The digital euro is getting closer with Amazon on board
The launch of the digital euro, a central bank digital currency (CBDC) for the Eurozone, looks increasingly likely this decade. The European Central Bank (ECB) has announced that it will work with five companies to develop and prototype potential user interfaces for the proposed coin.
The exercise is a critical step in the two-year investigation phase of the digital euro, which is expected to be completed by the end of the first quarter of 2023. At that time, the ECB will publish its findings.
Unusually for a eurozone project, US e-commerce and web services giant Amazon is among five companies chosen from a pool of 54 front-end prototype applicants, after a call from the ECB in April.
Amazon will help test use cases for e-commerce payments. The other four companies are: EPI (buyer-initiated point-of-sale payments); Nexi (payee-initiated PoS payments); Worldline (offline P2P payments); and CaixaBank (peer-to-peer online payments).
According to a separate announcement from CaixaBank – the only European bank selected to participate in the program – it has been chosen specifically to develop a mobile application for digital P2P euro payments.
However, the ECB explained that the prototyping and testing phase should not be seen as a stepping stone to the direct involvement of any of these companies in the future. It said:
The objective of this prototyping exercise is to test how well the technology behind a digital euro integrates with the prototypes developed by the companies. The simulated transactions will be launched using front-end prototypes developed by the five companies and processed through the Eurosystem’s interface and back-end infrastructure.
There are no plans to reuse the prototypes in subsequent phases of the digital euro project.
At first glance, the digital euro project appears to be months ahead of discussions on the digital pound, aka BritCoin.
The Bank of England launched its formal consultation on a retail CBDC this year, but sees the digital pound as “a major national infrastructure project”, according to former Treasury minister John Glen. In other words, something the UK failed to undertake quickly, efficiently and effectively.
Speaking last year, Glen said:
If decided to proceed following the consultation, a development phase would include the publication by the Bank of England of a technical specification explaining the proposed conceptual architecture for a UK CBDC. This phase of development could involve extensive testing of the optimal design and feasibility of a CBDC in the UK.
Following this, a decision would be made on whether to proceed to a later build and test phase. Given the scale and national importance of such a project, this phase would likely take several years and could involve the development of full-scale prototypes and actual pilots.
The last minutes of Bank of England CBDC Forum suggest it is still discussing payment providers’ business models and how revenue could be generated from the project, at a time when the ECB has already moved into prototyping and testing. In short, the signs show that the UK is being left behind.
The future of finance?
So what is the appeal of CBDCs? It is believed that token currencies issued by central banks for everyone to use (as opposed to digital reserves issued to banks and other institutions) could promote financial inclusion and speed up international currency transfers.
CBDCs would complement cash and other forms of payment and deposit, but could also pose risks to traditional finance, including interoperability, inflation/deflation, and security issues. This is why many central banks are treading cautiously in the new world.
Currently, 105 countries are said to be in various stages of investigating CBDCs. To date, only 11 have launched them: the Bahamas, Jamaica, Nigeria and the Eastern Caribbean (a monetary union of eight countries).
Others are piloting CBDCs including Sweden, Ukraine, Saudi Arabia, United Arab Emirates, Kazakhstan, Thailand, Singapore, Malaysia, Russia, South Korea, Hong Kong and – most important for the West, perhaps – China, which has rolled out limited amounts of digital RNB yuan.
The message is clear: the center of gravity for CBDCs is shifting towards Asia, and away from the traditional dollar-dominated financial world. If China – or for that matter Russia – forces other countries to trade in their CBDCs long before the launch of the digital dollar, euro or pound, it could shift the financial balance of power.
However, nerves are also fraying internationally, given recent issues associated with decentralized finance (DeFi) and cryptocurrencies, with the value of many tokens plummeting amid empty promises, high-risk speculation , disputes over energy consumption and reports of criminal activity. enabled by the crypto world. (Of course, nerves are fraying in traditional finance too, with rampant inflation, war in Europe and a looming recession.)
Last week, the Ethereum platform, on which the Ether coin is based, completed “The Merge,” transitioning from the proof-of-work system favored by crypto purists to a proof-of-stake-based system, saving about 99.5% on energy consumption. But although the switch was successfully made, Ether’s value has since declined.
Although CBDCs should not be confused with cryptocurrencies, having more in common with stablecoins (tokens tied to the value of a fiat currency or commodity), they can use similar blockchain or cryptocurrency systems. distributed ledger, and thus face at least some of the same risks. The cryptocurrency rout earlier this year saw some stablecoins lose their dollar peg, in one case becoming nearly worthless.
A briefing note from the US Federal Reserve explains:
Although there are many potential options for designing and implementing a CBDC, one important consideration that spans all approaches is security. Like conventional cash and electronic payment systems, security considerations for a CBDC include preventing counterfeiting, fraud, and double-spending.
Given the likely importance of a CBDC to the financial system and broader economy of a jurisdiction, other security considerations include anti-money laundering and anti-terrorist financing, protection of consumers and financial stability.
A potential technology solution that is often discussed for a CBDC is Distributed Ledger Technology (DLT). Using a decentralized ledger replicated over a distributed network could provide increased availability and minimize single points of failure, and using cryptographic hashes ensures the integrity of transaction records.
[But] although the DLT can offer advantages, its use is not without security risks. For example, many of the purported benefits are associated with permissionless designs, but security incidents involving these same designs demonstrate the continued existence of vulnerabilities.
Europe is moving at high speed, with the United States catching up on four years of thinking about the old economy of the previous administration. Meanwhile, the UK’s over-cautiousness and navel-gazing towards CBDCs – while understandable and pragmatic – could prove to be another historic mistake.