What is the Digital Euro?
Bitcoin started out in 2008 as the flagship cryptocurrency. Since the inception of decentralized networks, federal governments have decided to leverage the principal DLT for issuing a Central Bank Digital Currency (CBDC).
At present, a multitude of CBDCs are participating in the race. However, the Bank of England has emerged as the top authority in this regard. The Central Bank of England started the digital euro project in 2014.
Digital Euro is another project fashioned in the same manner as CBDC. The main aim of the project is to grant open access to generally acknowledged, trusted, and secure modes of payment for European locals.
The digital euro is based on DLT or distributed ledger technology, the same programming interface as the Bitcoin network. CBDC projects such as digital euro bring fast delivery and accessible payments on integrated platforms.
The Origin of Digital Euro
The Digital Euro project is spearheaded by the European Central Bank (ECB). The federal banking agency implements monetary policy with fiat issuance within Eurozone. However, Central bank does not directly issue reserves held in bank accounts.
Therefore, there is a risk of losing deposits in case of bank collapse. To prevent such a scenario, the ECB incorporates deposit security measures such as the Dutch Deposit Guarantee Scheme.
This type of agency insures a specified portion of bank deposits. Thus, it grants protection against bank runs and potential losses during periods of financial constraints. It is important to note that in countries such as the Netherlands, use of fiat currency has declined during the last few years.
Additionally, e-payments have increased during last decade at a rapid pace. It is the main reason that ECB and various other federal banking agencies are conducting research on electronic payment systems such as the digital euro.
How does Digital Euro Work?
The digital euro will serve as the legal tender placeholder in Eurozone. It performs all the functions of conventional money in the region such as medium of exchange and unit of account.
However, it will only exist in digitized form and be regulated by ECB and other nationalized banks. The digital euro will be available to all European locals and it will operate alongside fiat rather than replacing it.
Digital Euro Transformation
Eurosystem started the research digital euro project in 2021. The project remained active for 2 years and worked on various aspects of the new digitized euro such as distribution, economic impact, and social influence.
The Governing Council of ECB approved the project design and development. These platforms implemented peer-to-peer and third-party verification options for payments, privacy improvement, and preventive measures for excessive usage.
In the second phase, the project proceeded to make excessive engagement with relevant stakeholders. This stage witnessed and assigned intermediary supervision, distribution, and management roles.
This phase ensured limited data processing in addition to controlled issuance and settlement. The third stage of the digital euro project is planned to launch the digital euro during the second quarter of 2023.
During this time, Eurosystem was making preparations for design adjustments and timely launch to comply with legal requirements. The research phase also accounted for eventual expansion to non-resident consumers and broader European Economic Area after initial pilot.
At the same time, it finalized zero-holding limits for merchants, governments, and instant payments. The fourth and final phase of the project introduced a compensation model that covered prototyping and market research before 2nd quarter of last year such as free basic services and fair compensation for the public.
Advantages of Digital Euro
The digital euro is a programmable and automated mode of money that leverages smart contracts, IoT, peer-to-peer payments, and the usage of volatile and uncontrolled cryptocurrency assets.
The digital euro has a robust safeguard against manipulation since transactions are stored on various nodes due to the DLT mechanism.
DLT infrastructure also makes digital euro more secure because there is no single point of failure.
Conclusion
Digital euro project is one of the most advanced and innovative CBDC projects in the world. Researchers are working on addressing probable risks such as cybersecurity concerns, price volatility, privacy, and technical errors.
