Digital Euro prototype is token-based. Borrowing from Bitcoin – Ledger Insights

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

MIT worked with the Boston Federal Reserve on Project Hamilton, using Bitcoin’s UTXO model, but not the blockchain. The technology was released as open source software. However, the ECB document states that 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, which will currently be front-end prototype providers. The goal of centralizing key management is to improve usability for end users, and central banks are less enthusiastic about decentralization.

One of the features of the digital euro is that there are maximum holding limits. This can cause many transactions to be rejected if the amount received puts the user’s balance over the limit. To prevent this, users must link their digital euro wallets to their bank accounts, and excess digital euros will automatically be swiped into their bank account.

Similarly, if a user goes to make a payment but does not have enough digital euros, it will automatically top up from the linked bank account to make the payment. We suspect this may prove unpopular and users may prefer the payment to be declined. At the very least, users could be asked first, or there should be a (low) limit on the auto-fill. Otherwise, if your phone is stolen, this functionality can allow your bank balance to be used through the digital euro wallet.

The prototype document also outlines offline use where all payments are final and cannot be reversed, even in the event of fraud.

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

What is UTXO?

In the case of UTXO, which stands for Unspent Transaction Output, this contrasts with account-based models, which always know a user’s balance. UTXO resembles 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 remaining balance of €60. In effect, €100 is removed from circulation, and €40 and €60 tokens are created. A wallet collects all UTXO tokens associated with the user.