FinTechBlockchainECB explores anonymity in CBDC transactions

ECB explores anonymity in CBDC transactions

ESCB: It is possible to build a simplified CBDC payment system that safeguards users’ privacy for lower-value transactions, while still ensuring that higher-value transactions are subject to mandatory AML/CFT checks.

A proof of concept has been developed by the EUROchain research network, demonstrating how to allow some degree of privacy in electronic payments, while still ensuring compliance with AML/CFT regulations.

The proof of concept was released last month as a part of the ongoing technical research on Central Bank Digital Currencies (CBDC) by the European System of Central Banks (ESCB) under the coordination of European Central Bank (ECB).

The main thing that this proof of concept shows is that, in a simplified environment typical of a proof of concept, distributed ledger technology (DLT) can be used to balance an individual’s right to privacy with the public’s interest in the enforcement of AML/CFT regulations.

The EUROchain research network is the world’s first research collaboration between a large group of central banks focusing on DLT solutions in the field of market infrastructure and payments. Leveraging existing central bank services, the IT architecture supporting the proof of concept has been developed in cooperation with R3 and Accenture, building on the functionalities of the Corda platform.

Exploring anonymity in central bank digital currencies proposes a system that makes use of anonymity vouchers which allows users to process low-value transactions without revealing their identities.

Balance between privacy and compliance possible

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 transactions, while still ensuring that higher-value transactions are subject to mandatory AML/CFT checks. The key element of the proposed system is the use of ‘anonymity’ vouchers.

Every user is identified in the network with a pseudonym and allocated a certain number of vouchers per month, the report explains. When users process low-value transactions, they can spend the vouchers to avoid revealing their personal information to either the central bank or the intermediaries.

When they make high-value transactions that exceed the allowed amount of anonymous transfers, on the other hand, a dedicated AML authority will oversee transaction data and ensure that they meet current compliance standards  and monitor for money laundering and terrorism financing.

However, there are a number of areas where there is room for improvement. The report acknowledges that more work is needed before such a system could be implemented:

  • Reducing the amount of information visible to parties not involved in the transaction
  • Users’ ability to access or spend CBDC balances when the intermediary is unavailable
  • Adding privacy-enhancing techniques
  • Interoperability with an RTGS system
  • Practical functioning of the prototype

The proof of concept mentions that although there is no immediate need to take concrete steps towards the issuance of CBDC in the euro area, the aim is to contribute to the broader discussion on the topic.


Through this proof of concept, ECB is making great efforts towards embracing the blockchain/DLT technology, by bringing cryptocurrencies and payment systems closer together. But ECB’s opinions on CBDC have not been the same always.

In spring 2019, the outgoing European Central Bank (ECB) President, Mario Draghi, had claimed that cryptocurrencies are assets and not currencies when recently questioned about his stance on Bitcoin – and that there are no plans for a centralised euro-based digital currency. He had said: “I would say that it is more something that falls within the field of consumer protection. We want to ensure that buyers of these assets know what they are doing, and are aware of the risks.”

The ECB, then, seemingly did not see any benefits of using blockchain technology, having dismissed any plans to do something similar for the European Union with a euro-based digital currency. Draghi had added: “We tend to consider [cryptocurrencies] as speculative assets, highly risky, but as far as the rest is concerned, it’s not really something that pertains to the central bank – the task of monitoring and regulating. It’s more, I would say, something that falls within the consumer protection competence, where you want to make sure that people who buy into these assets know what they’re doing and are aware of the risks they run.”

Popularity of CBDC

According to a report last year on CBDC by Bank for International Settlements (BIS), 70% of banks were engaged in or about to start CBDC. Another report published last year by OMFIF and IBM confirms CBDC’s popularity stating 38% of the 21 central banks surveyed were exploring wholesale CBDC.

Although work is in the early stages, the IMF believes that central banks may issue digital currencies in the future and CBDC could become reality, according to a blog. Both emerging economies as well as developed economies are said to be considering CBDC options. Developed countries are seeking to provide an alternative to cash as its frequency of use dwindles. For emerging economies in developing countries, the main interest for CBDCs would be reducing banking costs, as well as potentially making banks more available to unbanked citizens.

Several national central banks have recently been discussing the idea of creating a digital version of their fiat currency. The Bank of Japan has provided in-depth research on the benefits and outcomes of CBDCs integration within the existing financial system.

A working paper from the National Bureau of Economic Research (NBER) claims that a generic framework that nests many—and most standard—models of money, liquidity, and financial frictions is the way forward.

However, a another blog IMF points out that the acceptance of new forms of money could bring significant benefits to customers and society, but it could invite risks as well.


Embracing the challenges and welcoming the new technologies requires a balance between allowing a certain degree of privacy in epayments yet also ensuring full compliance with regulations, which aim to tackle money laundering and the financing of terrorism.

Central Banks worldwide are testing digital currencies with the aim to follow the trends in digitization, exploiting the new technologies.

On one hand, CBDC represent a great opportunity when designed and applied properly, but they could potentially be a subject of instability, inflation, and high fees. However, such a model can bring a lack of trust in the CBDC for not having any intrinsic value or utility or for not having any reserve or guarantee behind, but being merely a parallel alternative for the current fiat money system.

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