Digital Euro: Balancing Innovation, Privacy, and Skepticism in the CBDC Race

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The European Central Bank (ECB) is moving forward with its plans for a digital euro, having recently finalized prototypes. As a decision looms later this year on whether to develop the EU’s fiat currency in a new digital format, the ECB has stated that its potential central bank digital currency (CBDC) can be designed to boost innovation. However, they remain more skeptical about adopting Web3-style distributed ledger technology and smart contracts.

ECB Executive Board member Fabio Panetta explains that the findings of the digital euro prototypes “will serve as input for both the functional and technical design of a digital euro.” The idea of a digital euro was once considered a response to Facebook’s Libra currency, but the ECB’s prototypes have faced controversy due to the involvement of another US tech giant, Amazon.

Some EU lawmakers have called for a change in direction for the digital euro project. Panetta attempted to downplay the long-term significance of Amazon’s involvement by describing the prototypes as a “lab experiment” to be “discarded and not used further.” The central bank itself developed the back-end of the prototype and opted for a centralized model based on unspent transaction outputs (UTXO) used in crypto transactions instead of distributed ledger technology.

According to the ECB report, the UTXO system “allows for fast and efficient validation of transactions” and supports various payment types while protecting privacy. Additionally, conditional payments can be made without using smart contracts – automated software popular in decentralized finance.

The European Commission is set to publish a bill covering digital euro privacy safeguards and other major issues this June. Nonetheless, lawmakers have expressed skepticism over the CBDC’s benefits, particularly if it doesn’t foster innovations such as programmable money, where users can control how funds are subsequently used.

As the EU continues to consider the possibility of a CBDC, it finds itself in good company. Numerous global jurisdictions, including close neighbors at the Bank of England, are also contemplating the development and use of central bank digital currencies.

As the world continues to shift toward digitalization, the concept of a digital euro represents both opportunities and challenges for innovation, privacy, and the overall monetary landscape. The forthcoming decisions on the development and implementation of a digital euro will be of utmost importance, not just for the European Union but also for the global financial scene.

Source: Coindesk

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