A digital euro might be based on blockchain technology, but it will require middlemen to validate transactions, at least to begin with.
The core purpose of blockchain cryptocurrency, as described in the Bitcoin Whitepaper that launched the technology, was to solve the double-spend problem in order to allow electronic peer-to-peer (P2P) payments without a trusted third party — a financial institution (FI) — in the middle. That’s why blockchain transactions are “trustless.”
But the European Central Bank (ECB) is having none of it for its central bank digital currency (CBDC).
“Holding a digital euro would mean holding a direct liability of the central bank…,” Fabio Panetta, ECB executive board member and digital euro point man, told the European Parliament’s Economic and Monetary Affairs Committee Thursday (Sept. 29).
“This means that digital euro would be on the balance sheet of the Eurosystem,” he said. “And the Eurosystem would be liable for any mistake made in digital euro settlement. It is therefore of utmost importance that the Eurosystem retains full control over digital euro issuance and settlement.”
Intermediaries Wanted
The best way to do this, he said, is “to have the Eurosystem performing the settlement activities” for the intermediary banks that will distribute it.
Those FIs, Panetta added, “will be responsible for transaction management tasks, in a similar manner to current payments. This means they will be responsible for initiating transactions in digital euro, as well as customer authentication and transaction validation.”
That’s why the ECB has decided that it will not pursue blockchain-style “peer-to-peer validation of online transactions” in its initial digital euro design, he explained. While this would allow remote payments, the transactions cannot be checked for anti-money laundering (AML) and countering the financing of terror (CFT) compliance “ex-ante” — in advance.
It is one of three options that were being explored, along with online and third-party validated transactions — the initial winner — and P2P validation of offline transactions.
As for the former, the intermediary FIs, “have in-depth knowledge and unique insights into what users need,” Panetta said. “They are thus best placed to be the direct counterparts for the individuals, merchants and businesses that would use the digital euro.”
They would be responsible for opening and managing accounts and digital wallets, know-your-customer (KYC) and AML checks, and providing the devices and apps needed for the digital euro system. They would also “have a role” in moving funds into and out of consumers’ accounts, he said.
Intermediaries would also be able to “develop further innovative solutions for their customers,” Panetta said. “It would offer the standardization and harmonization needed to foster market innovation across the entire euro area.”
Offline P2P
The latter, offline P2P validation, is the closest of the three options to cash and would allow privacy of low-value point-of-sale (POS) transactions — as well as transactions when internet access is unavailable — the ECB explained in its report on “Progress on the Investigation Phase of a Digital Euro.”
Therefore, it “should be developed” but the timeline is “uncertain” because it relies on technological innovations, regulatory changes and security risk tolerance decisions, the ECB concluded. The intermediated digital euro design should not wait for this.
None of that means that a digital euro will be launched, the ECB carefully added, as the design is being done in parallel with the go/no go decision.
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