The European Central Bank is looking into how central bank digital currencies need to be built. In a new research document, the ECB shows that there is tremendous potential ahead. Safeguarding users’ privacy while still complying with AML is the biggest hurdle to overcome.
The ECB Wants to Keep Control
As numerous central banks seemingly explore issuing digital currencies, officially guidelines will need to be drafted. It is crucial that all players adhere to these rules and regulations accordingly.
In a new proof-of-concept, the ECB is looking at critical features. Respecting and safeguarding user privacy needs to be a top priority. The same applies to performing anti-money laundering checks to avoid illicit money streams.
Complying with both of these elements is a tough balancing act. The role of distributed ledger technology cannot be understated in this regard. It is the only technology that can help check all of the right boxes for the ECB.
Together with its partners, the central bank has begun making progress. New features provided by Eurosystem’s EUROchain research group have proven incredibly valuable Additionally, there is also the support by R3 and Accenture.
Addressing Anonymity Without Ruining Privacy
One key problem for the ECB is how digital currency transactions offer a layer of anonymity or pseudonymity. This will need to be weakened, albeit not by removing all privacy aspects in one go.
Instead, the system will offer some privacy to users, while being compatible with AML regulation in participating countries. To ensure that can happen, this DLT-based system cannot reveal user’s identities or transaction history.
Neither the central bank nor intermediaries will be able to access this information, unless the end user decides to let them see it. Furthermore, there is a limit on anonymous electronic transactions. Furthermore AML checks will be delegated to a dedicated authority.
The ECB adds:
“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.”
If and when central bank digital currencies will be issued, remains uncertain. For now, all of the effort by the ECB is preliminary and not indicative of digital currencies currently under development. Further research is needed before any of these measures can be implemented.