The European Central Bank is looking into the development of a proof-of-concept (PoC) for a central bank digital currency (CBDC).
Revealed in a report published on Tuesday, the PoC has been developed by the central bank’s EUROchain research network to study the practical application of decentralized technology.
The report outlined that the concept is trying to bridge the gap between the demand for private transactions and the regulators’ concern with anti-money laundering (AML) compliance.
“The ongoing digitalization 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),” the report noted.
Our latest research shows that it is possible to build a simplified payment system for central bank digital currencies. Such a system would safeguard users’ privacy for low-value transactions while ensuring that higher-value transfers are subject to anti-money laundering checks.
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— European Central Bank (@ecb) December 17, 2019
Bringing anonymity to transactions
The bank is planning to bring a payment system that has separate requirements for low-value transactions, called “anonymity vouchers,” bypassing the surveillance of the central bank. However, large-value transactions will require the mandatory revelation of identity for compliance with AML and counter-terrorism (CFT) requirements.
“In order to enforce AML/CTF limits on the amount that a user can spend without the AML authority seeing transaction data, a novel new concept – “anonymity vouchers” – has been devised,” the report stated.
“The AML authority issues these additional, time-limited states to every CBDC user at regular intervals. If users want to transfer CBDC without revealing information to the AML authority, they need to spend these vouchers (at a ratio of one voucher per CBDC unit transferred). Thus, the amount of CBDC that can be spent anonymously is limited by the number of vouchers that the AML authority provides to each user.”
The ECB is not alone in exploring the concept of CBDC as its counterpart in China is already vocal about such development and is aiming to strengthen the international usage of yuan with a digitized version of the fiat.