Will EUDI Wallets be Able to Support the Digital Euro?

Good afternoon, everybody. Well done for sticking around.

So yeah, I'm talking about the digital Euro. My name's Steve pfa. I'm the CEO of Consult Hyperion. We are a a boutique consult consulting firm, and we work in the areas of payments and identity. So we have a kind of a foot in both camps. So you may ask yourself why talk about the digital Euro and an identity conference.

Well, 10 years ago, my colleague Dave Birch, published a book. Some of you may have seen it. Identity is the New Money. And in that book, he argues that digital identity is more fundamental than payments in making the economy work, the digital economy work, obviously the digital economy, you have to be able to pay for things. But for that to be able to work in a safe and secure way, we've gotta have good identity rails in place. And oftentimes today we don't, which is why we experience fraud and all sorts, and friction, all sorts of other problems.

So when we think about the digital euro, it's really important that we think about the identity foundation that's gonna sit underneath it. So I think it's a really important topic for the identity community to be thinking about. So I'm gonna spend a little bit of time explaining what the digital Euro is, and then I'm gonna draw some connections between that and digital identity. And then at the end, we will just touch on how these two things come together, in particularly in, particularly in Europe, the, the, the, the EI das initiative and, and the digital euro. So what is the digital euro?

Well, every step back a minute. Most of you today, when you are using electronic money, that money is what we call commercial bank money. The money's issued to you by a commercial bank. The digital euro will be money that's issued by the central bank, by the European Central Bank. So in that sense, it's a bit more like cash than, than than the electronic electronic money that you use today. So what will be the characteristics of that?

Well, it'll be universal. You won't need to have a bank account to, to ha to, to get access to the digital euro. So those issues about inclusion that Adam was talking about just a little while ago, those need to be addressed because the digital euro needs to be accessible to everybody. It'll be risk free today. If a bank goes bust, then some of your money might be at risk. The digital euro, that won't be the case. It's gotta be widely accessible, user friendly, and it needs to be, needs to be free to use as well, at least for basic use.

And that definition there, those green words, those come from the ECPs website. What is the digital euro? Not though, what's it not?

So it's, it's not gonna be like cash in particular. Cash is by and large, pretty much anonymous to use.

I mean, maybe you can in some very limited cases, trace the cash if you could get the, the serial numbers off the, off the, off the, the notes or something. But in it, to all intents and purposes, it's anonymous. The digital euro will not be anonymous.

There's a, a great desire that it doesn't become yet another vehicle for supporting a financial crime. And so there's a balance to be had.

It, it will be a lot more private than the commercial bank money that we're all used to today. Why is the ECB, and it's not just the ECB central banks all around the world are looking at this topic of, of central bank digital currency, digital euros, the the version that we have have here. Why are they thinking about that?

Well, there's a whole, there's a whole range of reasons. There's no burning platform when it comes to payments. We all have ways to pay for things electronically today, but there are lots of reasons why central banks are looking at this. If you think about the role of a central bank, it's to ensure monetary stability, to promote economic growth. They're concerned about things like concentration. So in some places it's concentration of the payment system. They're concerned about sovereignty. So there are lots of reasons, political, economic, social, technological.

So that's, that's why they're doing it. What's the link to identity?

Well, there's a lot that could be said on this topic, but I'm just gonna pick out a few things. Firstly, there are some things that the, the digital euro or central bank digital currencies in general must enable. They've gotta be private for the reasons I've just explained, and they've gotta be inclusive. And there's things that they must prevent. They've gotta prevent illicit use of that money. So financial crime, money laundering, but also potentially there would be a desire to reduce the ability of the shadow economy to to, to function. These are identity problems.

These, if you think about what we do with digital identity and the financial services, we're addressing these exact problems. So there's definitely a link between these two things. Let's think about what it might look like in practice. This picture up here is kind of like a blueprint.

It's, it's the model that most central banks are looking at in terms of the way that a, a, a digital central bank digital currency might work. So at the bottom, there's a ledger. That ledger is, is the, the system of record for the money. It's where the money's issued onto. And so individuals will have individuals and businesses as, as well will have balances on that ledger. And what that ledger's doing is it's holding those balances and it's linking public keys to those balances. It's not doing, it's not doing much else.

The thing about central banks is that they, today, they operate in the background. They run like a, a real time growth settlement system or something like that. And they're not involved in the distribution of money out to the wider population. That's what banks do. And they don't really have the ability to, to, to, to, to distribute at that scale. And so they will be using intermediaries to help with that distribution. Those intermediaries might be banks, but they also might be non-banks as well. Those intermediaries will be providing services to customers to get access to the digital euro.

So that, and that will be in the form of wallets. They'll be helping with onboarding and maybe some customer services as well.

