In this era of science, it is natural to see more and more technological innovations in an attempt to make our life easier. When it comes to finance, digital money is such an example. Many parts of the world are embracing this new financial innovation to make the transfer of money faster, cheaper, and safer.
A recent survey conducted by the Banks for International Settlements studied more than 60 central banks. Interestingly, almost 80% of those are preparing to launch central bank-backed digital currencies (CBDCs). The European Central Bank (ECB) is of no exception. After economic superpower China had put itself into the race of CBDC, many other countries followed the suit.
ECB started to dig deeper into the distributed ledger technology (DLT) which might be an important foundation for the digitalization of the financial sector.
Why others are getting ready for crypto
The Frankfurt School of Blockchain Center [FSBC] came up with the news of ECB’s effort to integrate DLT into its monetary system. The German research centre is a European Commission approved Digital Innovation Hub. While studying the prospects of digital currencies in Europe, they revealed the ECB’s endeavour in a recently published paper.
By the way, Germany has already been investigating the prospect of programmable digital Euro since 2019. Although fiat money is a universally acceptable and most popular form of money to date, it has several shortcomings. The paper published by FSBC investigated the concept of digital Euro and how it can be utilized to overcome the pitfalls of fiat money using the digital currencies.
FSBC referred to three types of money out there including cash, bank money, and central bank reserves. But the report also expressed fear about ‘bank runs’, a term used to describe a condition where customers withdraw all their money from banks as a result of mistrust in the banking system leading to a liquidity crisis. People naturally want their money to remain in a safe hand, and this is where the question of trust comes in. DLT promises to handle this safety concern which many financial institutions are exploring today.
ECB’s current efforts
The paper pointed out other advantages of digital currencies technology including resistance to manipulation, automatic nature, high speed, and programmability. To explain a downfall of the existing financial system the paper mentioned,
“A traditional money transfer from Germany to Argentina takes up to ten days and costs as much as 10% of the transfer amount in fees. However, with the use of a DLT system, this transaction can be settled in real-time at low transaction costs between any parts of the world.”
As a result, the investigators considered the DLT-based digital Euro as an effective alternative to cash. The ECB showed an optimistic attitude by studying the consensus mechanism of DLT, but they are concerned about extra energy usage and delay in transactions caused by Proof-of-work. The paper suggested that the ECB might use a modified version of the existing system which is not completely decentralized. The alternative system would comprise a series of identified and accountable nodes.
FSBC referred to some central bank initiatives trying to implement such “permissioned” projects with the help of leading DLT platforms. A proof-of-concept has also been crafted by the ECB that might be established based on R3 Corda by the end of this year. Other study findings are also prompting ECB to take the DLT matter seriously as most nations of the regions are on the verge of switching to a cashless society.
All these initiatives are not only to keep up with the fashionable trends but to prepare the people if there is a change in payment behaviour. It is also necessary to maintain the link between people and the central bank. Even though fiat money has some bad impressions, its demand is not reducing. There is no current evidence to suggest that common folks are willing to sacrifice the valued and trusted benefits of fiat currency. But we need to be ready for any possible change in the monetary system.