The European Central Bank (ECB) is about to launch a project to develop a prototype digital euro.
Development of ECB’s digital euro
The Banque de France (BdF), or the French central bank, has actually already been working on this for some time, but since France is an integral part of the eurozone, the ball is now directly in the ECB’s court.
With this in mind, the European central bank has selected a number of external companies to jointly prototype user interfaces for the digital euro, and Amazon is among them.
So these are not collaborations aimed at developing the core infrastructure of the digital euro, but to develop auxiliary, albeit essential, tools for users to use it.
Specifically, the official statement reads:
“The aim of this prototyping exercise is to test how well the technology behind a digital euro integrates with prototypes developed by companies. Simulated transactions will be initiated using the front-end prototypes developed by the five companies and processed through the Eurosystem’s interface and back-end infrastructure. There are no plans to re-use the prototypes in the subsequent phases of the digital euro project.”
Therefore, it is possible that the Banque de France has already worked on the basic platform, and that this collaboration with external companies will only serve to test the interaction of the digital euro with real markets.
Amazon will serve as a tester for the digital euro
For example, Amazon was specifically selected to test digital euro payments on e-commerce sites, while Nexi was selected for payments at physical locations.
The other companies selected are CaixaBank, for online peer-to-peer payments, Worldline, for offline peer-to-peer payments, and EPI for payer-initiated point-of-sale payments.
These five companies were selected from a pool of 54 front-end development vendors that applied in April 2022.
The bank says this prototyping exercise is an important element in the ongoing investigation phase related to the digital euro project. This investigation phase is expected to be completed in the first quarter of 2023 with the ECB itself publishing its findings.
Studies to analyze the feasibility and usefulness of a natively digital version of the euro have been ongoing for a few years now.
Initially, these were only theoretical studies, but for at least a year now they have also moved into the operational phase.
This operational phase involves field-testing both the basic infrastructure, i.e., that which is used to create and manage digital euros, and the user interfaces, i.e., those software programs that are used to give users a way to use the services of the basic infrastructure without having to access it directly.
How will it work
These basic infrastructures will presumably be used and managed only by the ECB, while actual users of the digital euro will only have user interfaces that enable them to use the services made publicly available with respect to the digital euro.
The two developments are proceeding in a parallel and separate manner, so much so that the private companies involved will apparently each deal only with individual interfaces that are unrelated to each other.
There are three main reasons why the ECB has decided to experiment with the creation of a natively digital euro, although on the third to date there is no official confirmation.
The first is that the euro in use today is a classic traditional currency, very similar to those of the past such as dollars or British pounds. That is, it is originally a low-tech system on which many technologies have been developed.
A natively digital euro, on the other hand, would be a newly developed, and above all technologically advanced, currency that would make it easier to develop any other innovative technologies related to it.
Right now the traditional nature of the euro sometimes makes it very complex to handle transactions, whereas the natively digital version could instead make them much easier.
So the first reason is a kind of technological upgrade of a centuries-old technology that seems outdated by recent innovations.
The second reason, on the other hand, is purely technical, namely the introduction of so-called smart contracts.
With the traditional euro, smart contracts are basically impossible unless ad hoc platforms are developed to enable the creation of computer programs that can manage money independently.
Instead, the digital euro would also natively introduce the functionality associated with the creation of smart contracts, as is done, for example, on a network such as Ethereum.
It is possible that this is the real winning weapon of CBDCs, or Central bank Digital Currencies, because it is an innovation never before seen in this area.
The potential of smart contracts is considerable, especially if they are managed by a core platform that is in turn managed by the ECB.
This potential could also be tested directly on user interfaces, for example to arbitrarily set up an installment payment financed by some external lender. In this respect, DeFi has much to teach.
The third reason, however, is less clear. The point is that with a digital euro managed by a centralized core platform in the hands of the ECB, the central bank could have access to all transactions in real time. This is not possible to date, and could enable the bank itself a very high degree of control and monitoring of financial flows involving the euro.
Although the bank has already made it known that it will not track all transactions in a timely manner, it is nevertheless difficult to imagine that it could not do so in the event of an eventuality. In other words, while it is simply impossible today, especially if cash is used, in the future it may just be the bank’s own choice whether or not to do so, since with the digital euro it would be entirely possible.
The privacy of transactions made in CBDC is probably the single most critical point of their use, since a single centralized ledger maintained by the central bank makes every transaction theoretically traceable in a timely manner. Assurances that this simply will not be done do not seem sufficient to allay doubts in this regard.
For this very reason, there are those who believe that stablecoins based on crypto platforms may not face too much competition from CBDCs, since they allow for potentially more anonymous use.