Countries around the world are trying to catch up on technological progress, particularly in the area of finance. As China moves towards a central bank digital currency [CBDC], other central banks are also shifting to understand the technology and its use cases. One of the members of this list us the European Central Bank [ECB], the ECB plunging into the cogs of distributed ledger technology [DLT], while noting that it will be an essential pillar of the digitization of the monetary system.
The central bank has examined the prospects for using DLT in its existing monetary system, according to an article published by the Frankfurt School of Blockchain Center [FSBC]. This think tank and blockchain certified research center is listed as a digital innovation center by the European Commission, with the organization also examining the implications of DLT in Europe.
The FSBC is based in Germany, a country where banks have been pro-programmable in digital euros since 2019, while the ECB is still studying the intricacies of this change.
In its recent article, the FSBC explored the very idea of a digital euro and how it can be used to perfect the flaws in the current monetary system using DLT. Although there are only three types of money, cash, bank money and central bank reserves, the report noted concerns about bank withdrawals.
This referred to a situation where, due to distrust of the banking system, customers were withdrawing all their money, resulting in massive liquidity shortages. Security plays an important role in maintaining people's confidence and, according to the same, it is something that could be provided by DLT.
DLT has also highlighted other advantages, notably its resistance to manipulation, its automation and the possibility of programming money, while guaranteeing efficiency gains. Here is an example of the concerns of the current monetary system:
“A traditional money transfer from Germany to Argentina takes up to ten days and costs up to 10% of the amount of the transfer in fees. However, with the use of a DLT system, this transaction can be settled in real time at low transaction costs between any part of the world. "
Thus, a digital euro based on DLT could constitute a much more effective alternative. Even though the ECB has looked into the consensus mechanism, concerns have been expressed about energy consumption and the delay in debiting transactions using Proof-0f-work.
The document mentions that central banks in Europe may choose to choose a structure different from the existing DLT system which will not be fully decentralized. It could be a large number of identified and responsible nodes. Many blockchain projects have worked with central banks to provide "authorized" blockchains with known and reliable validators like Hyperledger and Corda by R3.
The ECB has already developed a PoC that could be published on the DLT R3 Corda platform by the end of 2019. In addition, according to a recent Central Bank study that investigated the CBDCs in 2020, 65% of Central banks are currently looking for CBDCs, with 71% of the sample claiming to favor DLT. These results show that the ECB takes these developments seriously, as the continent may be on the verge of moving to a cashless society.