European Central Bank Reaches the Final Stage of Its Digital Euro Prototyping

The European Central Bank (ECB), the central bank of the European Union countries which have adopted the euro, has reached the final stage of its digital euro prototypes.

According to the report shared on May 26th, ECB's central bank digital currency (CBDC) should help foster innovation in the sector. However, ECB expressed skepticism about Web3-style distributed ledger technology and smart contracts adoption.

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Fabio Panetta, a member of the ECB's Executive Board, shared his insights in a letter to the European Parliament’s Irene Tinagli, stating:

This exercise shows that it is possible to smoothly integrate the digital euro design choices into the existing payment landscape while leaving ample scope for innovative features and technologies.

ECB's Executive Board member added that these findings "will serve as input for both the functional and technical design of a digital euro.”

In the development of the backend for the prototype, the ECB decided against distributed ledger technology, opting instead for a centralized model centered on unspent transaction outputs (UTXO), a system also employed in cryptocurrency transactions.

According to the ECB report, the UTXO model "allows for fast and efficient validation of transactions," facilitating different payment types while preserving privacy. It also enabled conditional payments to be made without utilizing smart contracts.

Above everything else, in June, the European Commission is expected to introduce a bill addressing digital euro privacy safeguards, among other issues.

However, lawmakers doubted the benefits of the CBDC, particularly if it fails to incorporate innovations like programmable money, which enables users to dictate subsequent fund usage.

With the EU being one of the numerous jurisdictions globally currently contemplating a CBDC, the completion of the ECB's digital euro prototypes signals a pivotal juncture in the realm of digital currencies.