The European Central Bank and Its Prototype Digital Euro
The European Central Bank (ECB) is at the forefront of central banks worldwide in exploring the possibility of developing a digital euro. The project is still in the prototype phase, and a decision regarding its progress will be made later in the year.
The digital euro is a form of central bank digital currency (CBDC), a type of stablecoin issued and controlled by a country’s central bank. Compared to other cryptocurrencies, CBDCs can immediately serve as legal tender.
Digital Euro Does Not Use Blockchain
While the ECB is optimistic about the innovative possibilities that a digital euro can offer, they do not see any benefit (yet) in a CBDC that uses smart contracts. In contrast, the agency prefers a centralized system. The digital euro does have a striking resemblance to bitcoin and makes use of the UTXO model.
The UTXO Model
The ECB intends to use the UTXO model, which is a term used in the world of cryptocurrencies and particularly in the Bitcoin protocol. A UTXO is an output of a transaction that is not yet used as an input for another transaction. It is essentially an unsent transaction, and bitcoin holdings are made up of UTXOs.
According to a new report by the European Central Bank, the UTXO system is ideal for efficiency and speed. The report further details that the UTXO system supports various payment types and protects privacy. Additionally, the system allows conditional payments without the use of smart contracts.
Privacy Protection for the Digital Euro
The European Commission will publish a dissertation in June that discusses privacy protection for the digital euro and other key issues. The ECB recognizes that privacy concerns should be addressed to ensure public trust in the digital euro.
The ECB is among the world’s central banks that are exploring the possibility of developing a national digital currency. The digital euro will use the UTXO model and will not rely on smart contracts. While the project is still in the prototype phase, the ECB is optimistic about the innovative possibilities that the digital euro can offer.