The European Central Bank (ECB) conducted an analysis of the economic and societal impact of issuing Central Bank Digital Currency (CBCD) or Digital Euro. In the framework of this analysis, the ECB carried out a ‘proof of concept’ related to the anonymisation of digital currency transactions, by using the open source solution Corda, a blockchain platform for business.
In a speech given on 16 January 2017, Yves Mersch, member of the ECB executive board, explained that the Digital Euro, also called Digital Base Money (DBM) “is characterised by two features: (1) like banknotes in circulation, DBM is a claim on the central bank; (2) in contrast to banknotes, it is digital.”
The Digital Euro would allow non-banks to hold digital claims on the European Central Bank in the form of deposits. The Digital Euro would compete with lawless cryptocurrencies such as Bitcoin and private projects such as Libra (Facebook), allowing EU citizens to access some of the benefits of digital money while keeping traditional financial authorities in control.
The ECB’s proof of concept: the use of the open source solution Corda
In its report published in December 2019, “Exploring anonymity in central bank digital currencies”, the ECB elaborated a proof of concept in order to test whether the anonymisation of transactions in the framework of a digital currency such as the Digital Euro was adequate.
To do so, the ECB used the open source Corda solution, developed by the blockchain software company R3. The Corda open source software uses mainly Kotlin, Java and C++ and is available on GitHub under an Apache 2.0 license. The Corda solution consists of two elements: (i) an open source software called Corda, and (ii) a set of standards, network parameters and associated governance processes, called the global Corda Network. Together, these elements form the Corda solution which enables any organisation or individual to use the open network to transact directly with any other.
The European Central Bank chose the Corda solution due to its technical specificities. The solution, which is designed to model real-world transactions across an open network, contains the following features:
Contrary to other blockchain solutions, the Corda solution is characterised by a “notary” infrastructure to validate uniqueness and sequencing of transactions without global broadcast;
The possibility to elaborate Smart contracts that can be written in Java and other Java Virtual Machine languages;
A flow framework to manage communication and negotiation between participants;
Peer-to-peer network of nodes; and
The development of distributed open source apps, called CorDapps to offer users new services such as an automatic loan agreement / refusal system according to credit agency ratings or the possibility to perform public or private auctions.
The limits of the anonymisation system
The ECB report underlined the current limitations and challenges of the Digital Euro:
Ensuring the anonymity of the transaction: Thanks to the Corda solution, 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, thus making the transactions partially anonymous. However, the report outlines that government entities cannot see the identity of the user or transaction history.
Fighting money laundering and terrorism: Operations within the system will use solutions to combat money laundering and terrorist financing. In its report, the ECB stated that there are limitations on privacy that can be improved using mechanisms such as public revolving keys, zero-knowledge proof and enclave computing.
Future challenges: The scalability of the system and its interoperability have yet to be tested and analysed by the European Central Bank.
