The Luxembourg-based fintech and its token technology could revolutionize the way monetary authorities make new crypto-money available to the public, a white paper by the Swiss National Bank (SNB) explains.

Taler Systems, a Luxembourg-based fintech, could empower reserve banks to manage their own crypto-currency issue and make the issued money accessible to the public.

In a white paper recently published by the Swiss National Bank (SNB) the Helvetian central bank, two computer scientists and an economist explain how the token technology developed by the start-up could revolutionize the way central banks could issue their own digital currency and run their own payment infrastructure in a data-protected and fraud-eliminated way.

David Chaum, Christian Grothoff and Thomas Moser the three authors of the document propose “a token-based system without distributed ledger technology”. to be implemented by central banks issuing digital currency (CBDC).

Making crypto-issue more accessible

Distributed ledger technologies (DLT), such as blockchain, use a database, which is spread across several nodes (or devices) on a peer-to-peer network, where each replicates and saves an identical copy of the ledger and updates itself independently.

Traditionally, central banks issue two types of money: reserves in the form of settlement accounts at the central banks for selected financial market participants; and currency in the form of banknotes available to the public.

Moreover, central banks issuing digital currency distinguish between wholesale CBDC with limited public access, and retail CBDC, which is made accessible to all.

“A retail CBDC, would be a new form of publicly available central bank money, and could be more disruptive to the current system, depending on its design,” the document says.

Withdrawing banknotes from an ATM soon to be passé (photo: SNB)

Such institution could also bring benefits the authors insist: ”Making electronic central bank money without counterparty risk available to everyone could improve the stability and resilience of the retail payment system. It could also provide a neutral payment infrastructure to promote competition, efficiency, and innovation.”

Just a smartphone and a simple database

However, Chaum, Grothoff and Moser suggest that the system should not rely on distributed ledger technologies but “should be built on a token-based software-only solution”.

The proposed feature, which is built on eCash and GNU Taler, could merely take the form of a smartphone app, which does not require any additional hardware from users.

“Such software-only solution can improve electronic cash and can be deployed at early stage while preserving transaction privacy, meeting regulatory requirements and offering a level of quantum-resistant protection against systemic privacy risk,” they explain. “The token-based CBDC we propose combines transaction privacy with KYC and AML/CFT compliance.”

Such a CBDC would not compete with commercial bank deposits, but rather replicate physical cash, and thereby limit financial stability as well as monetary policy risks: “Electronic payments with our CBDC would only necessitate simple database transactions and miniscule amounts of bandwidth,” they continue.

“The efficiency and cost-effectiveness, together with enhanced consumer usability caused by shifting from authentication to authorization, make this scheme likely to be the first to support the long-envisioned objective of online micropayments”.

Furthermore, the use of coins to cryptographically sign electronic contracts would enable the use of smart contracts. “This, too, could lead to the emergence of entirely new applications for payment systems,” the document details. “Central banks can avoid significant disruptions to their monetary policy and financial stability while reaping the benefits of going digital”.

Complex security features and sophisticated design on a 100-franc note, making it difficult to counterfeit (illustration: SNB).

Launched in Luxembourg in 2016, Taler Systems specializes in digital payments, payments, privacy, cryptocurrencies, CBDC and tokenization.

No tax evasion, no money laundering

The fintech runs a privacy-preserving payment system allowing payments from existing currency into electronic money. Payments are backed by an existing currency. “Customers can stay anonymous, but merchants cannot hide their income through payments with GNU Taler,” its website says. “This helps to avoid tax evasion and money laundering”.

David Chaum is an American computer scientist and cryptographer, known for his work on electronic cash applications (ecash) that aim to preserve a user’s anonymity.

Christian Grothoff, a German computer scientist, works at the Bern University of Applied Sciences and is part of the GNU Project.

Thomas Moser is Alternate Member of the Governing Board at Swiss National Bank and a former executive director at the International Monetary Fund.

The GNU Project is a mass collaborative initiative for the development of free software, founded in 1978 by Richard Stallman, an American free software movement activist and programmer at the Massachusetts Institute of Technology (MIT).