2022 has been the year of the rise of cryptocurrencies, decentralized finance and the development of Blockchain systems. So much so, that governments and central institutions (such as the European Central Bank) have considered recovering their digital currency projects so that they become part of our daily lives. So that you become a true expert on the subject, we bring you this post in which we explain what the digital euro is, what makes it different from a cryptocurrency and its advantages and disadvantages.
European Digital Currency
The digital euro is a perfect fusion between the convenience of digital payments and cryptocurrencies with the security of support in the system for the issuance and custody of the European Central Bank. It will be part of a natural evolution of payment systems that will make it possible to pay in situations where using cash is less practical.
An important point that we have to understand is that the digital euro is not intended to replace cash, but to complement it. It will be one more option to be able to make payments.
In summary, the digital euro will allow European citizens to have a secure and centralized alternative to be able to use digital means of payment as a complement to the cash that is already being used.
- Traceability for authorities and security for citizens.
- Reduction of entry barriers towards banking access.
- Improvement of monetary policy by having greater monitoring.
- Learning curve.
- Currency weakness in the medium term.
- Custody security will be critical.
When will the digital euro arrive?
The European Central Bank began studying the digital euro proposal in July 2019 and has defined an initial period of approximately 2023 for research and development of the digital structure in which it can run and a launch for 2025, at least.
This initial phase of investigation additionally includes a strong impact study, since it has to be determined how the currency will be distributed between the central bank, commercial bank, businesses and individuals. In addition, it must be taken into account that the potential implementation of this system must bring with it legal and regulatory reforms that will take more time to manage.
Impact or opportunity on Software Industry
- Programmability and automation of money: Smart contracts and peer-to-peer (micro) payments, for example, between machines, can be implemented in euros and do not require the use of volatile and/or uncontrolled crypto assets. Smart contracts would allow Internet of Things (IoT) devices linked to the DLT, including machinery, automobiles and sensors, to offer services on a pay-per-use basis. In the context of the machine economy, a DLT-based payment system is thus very promising.
DLT is also well-suited to equip millions of IoT devices with a computer chip and, as a result, their digital wallet. Devices would be able to send digital euros straight from wallet to wallet, and they would be able to receive and send money on their own.
- Security: Data is often stored centrally in the present financial system on the servers of a third party, such as a (central) bank. However, while using DLT, transaction data is saved on a massive number of computers simultaneously. Because there would be no single point of failure, decentralized data storage would make the system more resistant to hacker attacks.
The digital euro will lower transaction costs and promote economic digitalization while ensuring that central bank money stays at the heart of the financial system, providing stability. A digital euro might potentially catalyze on a global scale. It might generate much-needed efficiency advantages in cross-border payments by providing interoperability with international digital currencies, including other CBDCs.