions to combat money laundering and terrorist financing. The financial institution states that there are limitations on privacy that can be improved using mechanisms such as public revolving keys, zero-knowledge proof and enclave computing.
The scalability of the system and its interoperability have yet to be tested and analyzed by the financial institution.
CBDC race: China starts piloting the Digital Yuan
On the other hand, the European Union’s interest in developing a digital currency (CBDC) comes from the legal process against Facebook’s Libra. In a report published by the agency’s presidency, it was revealed that stablecoins have enormous potential that the European Union must exploit.
In addition, the European Union must achieve the progress that China has been making. The Asian giant is in the process of launching its test phase of the Digital Yuan. It therefore has a significant advantage over Europe and other countries around the world.
The Digital Yuan will be used by banking institutions and partners of the central bank of China, in its first stage. The implications of its launch for the cryptomarket are unknown. However, the European Union recognized in its report on Facebook Libra that a global stablecoin could have the capacity to affect the world’s economy.
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It remains to be seen how the ECB’s transaction solution will be implemented. Its future development could be an institutional competitor for private coins such as Monero and Dash.