But, but critically, those wallets are gonna perform a, an important function. They'll hold the private keys that unlock a person's access to their digital euro. They may contain credentials to enable the sharing of assured data that needs to go alongside those transactions. And in some cases, there may be tokenized forms of that money.

So money that's held in a wallet that can be transferred from wallet to wallet in some cases, without going back to the ledger, when you look at this diagram, it's not that dissimilar from the kinds of diagrams that we have in, in the decentralized identity space. I haven't drawn issuers and verifiers on this, but we have wallets in the middle and we talk about holders where we, we can talk about holders of the digital euro and you have ledgers in the background. So there's, there's definitely some kind of connection between these, between these things.

What I thought would be an interesting exercise would be to compare the wallet requirements of CBDC with the wallet requirements of E IDAs. And so I put this table together just just last week on the left there, there's a, a set of wallet requirements.

These, these are my requirements. I'm, I'm working for a number of central banks in this area. I'm not working for the ECB, but I'm working for some other notable central banks. And so from my experience, and by looking a little bit at the, at what, what the ECBs published, I put together this high level list of requirements on the wallet. And you can see there's some functional requirements and some non-functional requirements. And then I went to, I think it's annex two of the A RF to pull out some high level requirements of the, of the, the uni wallets.

And you can see there's a lot of overlap between those, between those two, the wallets, both types of wallets are gonna have to involve strong customer authentication or strong user authentication because you wanna make sure that those wallets can only be used by the legitimate wallet holders. They're both gonna be involved in protecting private keys. They're both potentially gonna have to support a range of use cases, including in person and remote use cases, online, potentially offline use cases.

They're both gonna have to provide privacy protections and controls to the holders of those wallets as well. But there will be some differences as well. So in particular in the, in the, the digital euro side of things, there could be this need for tokenized value. The ECBs making some comments about programmability, and I don't, I haven't got time to get into that, but program programmability, the idea that you could have money that, and transactions that, that, that occur when certain conditions have been met is something that's being looked at within the CBDC community.

It won't be something that's provided by the, the, the ECP themselves. They don't want to be, you know, their, their, their job is to supply the money. Their job is not to make determinations over where that money gets used. But you can imagine at the wallet level, the intermediaries might build interesting creative services to build program programmability into those payments. And then last but not least, both uni wallets and the digital Euro wallets need to be recoverable.

You know, if you lose your wallet with your money in it, or the keys to give access to your money in it, you're gonna want to get that money back, right? The timelines. So these are the timelines that we're very familiar with. So implementing acts in, in EI Ds this year, the wallets should be available in a couple of years time. And then the big question, you know, when will people start using it? Digital euro, the timelines is a little less specific. So they're in a phase at the moment called the preparation phase.

That means they're engaging with the market, understanding what technology is available there, how they might go about building something. And then after the preparation phase, they've got this snappily titled next phase.

So we'll, we'll see what that means. They, they're, they're not, they're not kind of committing, they're sitting on the fence a little bit.

But I I, my feeling is that if you look at the amount of work that's being done, that they are thinking very, very seriously about, about this as something that, that the, the ECB should do. And certainly the the other central banks that I'm working with think this is more likely than not for me.

The, the sequencing sequencing of these things is really important. The, the UD wallet is, they're, they're being built now, but I think they're going to be an important underpinning will come, come to this in a second important underpinning for the digital euro, which we're going to see emerge potentially in 2, 3, 4, 5 years time.

And so it's really important that we as an identity community are thinking about what are the requirements of that wallet that we're engaging with that community to ensure that we are in a position to, to enable the digital euro so that it is secure and accessible to everybody. This is a piece of graffiti that I saw in London last year and I thought it was fun, sort took a photograph of it.

And, and what struck me was that there's somebody here who's made that connection between identity and payments. The connection that they've made is perhaps not the connection I would make.

I mean, obviously their, their thought is we've got 2, 2, 2 concepts here. Two ideas of potential government mass surveillance. We don't want this obviously, you know, I think that we need these systems. They need to be built so that they're not mass surveillance systems, but there's clearly a connection. The ECB has made that connection as well. So they have a thing called the, the, the rule book development group, which is building the scheme rules for the ECB. And they make references back to, to EIDA and they talk about the ways that these things might come back together.

But really all I wanted to do today was to say, look, this, this is out there. There's a lot of work being done. It's something that we as a community should be keeping an eye on. And I think we've got a lot to offer into that space. So encourage you to, to take a look and get involved. Thank you. And thank you. You've given us some interesting things to chew on over this. In your ideal world, how does this play out? In my ideal world?

Well, I I, I love the concept of digital cash. You know, I think paper cash is, has all sorts of problems. It's grubby, right?

So it's, it's hygienically bad. Also, I, you know, it is used for lots of, you know, illicit purposes.

