The European Central Bank has wrapped up its assessment of distributed ledger technology prior to deciding on implementing a digital euro.

According to reports released last Friday, the European Central Bank (ECB) has finalised prototypes for a digital euro in preparation to carry out development of a digital version of the EU’s fiat currency.

The ECB says that the potential central bank digital currency (CBDC) can propel innovation in the region, but the bank appears to be sceptical about using distributed ledger technology and smart contracts – the technology that Web3 architecture is based on.

“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 Executive Board member Fabio Panetta wrote in a letter to the European Parliament’s Irene Tinagli. 

Panetta adds that the findings from the investigation “will serve as input for both the functional and technical design of a digital euro.”

The idea of a digital euro first made rounds not as a fiat currency – but as an answer to Facebook’s now-failed digital currency project, Libra. Libra then underwent a name change to diem, where after a few months, the idea has been abandoned since.

The ECB’s digital currency prototypes have been plagued by much controversy, resulting in EU lawmakers turning fire due to US retail giant Amazon’s involvement in the possible development of the digital euro over concerns of privacy and taxation.

As EU lawmakers demanded for changes to be made, Panetta appears to downplay Amazon’s involvement in the project, saying that the digital euro prototypes “lab experiment” to be “discarded and not used further.”

Designing the digital euro

During the back-end development process of a digital euro prototype, the ECB opted to devise their own crypto transaction mechanism instead of choosing a route which uses distributed ledger technology.

The centralised approach used by the ECB utilises unspent transaction outputs – or UTXO – to bring fast and efficient validation of transactions.” The UTXO system also supports a variety of payment types while protecting user privacy, according to the ECB’s report.

The ECB’s design also allows for conditional payments to be made even without leveraging smart contract technology – a popular form of automated software prominent in the decentralised finance industry.

What’s next?

The European Commission is expected to publish a bill that covers the digital euro’s privacy safeguards and more in June.

However, EU lawmakers seem that they won’t be that easily convinced, having shown scepticism over the potential benefits of a CBDC. Amongst the complaints include the doubt that a CBDC can make room for innovations such as programmable money, where its users can use such technology to control how funds are subsequently used.

The EU has been one of many jurisdictions around the world contemplating the implementation of a CBDC, joining its neighbours at the Bank of England.

According to a mid-2022 survey conducted by the Bank for International Settlements, nine out of 10 central banks around the globe were exploring a CBDC at the time. 

The survey also shows that central banks have comparatively shown more interest in researching retail CBDCs, meaning digital currencies that are designed to be used by consumers, rather than a wholesale CBDC, which is intended for bank use.