Alongside the European Central Bank (ECB) and seven other euro area central banks, Eesti Pank carried out a research project into the technical possibilities for a digital euro. The experiment established that a blockchain-based solution could support the processing of almost unlimited numbers of payments.
This could, therefore, support a very large money supply with a smaller carbon footprint than existing card payments systems. As important, for central bankers, such a blockchain-based solution could balance privacy and the need to meet anti-money laundering requirements.
The institutions involved in working with the ECB on this research project included the central banks from:
- Estonia (Eesti Pank)
- Germany (Deutsche Bundesbank)
- Greece (Τράπεζα της Ελλάδος or Bank of Greece)
- Ireland (Central Bank of Ireland)
- Italy (Banca d’Italia)
- Latvia (Latvijas Banka or Банк Латвии)
- the Netherlands (De Nederlandsche Bank)
- Spain (Banco de Espana).
The ECB-led experiment and scope
The objective was to assess one technical solution for the digital euro. The experiment looked into:
- how a technical solution for a digital euro might exploit the blockchain technology which already serves as the basis for the Estonian e-state (Guardtime)
- if this could perform in terms of the number of payments and money-holders
- what were the implied energy costs
- how to link digital identities while ensuring privacy.
If the ECB was to pursue e digital euro, it would not replace cash. Instead, it would provide an alternative that could operate in parallel to cash – for citizens and businesses. As with cash, the central bank (presumably the ECB) would guarantee the value of such a digital euro.
The experiment saw payments made in digital money between people with digital identities from Estonia, Latvia, Lithuania and Spain. Performance test results demonstrated:
- load-testing in which simulated 100M wallets performed payments on a deployment of the CBDC system; this setup supported 15K/tps with a 2s median transaction time
- the core infrastructure possessed a scalability to at least 325K retail payments per second, equivalent to 2 million bill transactions per second, with a 0.6s median, end-to-end transaction time per payment.
Such results would seem to indicate that a conceptual ECB digital euro:
- could be a means of payment in all the countries of the euro area
- would be as secure to use as cash
- would allow banks to build new payment solutions for purchases in traditional shops or online as well a be for payments between individual people and/or businesses.
More experiment conclusions
Among broader conclusions from the technological experiment were:
- it was possible to overcome earlier bottlenecks in blockchain technology (such as low performance and high energy costs)
- innovative digital euro technology based on the blockchain is scalable, meaning that the number of payments made with the digital euro can increase if needed
- the technology does not set any essential limits on the size of the money supply; for instance, the system could handle the entire supply of euros in current circulation – and more
- there were no limits on the number of money-holders or on the number of payments made simultaneously.
- existing Electronic IDs (eIDs) can link to a digital euro; this matters, because it ensures security while providing various levels of privacy (the various parties involved can only see information on the payment, yet it is still possible to implement anti-money laundering controls).
As mentioned above, the experiment involved integrating the Estonian and Spanish eID systems and certificates. The CBDC system exchanged €-CBDC tokens in peer-to-peer transactions both within one single jurisdiction and across two EU countries. This exercise showed, with caveats, that eIDAS-compliant eID solutions and certificates could:
- support the core principles and key requirements of a digital euro – such as privacy, safety, accessibility and market neutrality
- contribute to other policy goals – like limits, tiered remuneration or direct allowances to the general public and streamlining of onboard processes.
The results now provide an input to the ECB’s Project Investigation Phase on the digital euro. This ECB Phase will:
- involve various user surveys and bring in banks and other payment service providers to look more deeply into the options for issuing digital euros
- establish what technical infrastructure may be needed for a digital euro
- how a digital euro could best support the construction of innovative payment solutions in the euro area.
Enterprise Times: what does this mean
Programmable money is digital money that a holder can programme to make conditional payments for a set purpose. For example, governments might use a digital euro to support an economy during a pandemic in completely new ways. By issuing a digital euro to citizens, even to arriving tourists, it might impose a requirement that spending them was only possible for approved services (say to support the tourism sector).
The Governing Council of the European Central Bank has not yet taken a decision about whether to introduce a digital euro though it decided on 14 July 2021 to move forward with the preparations needed for introducing one. The Governing Council will only decide whether or not to introduce the digital euro and what technology it should be based on at a later date.
A digital euro would almost certainly further the digitalisation of Euro economies. It could lead to programmable money as well as reduce the cost of making payments (the latter almost certainly being of greatest interest to citizens and businesses). That an existing, and proven system (the Estonia use of blockchain) can work could be a significant accelerator. T
he demonstration of the integration of existing eID systems cross border within the overall blockchain approach is another accelerator. Despite the EU and ECB normally working with extreme care (resulting in slowness), some form of digital euro might arrive sooner than you think.