Central bank digital currencies, otherwise known as CBDCs, are a formal and institutionalized type of cryptocurrencies issued and controlled by central banks. Adopting blockchain technology, the sector believed that the technology’s transparent trait would allow a user to see everyone’s transaction and identity on the network. However, the ECB confirmed that a new proof-of-concept system is developed that would introduce anonymity to the network for all participants.
In a report by the European Central Bank (ECB) titled ‘Exploring anonymity in central bank digital currencies,’ Europe’s most influential financial institutions revealed that there is a way to protect the privacy of users when using a central bank digital currency (CBDC). As blockchain systems represent transparent and immutable ledgers, investors are often solely covered by pseudonymous protection. In some cases, hackers rely only on the details of transactions to figure out who the person receiving or sending the transaction is.
In the case of an EU national cryptocurrency, the European System of Central Banks (ESCB) developed a proof-of-concept system that provides anonymity to CBDCs. Interesting enough, the system was developed together with one of the strongest blockchain technology companies in the sector, R3 and Accenture. Moreover, the ESCB applied R3’s Corda blockchain platform, which is open-source.
The PoC system features four parties out of which two represent intermediaries, such as a central bank and an Anti-Money Laundering (AML) authority. As described by the report, each party represents an individual node that is hosted by the CorDapp, created to allow users to transfer assets between entities. Furthermore, the ESCB also developed several AML and CFT mechanics that protect money laundering and terrorism financing but keep transaction history and user identities anonymous.
The ESCB claims that the notary in the system does not have access to private information such as transaction values, histories, and user addresses. Stated in the report, the bank claims “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.”