Blockchain for Banking News

Digital Euro prototype is token-based. Borrows from Bitcoin

digital euro cbdc

Yesterday the European Central Bank (ECB) shared details about current design features in its briefing for retail digital euro prototypes. In September, it announced five partners who will build front-end prototypes for the central bank digital currency (CBDC). The prototype briefing reveals the current digital euro iteration is token-based and uses UTXO, a token model popularized by Bitcoin. However, that does not mean it uses blockchain.

MIT worked with the Boston Federal Reserve on Project Hamilton, using Bitcoin’s UTXO model but not blockchain. The technology was released as open source software. However, the ECB document states the digital euro UTXO ledger is a greenfield design by Eurosystem experts.

Users will not control their private keys in the digital euro prototype. Instead, the keys will be held in custody on their behalf by wallet service providers, who currently will be the front-end prototype providers. The goal of centralizing key management is to improve end-user usability, and central banks are less enamored by decentralization.

One of the features of the digital euro is there are maximum holding limits. This could result in many transactions being rejected if the amount received puts the user’s balance over the limit. To prevent this, users have to link their digital euro wallets to bank accounts, and any excess digital euro will be automatically swept into their bank account.

Likewise, if a user goes to make a payment but has insufficient digital euros, it will automatically top up from the linked bank account to make the payment. We suspect this could prove unpopular and users might prefer the payment to be rejected. At the very least, users might like to be prompted first, or there should be a (low) limit on the automatic top up. Otherwise, if your phone is stolen, this functionality could allow your bank balance to be spent through the digital euro wallet.

The prototype document also outlines offline usage in which all payments are final and cannot be reversed, even in the case of fraud.

In other ECB news, Christian Schäfer has been appointed to manage the digital euro scheme rulebook. This will govern relationships with banks and intermediaries responsible for distributing the digital euro to end users.

What is UTXO?

Regarding UTXO, which stands for Unspent Transaction Output, this contrasts with account-based models, which always know a user’s balance. UTXO is reminiscent of cash, where users hold coins and notes. With UTXO, tokens are associated with cryptographic keys. If someone owns €100 and spends €40, they will receive a token with a €60 remaining balance. In effect, the €100 is removed from circulation, and the €40 and €60 tokens are created. A wallet aggregates all the UTXO tokens associated with the user.

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