As research continues into a potential digital euro, the European Central Bank plans to start trials that settle transactions using a central bank digital currency.
The European Central Bank will begin experimenting with settlements of market transactions using distributed ledger technology (DLT) via a central bank digital currency (CBDC). It follows the ECB’s readiness to start trials and trials of the first CBDC interview From the New Technologies for Bulk Settlement Communications Group (NTW-CG).
The meeting minutes explored transaction settlements between financial institutions as well as the development of a central bank digital currency. The ECB trials will start in 2024 and will likely cover basic transactions and settlements because they will be “limited in capacity and time”.
European Central Bank and Digital Euro CBDC
Last month, the European Central Bank finalized a prototype of the euro and published a report on its results. Although this prototype is the result of deep research, the main bank has not decided on issuing CBDCs.
The ECB report indicated that it researched the use of DLT and smart contracts as a framework for the CBD. Despite their proven importance, the European Central Bank has concerns about decentralized smart contracts. However, Executive Board member Fabio Panetta points out that the digital euro will integrate with the existing financial system. This would help financial institutions to expand the scope of innovation and related solutions. The report came after the European Central Bank conducted the model exercise from July 2022 to February 2023.
The European Commission has also published proposals supporting the use of a digital euro that would complement coins and banknotes. The Commission said it is aware that while most people like the cash option, many others want digital options for payment, especially since the COVID-19 pandemic.
Further research on the European Convention on Biological Diversity
The proposals from the European Commission contain a legislative proposal to protect the role of cash and another to create a legal framework for a digital euro. The Commission’s proposal states that the euro would support direct transactions between devices, would not require an internet connection, and would ensure a higher level of privacy. However, the Commission notes that its proposal still relies on the European Central Bank to decide whether to issue a central bank digital currency.
The European Parliament supports further research into the Convention on Biological Diversity. However, her attitude to the release may be less favorable. According to a report by the Parliament’s Committee on Economic and Monetary Affairs, a central bank digital currency could negatively affect the European Central Bank. Economist Ignazio Angeloni, who wrote the report, believes that a central bank digital currency will force the European Central Bank to compete with commercial banks for deposits.
Furthermore, Angeloni stated that CBD should not be very successful or not very successful. If it works too well, there will be negative consequences for monetary policy if bank intermediation is not optimal. This could lead to financial instability if the process – which directs money between institutions that have a surplus and those that don’t have enough – is destabilized.
On the other hand, the lack of success of central bank digital currencies means that the European Central Bank is wasting a lot of resources. According to the economist, the ECB will also suffer reputational damage.
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Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify cryptocurrency stories down to the bare essentials so that anyone anywhere can understand without much background knowledge. When he’s not deep into cryptocurrency stories, Tolo enjoys music, loves to sing, and is a movie lover.
