As research continues into a possible digital euro, the ECB plans to begin trials that settle transactions using a CBDC.
The European Central Bank will begin trials on market transaction settlements using distributed ledger technology (DLT) via a central bank digital currency (CBDC). The ECB’s readiness to begin the CBDC trials and experimentation follows the first meeting of the New Technologies for Wholesale Settlement Contact Group (NTW-CG).
The minutes of the meeting explored transaction settlements between financial institutions in addition to the development of a CBDC. The ECB’s trials will begin in 2024 and likely cover basic transactions and settlements as they will be “limited in capacity and time”.
The ECB and the Digital Euro CBDC
Last month, the ECB finalized a digital euro prototype and published a report on its findings. Although this prototype is a result of deep research, the apex bank has yet to decide on CBDC issuance.
The ECB’s report indicated that it researched the use of DLT and smart contracts as a framework for the CBDC. While they proved essential, the ECB has concerns about decentralized smart contracts. Nonetheless, executive board member Fabio Panetta notes that the digital euro would integrate with the existing financial ecosystem. This would help financial institutions to expand innovation and related solutions. The report came after the ECB conducted the prototype exercise from July 2022 to February 2023.
The European Commission also published proposals that support the use of a digital euro that complements coins and banknotes. The Commission said it recognizes that while most people like the cash option, many others want digital options for payment, especially since the COVID-19 pandemic.
More Research into a European CBDC
Proposals submitted by the European Commission contain a legislative proposal to safeguard the role of cash and another to create a legal framework for the 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 depends on the ECB to determine CBDC issuance.
The European Parliament is in favor of continued research into a CBDC. However, its position on issuance may be less favorable. According to a report by the Parliament’s Committee on Economic and Monetary Affairs, a CBDC could adversely affect the ECB. Economist Ignazio Angeloni, who authored the report, believes that a CBDC would force the ECB to compete with commercial banks for deposits.
Furthermore, Angeloni states that the CBDC should not be too successful or too unsuccessful. If too successful, there would be adverse consequences for the monetary policy if bank intermediation is not optimum. This could lead to financial instability if the process – which channels funds between institutions with surplus and those that do not have enough – is destabilized.
On the other hand, an unsuccessful CBDC would mean the ECB wasted a lot of resources. According to the economist, the ECB would also suffer reputational damage.