ECB plans CBDC market settlement trials by 2024.

The European Central Bank (ECB) will begin testing distributed ledger technology (DLT) for market transaction settlements using a central bank digital currency (CBDC). The trials and experimentation follow the first meeting of the New Technologies for Wholesale Settlement Contact Group (NTW-CG).

The meeting discussed transaction settlements between financial institutions and the development of a CBDC. The ECB’s trials will start in 2024 and will likely focus on basic transactions and settlements, with limited capacity and duration.

The ECB and the Digital Euro CBDC

Last month, the ECB finalized a prototype for a digital euro and published a report on its findings. While the prototype resulted from extensive research, the ECB has yet to decide on CBDC issuance.

The ECB’s report highlighted the use of DLT and smart contracts as a framework for the CBDC, but raised concerns about decentralized smart contracts. Nonetheless, executive board member Fabio Panetta stated that the digital euro would integrate with the existing financial ecosystem, enabling financial institutions to foster innovation and related solutions. The report was based on a prototype exercise conducted by the ECB from July 2022 to February 2023.

The European Commission also published proposals supporting the use of a digital euro alongside physical coins and banknotes. The Commission acknowledged the demand for digital payment options, particularly due to the COVID-19 pandemic.

More Research into a European CBDC

The European Commission’s proposals include legislative measures to safeguard the role of cash and establish a legal framework for the digital euro. According to the proposal, the digital euro would facilitate direct device-to-device transactions, independent of an internet connection, while ensuring a higher level of privacy. However, the Commission emphasized that CBDC issuance depends on the ECB’s decision.

The European Parliament supports further research into a CBDC but may have reservations about issuance. A report by the Parliament’s Committee on Economic and Monetary Affairs suggests that a CBDC could have adverse effects on the ECB, potentially leading to competition with commercial banks for deposits.

The report’s author, economist Ignazio Angeloni, also argues that the CBDC should neither be too successful nor too unsuccessful. Excessive success could disrupt monetary policy if bank intermediation is not optimized, potentially leading to financial instability. Conversely, an unsuccessful CBDC would result in wasted resources and reputational damage for the ECB.

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