Eesti Pank (EP), the central bank of Estonia, carried out a research project to assess one possible technical solution for a digital euro along with the European Central Bank (ECB) and the central banks of Spain, Germany, Italy, Greece, Ireland, Latvia and the Netherlands. EP carried out the experiment as part of the central bank digital currency (CBDC) research project started in October 2020.

The research aimed at exploring how a blockchain-based digital euro can serve as the basis for the Estonian e-state. The research also looked into the feasibility of such a solution with regards to the number payments it can process, the number of money-holders it can support, its energy costs, and how digital identities can be linked and privacy ensured. EP recently published the results of the experiment.

According to the report, the research established that a blockchain-based solution can, in theory, help process almost unlimited numbers of payments simultaneously. Moreover, it can also support a very large money supply with a smaller carbon footprint than card payments, the research showed. Additionally, a blockchain-based solution can help strike a good balance between privacy and the need to meet anti-money laundering requirements.

The Governing Council of the ECB is yet to take a decision on introducing a digital euro. However it decided on July 14 to move forward with the preparations required for introducing one. The final decision on whether or not to introduce the digital euro and the underlying technology to be used will be decided by the Governing Council at a later date, according to an EP statement.

If introduced, the digital euro will not replace cash but instead provide an alternative payment method for individuals and businesses. Moreover, like with cash, the central bank will also guarantee the value of the digital euro.

According to the EP statement, introducing the digital euro would further the digitalisation of the economy. It could also lead to programmable money and reduce the cost of making payments. Further, EP claims that the digital euro will be as secure to use as cash and will enable banks to build new payment solutions.

The experiment analysed payments made in digital money between people with digital identities from Estonia, Latvia, Lithuania and Spain. The digital euro system built during the test handled over 300,000 payments per second and the money reached the payee in less than two seconds.

Conclusions drawn from the digital euro experiment

The conclusions drawn from the experiment states that a blockchain-based central bank digital currency (CBDC) system is highly scalable. The research also found that the technology does not put any limitations on the size of the money supply. The system can handle the entire supply of euros in circulation and more.

Additionally electronic ID (eID) can be linked to the digital euro to ensure security and privacy, the study found. The various parties involved can only see information on the payment, but it is still possible to carry out anti-money laundering controls, the report said. Most importantly, the recent experiment overcame some the earlier hiccups in blockchain technology such as low performance and high energy costs.

According to the EP statement, this experiment provides an input to the Project Investigation Phase on the digital euro which started this month. In this phase, several user surveys will be conducted and consultations with banks and payment service providers will be carried out to evaluate the options for issuing digital euros.

This phase will also establish the technical infrastructure that may be required issuing for a digital euro in the future, the statement noted. Additionally, it will also establish how digital euros can boost innovation in payment solutions.

EP will participate in working groups to test the solutions in the project, set the strategic directions and goals, and take decisions on the requirements for a digital euro. The investigation phase is expected to last for two years, EP noted.

Featured image credit: Photo by bruno neurath-wilson on Unsplash