There are, you know, people make claims about how these, where money's held, a lot of, a lot of cash actually is stuffed under, stuffed under mattresses or being used for criminal purposes, which is why, you know, there's a lot of cash in circulation, but we are not using it. I'm not using it.

So, so who is right? So I think the, I I'm not saying the ECPs never gonna say they're gonna get rid of cash because of inclusion reasons, but I think there's, there's definitely a good reason for there to be an alternative to, to private sector money. It helps as it acts as a check and a balance, but it also provides ways to be inclusive. The idea of programmability is quite interesting.

So the idea that you can do new creative things with money that you're not, not able to do today because you are kind of hampered by the legacy rails that you can't change very well, I think, I think there's a lot of interesting things to say about it. Yeah, Absolutely. Thank you very much. Thank You. Actually in the last few minutes, if I could call our speaker back to the stage, we have a few more questions. Gonna see if he's got time.

Yeah, actually surprise, surprise, surprise. In the last minute, the app just exploded with questions. So let's see if we can get those answered. What do you think about the ethical concerns about digital money and programmability?

Yeah, so perhaps I can expand on that a little bit more. So as with a lot of these things, terms get misunderstood.

There's, there's a difference between programmability and conditionality. So the idea that you can say this money can only be used to buy food, but not buy alcohol. That's conditionality. Yeah. And I think that's what central banks are worried about. They don't want to be in the, in the position of making ethical choices. They're just there to supply the money.

It's, it's, it's for, for people to work out where they want to use the money. To give an example of what Programability might be, let's suppose that I am, you know, a startup and I wanna do a crowdfunding and people can put money into that crowdfunding. And then there's certain conditions around that.

So if the, if the, if the supply of money for the crowdfunding reaches the, the specified limit, then the funding will occur. And if it doesn't, then the funding automatically goes back to the people that paid the money.

So they, and they're guaranteed to get their money back. You know, that's, that's an example where you've used kind of programmability to, to add functionality into the money, whereas it doesn't exist a day to day. You put money into a crowdfunding website and you hope that they'll refund you if something goes wrong.

You know, so, so that's just one example. Perhaps not the best example, but the idea that you can do things with money that you couldn't do before. It's not about making moral choices, it's about enabling that money to do clever, innovative things. Absolutely. And we've also got a question from the risk people in the room. Doesn't this enhance risk? The BS or the banks and governments can limit what you can buy and scammers will liquidate non-techie people with all of their dig digital cash in one wallet.

Sorry, I didn't quite understand the question. It doesn't, the digital euro in this, in this world enhance risk with banks or governments having more reach and, and control over what could be bought?

Yeah, I mean, I think or scammers being able to, to have control over large amounts of digital cash. Yeah, so, so the, the, the central banks will put limits on the, on, on the, on the cash, those limits. So there's, there's an interesting question here. 'cause if you are, if you're putting a limit on the cash, then that means you kind of have some way of identifying that there's a discrete, discrete account here. So I think that's a, that's a debating point. How can you, how can you on the one hand have a limit and on the other hand not know that people have got money.

Maybe you can do that. Pseudonymously the controls in the system should prevent abuse, should prevent like, you know, fraudulent use of that money. We all know that that paper money, I mean no system is, is perfectly secure. And with paper money, we've been through this process of, okay, you have paper money, you have to add, gradually introduce more and more security controls, I dunno, strips of like metal in the things or whatever, you know, other paper, other special printing or whatever to make that money secure.

That ought to be, ought to be easier with hardware security and cryptography, you know, all the things that we're building into, into, into UD wallets. So we have to make sure that we're building a secure system to start with, but system that can adapt and have new controls as new risks are identified. But in terms of, you know, can people abuse that?

Well the, the money's going to be in a wallet with protected by a key that's under my control for someone to, to steal that money from me, they've got to compromise and get past those security controls. So those, those need to be built well, of course. Right?

Yeah, absolutely. Yeah. I mean a bit of a rambling answer, but I think, I think it's a good question, but of course I don't think, I don't think it's a new problem.

It's, it's the same problem we face everywhere else, right? Absolutely. And one last question, how to use a, a digital euro where there is no network solution for this Excellent question Offline. Perfect.

So, so in fact, this is something that you, the E the ECB has come, have, come out a bit, a bit more explicitly than compared to some central banks. They said there will be offline usage, there will be constraints limits around that so that there'll be some offline value that's in your wallet and the wallets will be able to exchange that value. Now they have to think carefully how they avoid double spending of that as well. Of course we have, we have examples of that already. So if you've got an EMV payment card, those support offline and online transactions, most transactions are online.

And those cards have counters that put constraints and business rules around the offline usage. And the way that you secure that, that offline usage is by public key cryptography that we all know and love. Right. So Thank you. Great. Thank you for your encore appearance here on stage.

Oh, most Welcome. Yeah. Thank you for your questions. Thank you.