Inside the Estonian CBDC Experiment That Could Shape the Digital Euro

At the height of the 2017 ICO boom, European Union member Estonia said it had the digital backbone to issue a national cryptocurrency, an "Estcoin", to its citizens.
At that time, then-President of the European Central Bank (ECB), Mario Draghi, put Estonia's plans down. In an interesting nod to how far things have come, Estonia's latest round of experiments in building a central bank digital currency (CBDC) is a rare example of a project publicly linked to the ECB's now energetic ambitions for the digital euro.
The changed position of the ECB today shows how serious the discussion about a digital euro has become, said Luukas Ilves, Head of Strategy and Innovation at Guardtime, the technology provider that supports Eesti Pank, the central bank of Estonia.
Related: "It's Something We Study": Assistant Secretary of the Treasury Discusses US CBDC Plans
It's a plum task for Guardtime that has long been helping to secure Estonia's core government infrastructure using a novel industrial-grade blockchain system called KSI (Keyless Signature Infrastructure).
"We know that the ECB is valued through the work we do with Eesti Pank," said Ilves. "Looking ahead, we hope to attract other central banks in the euro zone and to speak convincingly that a retail CBDC can be deployed on a large scale for the entire European economy."
Libra
The appropriate technical solution for wholesale or retail CBDCs can incorporate elements of the blockchain architecture, but these must be arranged to meet the necessary scaling requirements, said Mike Gault, CEO of Guardtime.
Building a system for a big economy and considering areas like micropayments and the Internet of Things (IoT) could result in millions of transactions per second, Gault said. That kind of scale really precludes multi-party validators from reaching consensus to prove that a transaction is going to ledger, he said.
Related: South Korea's central bank will test digital currency in 2021
"The only reason you have these multiple validators is to oppose censorship," Gault said. "We haven't met a central bank or government that is interested in censorship resistance. They are the censors."
Eesti Pank has not returned any requests for comments at the time of going to press.
Read more: The digital euro would be an alternative to cryptos, says ECB President Lagarde
Working within the security parameters of a central bank, Gault stated that the KSI mechanism provides evidence that the system is working properly by using a hashing system rather than slowing down the infrastructure with public key infrastructure (PKI).
Current blockchain technology might be fine for introducing a CBDC into wholesale, added Ilves, which basically means "better handling transactions and bringing some tokenized assets in addition to the way banks do things today" . However, a retail CBDC requires a different approach.
Identity politics
Meanwhile, the COVID-19 pandemic has underscored the need for greater digitization of the financial system, especially in adverse circumstances when a government may want to disburse funds directly to its citizens. Would Estonia's praised e-government and digital identity system make this easier for the central bank?
The exact question of how Estonia's CBDC will work with other services is what the research is looking to explore, said Ilves. What is clearly the case, he added, is that Estonia's existing payments and banking landscape is much less prone to fraud and identity theft.
"There are many ways that digital signatures and a government-issued digital identity can be integrated with wallet management and transaction authorization," said Ilves. "We don't have a specific scenario in mind, but we are certain that a CBDC ecosystem that uses E-ID will work better, faster, safer and cheaper."
Read more: Estonia's central bank is investigating whether blockchain can support a digital euro
It is also worth noting that the European Commission, the executive that implements the decisions of the European Parliament, has an ambitious proposal to improve the interoperability of digital identity systems in its different Member States.
"I think by the time a CBDC is deployed across Europe, the different ID systems will play better with each other and the interoperable infrastructure will be in place," said Ilves.
In conclusion, Guardtime CEO Gault acknowledged that CBDCs have become a busy and feverish place, but reiterated the need for speed in delivering a true retail offering.
"We believe there are a lot of horses in this race," said Gault, "but we invented the first internal combustion engine."
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Within the Estonian CBDC experiment that could shape the digital euro
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