Taler system overview

Das Taler-System im Überblick

The Taler system consists of protocols and free software implementations between a number of actors as illustrated in the illustration on the right. Typical transactions involve the following steps:

1. A customer instructs his bank to transfer funds from his account to the Taler mint (top left). In the subject of the transaction, he includes an authentication token from his electronic wallet. In Taler terminology, the customer creates a reserve at the mint.
5. Once the mint has received the transfer, it allows the customer's electronic wallet to withdraw electronic coins. The electronic coins are digital representations of the original transfer. It is important to note that the mint does not learn the "serial numbers" of the coins in this process, so it cannot tell later which customer purchased what at which merchant. The use of Taler does not change the currency or the total value of the funds (except for fees which the mint may charge for the service).
9. Once the customer has the digital coins in his wallet, the wallet can be used to spend the coins with merchant portals that support the Taler payment system and accept the respective mint as a business partner (bottom arrow). This creates a digital contract signed by the customer's coins and the merchant. Assuming courts accept cryptographic signatures, the customer can later use this digitally signed contract in a court of law to prove the exact terms of the contract and that he paid the respective amount. The customer does not learn the banking details of the merchant, and Taler does not require the merchant to learn the identity of the customer. Naturally, the customer can spend any fraction of his digital coins (the system takes care of customers getting change).
13. Merchants receiving digital coins deposits the respective receipts that resulted from the contract signing with the customer at the mint to redeem the coins. The deposit step does not reveal the learn the details of the contract between the customer and the merchant or the identity of the customer to the mint in any way. However, the mint does learn the identity of the merchant via the provided bank routing information. The merchant can, for example when compelled by the state for taxation, provide information linking the individual deposit to the respective contract signed by the customer. Thus, the mint's database allows the state to enforce that merchants pay applicable taxes (and do not engage in illegal contracts).
17. Finally, the mint transfers funds corresponding to the digital coins redeemed by the merchants to the merchant's bank account. The mint may combine multiple small transactions into one larger bank transfer. The merchant can query the mint about the relationship between the bank transfers and the individual claims that were deposited.
21. Most importantly, the mint keeps cryptographic proofs that allow it to demonstrate that it is operating correctly to third parties. The system requires an external auditor, such as a government-appointed financial regulatory body, to frequently verify the mint's databases and check that its bank balance matches the total value of the remaining coins in circulation.
25. Without the auditor, the mint operators could steal funds they are holding in reserve. Customers and merchants cannot cheat each other or the mint. If any party's computers are compromised, the financial damage is limited to the respective party and proportional to the funds they have in circulation during the period of the compromise.

Taler technology: About taxability, change and privacy

Taler Technik: Steuern, Wechselgeld und Privatsphäre

One of the key goals of Taler is to provide anonymity for citizens buying goods and services, while ensuring that the state can observe incoming transactions to ensure businesses engage only in legal activities and do not evade taxes (such as income tax, sales tax or value-added tax). However, we also want to stay out of the immediate personal domain, so sharing funds within a family or copying coins between devices should not be subject to monitoring by the state.

In Taler terminology, we distinguish between transactions where the exclusive ownership of the value of a coin is passed from one entity to another, and sharing whereafter control over a coin is shared by multiple electronic wallets (which may belong to different individuals). In Taler, the receiver of a transaction is visible to the state and thus can be taxed, while sharing is invisible to anyone not involved. Once a coin is shared among different individuals, any one of those can try to spend it, but only the first spender would succeed. Thus, sharing requires a strong trust relationship among the individuals involved, and thus represent interactions in the protected immediate personal domain, and not commercial transactions.

When Taler needs to provide change, for example because a customer only has a 5 Euro coin but wants to make a 2 Euro purchase, it needs to create fresh coins (of a total value of 3 Euros) that are unlinkable to the original 5 Euro coin to ensure privacy. To ensure that the resulting refresh operation where the change is converted to fresh coins cannot be used to transfer funds from one entity to another, Taler ensures that any owner of an original coin that was involved in a refresh operation can follow a link to the private information of the fresh coins generated by the operation. As a result of this trick, refresh operations cannot uses to create transfers, as the linkage ensures that the fresh coins are always shared with the owner of the original coin.

As a result, Taler does not intrude into the personal economic domain, offers good privacy, taxability for transactions and the ability to give change.