Tokenising Funds for the Digital Euro Schema
Digital Euro Schema
Units of monetary value that are stored electronically in a distributed ledger to represent a claim on the issuer and are issued, on receipt of funds, for the purpose of making payment transactions to persons other than the issuer, are often labelled “fiat-backed stablecoins” in public discussions. As further explained in the analysis below, these do not appear to constitute a new type of asset but rather represent existing currency units (i.e. a mere “tokenisation” of funds denominated in the currency/ies of reference) in a distributed ledger. Without entering into the possible legal classification of these initiatives as electronic money schemes under the national applicable law, this paper uses the factual label “tokenised funds” to describe such initiatives. Based on this definition, every unit of tokenised funds represents a claim on the issuer over the funds it received from users. The issuer either holds and channels the funds itself or involves a custodian for this purpose. In the latter case, the issuer has to be an identifiable and accountable entity to enter into an agreement with the custodian of the funds. The issuer ensures the funds backing tokenised funds are redeemable according to the terms of service communicated to users, either on the basis of bilateral contracts or via rules that are publicly auditable by the users. Sections below describes a typical process of issuance, transfer and redemption of tokenised funds involving a custodian. Even when the issuer relies on non-proprietary infrastructure, which is often an unrestricted DLT network, it can embed rules governing the initiative (e.g. the divisibility of the stablecoin unit) in a smart contract.
Issuance
Issuance of tokenised funds start with a user who transfers funds to the account the issuer opened with a custodian who shall keep them safe. Upon confirmation that the funds have been received by its custodian, the issuer creates (in jargon — “mints”) and allocates an equivalent amount of tokenised funds through the smart contract it maintains. Since the issuer is directly accountable for the redemption of tokenised funds, the responsibility to modify the number of units issued (the “notary” function) is not shared with the network of users as happens when DLT is used to record crypto-assets.
Transfer
Transfers of tokenised funds follow the typical DLT approach and involve network participants. The sender of tokenised funds initiates the transfer to a receiving user by instructing the smart contract accordingly. Network participants verify that the transfer is in line with the rules of the initiative and validate the transfer.
Redemption
The process of redeeming units of tokenised funds is similar to the issuance, but works in reverse. A user may send units of tokenised funds to the dedicated network address specified by the issuer who shall withdraw them from circulation (in jargon “burn” them) to maintain the redeemability of circulating units for the funds backing them. Once these units are burnt, the custodian is instructed to transfer an equivalent amount of funds back to the user.
Issuance, Transfer & Redemption directly referenced from Occasional Paper Series ECB