What is an Exchange, Banking and Exchanges interrogations

TALER Banking and Exchange Questions

Taler is a payment system which principles are well explained on the dedicated website section.

When using a Taler wallet to pay whatever the currency you always use Tokens that are exchanged back and forth to the original currency via an Exchange. An Exchange serves as an intermediary to transfer euro or other currencies (local currencies etc…) into tokens (and vice-versa) that are used by the Taler wallet.

I have been trying to understand better what exactly is the role of Banks and Exchange, both when Taler enters the eurozone and for local currencies.

What is a Taler Exchange?

Taler is a P2P payment system where the user can easily directly pay and receive money and still all transactions are checked by an Exchange. The role of the Exchange is to ensure that both sides know that they are receiving money, by notifying them, and to mark a token when spent in order to avoid double-spending.
The exchange does not know who sends money to whom as this operation is fully encrypted within Taler, it only knows when a Token is spent and when a Token is received and notifies the wallet tenants accordingly.

Who can become a Taler Exchange?

From a technical point of view anyone can become an Exchange by deploying the software. Therefore, steps to become an Exchange for your local currency or other non central bank currency are documented in Taler Exchange Operator Manual. However when using Euro or other CBC (Central Bank Currencies), there are legal rules and norms that need to be respected. At European level, an e-Money Issuer (EMI) license is at least required, or a Banking license. Depending on the country, additional specific regulations apply.
Therefore, an Exchange usually is a bank but is not necessarily one.
Obviously in the case of euro the Exchange needs to be KYC compliant (Know Your Customer, KYC are mandatory identification processes required to comply with anti-money-laundering regulations), KYC processes and providers are documented on Taler.net. KYC is built-in in Taler software; importantly satisfying to KYC regulations does not impact the privacy of the transaction itself. KYC is not mandatory for local currencies (so you may operate a Taler Exchange for local or fictional currencies without an EMI or banking license).

What is the exchange situation in NGI TALER in the context of launching GNU Taler in the Eurozone?

Currently GLS Bank is working towards reaching legal compliance for the use of TALER in the Eurozone. GLS bank will run the first Exchange in Euro within 18 months.

Other EMI/bank actors may become a Taler Exchange after the NGI TALER pilot, by going through the same (or similar, depending on the jurisdiction) process that GLS is currently going through. GLS aims to document their process to enable competition.

While Exchanges can be managed by an existing bank, it is not necessarily the case. If a new Exchange, not managed by a bank would get a licence to operate then they could proceed from an account with any bank they wish, provided that the banks agrees, (this depends on the bank willingness).
Onboarding more banks is not on the agenda of NGI TALER, however if needs and possibilities arise they can be discussed.

As a Merchant, or as a Buyer, can I use my bank to pay with Taler?

Yes. You can use normal SEPA wire transfers from your bank account to the bank account of the Taler Exchange to obtain Taler tokens. This operation is called ‘withdrawal’, since you withdraw money from your bank account to your Taler Wallet, by way of the Taler Exchange.

When you want to convert Taler tokens back into currency, then you ask the Exchange to execute a SEPA wire transfer of equivalent value to your bank account. This is called ‘deposit’, since you’re depositing value into your bank account.

Do buyers and sellers need to operate from the same Exchange?

At first during NGI TALER, Taler payments only work in Euro through the GLS Exchange and in Forint through Magnet Exchange, but the buyer and merchant do not need to use the Exchange bank: they can proceed from their current bank. This may incur extra wire transfer costs depending on the case.

Once inter-Exchange transactions will be available (currently under development), this won’t be the case any more.

Already, P2P wallet-to-wallet transfers work fully within the same Exchange, and Merchants could accept payments from multiple exchanges in the same currency, having therefore customers using different exchanges across the euro zone, as the money will be wired back via SEPA to the merchant account wherever they are in the eurozone.

Still, in order to deploy Taler across the Eurozone inter-Exchange features need to be deployed, allowing the wallet-to-wallet transactions to operate from different Exchanges. This is an important development done by Taler Sys as a part of NGI TALER. (link to the specific deliverable).

In the case of euro payments how much does it cost for a merchant to receive money?

SEPA transactions are free in the Eurozone. However, the Merchant’s bank may occur extra fees to cover the costs incured by the Taler Exchange. There might be fees from GLS treatment around 20cts for payments that can be aggregated (following GNU Taler docs): instead of converting Tokens back to Euro with every transaction, the Merchant should aggregate Tokens into a single SEPA wire transfer to dilute fees across all bundled transactions.

Why is TALER cheaper?

Other account based systems have overheads for fraud detection, that Taler does not need by design, e.g. there is no account to check because no accounts per se. Thus identity checks would not occur.
Onboarding and first and level support for people, KYC (around 8-10 euro per account to pay one) and anti money laundering (AML) checks.

What are the conditions, limits and regulations?

In the case of limited reach (local, internal), then there’s no need for EMI license.
As it is done as a standard, when a commercial bank account is opened All merchants need to go through KYC. This is part of the onboarding process that GLS is organising.

Lastly there is an embeded check in Taler system: The Auditor.

Taler auditor is a component of Taler - it does not have a regulatory power, it is a technical approach. There is no legal obligation to run an auditor, but the auditor is needed in Taler.
The auditor replicates the exchange data and oversees it to check for the good functioning of the exchange. The audit components does operation that are similar to research driven operations, even knowing all the data, the auditor only accesses a very limited set of transaction data: KYC and information about withdrawal from and to the banks. All other information are by design non personnally identifiable information, since they are blind signed.
As it only stores non personal data the auditor’s data could also be used by business analytics.

How does that work for the unbanked or undocumented citizens?

Does not work because you need an account to operate Taler.
If there was an entity that is legally authorized to operate an Echange/issuer then maybe they could decide to exchange for cash.