ECB Outlines Banks’ Role in Central Bank Digital Currency Project

The ECB has published an update on its Central Bank Digital Currency project.

The report, published on Thursday (Dec. 21), outlines the European Central Bank’s (ECB’s) progress on the investigation phase of the digital euro project, which began in October 2021.

It is the second such document following an initial progress report released in September.

The latest report details design and distribution options that were recently endorsed by the project’s governing council, including the role of intermediaries.

It writes that “supervised intermediaries,” i.e., credit institutions, banks and other payment service providers, “would be responsible for all end user-facing roles in the digital euro ecosystem.”

To summarize, the ECB said that in any potential digital euro system, private sector players would be responsible for onboarding customers, setting up wallets and managing day-to-day transactions.

As with existing eurozone interbank payment rails, initiation, authentication, validation and post-settlement activities, including reconciliation, would be managed by banks, while the Eurosystem will perform the settlement of transactions.

However, the ECB said that the Eurosystem would not be able to infer how many digital euros any individual end user held, nor to infer end users’ payment patterns.

“The digital euro would be designed so that it minimized Eurosystem involvement in the processing of user data,” the report states.

Without going into technical details, the involvement of the Eurosystem in the settlement of digital euro payments suggests some form of a central bank-owned ledger that remains updated in real time.

However, the ECB holds open the possibility that offline peer-to-peer payments could be recorded independently of any such ledger, writing that “settlement in a local storage device would be a suitable solution.”

To do this, “the Eurosystem could rely on either traditional technology, distributed ledger technology or a combination of both for settlement activities,” the ECB said, following its previous position of keeping all talk of distributed ledgers in the subjunctive mood.

Around the world, central banks are split on whether to deploy centralized or distributed ledgers as they issue digital currencies.

For example, Nigeria’s eNaira transactions are recorded on a distributed ledger built on the Hyperledger Fabric blockchain.

China’s digital yuan, on the other hand, does not operate through a blockchain-based decentralized ledger and is an entirely centralized operation.

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