An ECB report suggests the use of blockchain to improve banking privacy. In a paper titled “Exploring anonymity in Central Bank digital currencies” by the European Central Bank, they simulate a proof of concept using existing banking technologies with distributed ledger technology. The paper suggests that digital currencies can help improve user privacy while combating money laundering.
The ongoing digitalisation of the economy represents a major challenge for the payments ecosystem, requiring that 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). Under the coordination of the ECB, the European System of Central Banks (ESCB) has established a proof of concept for anonymity in digital cash – referred to here as “central bank digital currency” (CBDC).
That proof of concept is part of the ESCB’s ongoing technical research on CBDC 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 ECB will continue to analyse 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 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 proof of concept drawn up by the 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.That proof of concept boasts several novel features developed by the ESCB’s EUROchain research network (with the support of Accenture and R3) using distributed ledger technology (DLT).
It provides a digitalisation solution for AML/CFT compliance procedures whereby a user’s identity and transaction history cannot be seen by the central bank or intermediaries other than that chosen by the user. The enforcement of limits on anonymous electronic transactions is automated, and additional checks are delegated to an AML authority.
This is achieved using “anonymity vouchers”, which allow users to anonymously transfer a limited amount of CBDC over a defined period of time.Although there is no immediate need to take concrete steps towards the issuance of CBDC in the euro area, the proof of concept will be instrumental in any assessment of (i) how CBDC could work in practice and (ii) how the specific technical features of such an initiative will affect its potential implications for the economy.
Lessons learned and way forward
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 tr ansactions, 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.
