Will the digital euro become a privacy coin like Monero, Zcash or Dash?

  • The digital euro is currently under development and will be used as a central bank supported digital currency in the euro zone.
  • Various proposals are discussing an anonymity function, which should be as strong as Monero, Zcash or Dash and thus offer completely anonymous transactions.

Whether China’s digital yuan, Facebook’s Libra or the digital euro, the race to launch a digital currency that is directly or indirectly supported by a central bank (also known as the Central Bank Digital Currency = CBDC) continues to progress. In a research paper on the digital euro presented by Bitkom, various statements are currently being discussed.

Digital Euro to offer fully anonymous transactions

At present, cash is the only way to make anonymous payments through the physical transfer of coins or notes between two parties. Cash accounts for about 13% of the money in circulation in the euro area. As many people attach great importance to privacy and data protection, there are various proposals for the development of the digital euro to take account of this need.

The research paper presents two different concepts, each of which differs in the scope of the actors involved. The “Wholesale CBDC” concept will make the digital euro accessible and usable only for financial institutions, so that natural persons would be excluded. In contrast, the “Retail CBDC” approach provides that companies, governmental authorities as well as individuals will have access to the digital euro and can use it without further restrictions.

Depending on the design of the CBDC, there are various ways of limiting or even completely restricting the transmission of information on transactions and the dissemination of this information to all stakeholders. Transactions in the Bitcoin blockchain are only pseudonymous, as all transactions can be tracked and thus the identity can be found out with some effort.

However, the ECB is currently discussing possible upper limits for transactions that can be processed completely anonymously. This feature could “digitise” the cash, as it offers similar anonymity to the physical transfer of coins and notes. The biggest test case is the need to comply with both anonymity requirements and the applicable laws on money laundering and terrorist financing:

With regard to data protection, the CBDC has to master the balancing act between anonymity, as is the case with cash today, and the fight against money laundering, terrorist financing and tax evasion, which is definitely achievable.

In principle, an assignment between transactions and identity is possible, but the assignment can also be prevented by technical integration. Last year in December the ECB presented a Distributed Ledger technology-based CBDC prototype, which had cash-like features and offered completely anonymous transactions, provided that an upper limit was not exceeded:

It is technically implemented by not disclosing the identity of the customer to the central bank and the AML authority through the use of so-called “anonymity vouchers”. These vouchers allow anonymous transfers of funds for a limited amount and within a certain period of time. Each citizen is provided with a certain number of such vouchers. Once all vouchers have been redeemed, the subsequent transactions are no longer anonymous.

However, this approach was heavily criticised because the transaction data was still accessible to banks and therefore not really anonymous. For this reason, new approaches are currently being developed that have no limits and offer complete anonymity.

Privacy Coins Monero, Zcash and Dash a thorn in the side of governments worldwide

So-called Privacy Coins such as Monero, Zcash and Dash offer completely anonymous transactions that cannot be traced. Europol confirmed at the end of last year that Monero transactions cannot be traced and therefore offer complete anonymity. As a result of this feature, many crypto exchanges have decided to remove Monero or Dash from their portfolio as local financial laws require it.

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