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European Central Bank Completes CBDC Prototyping Exercise

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According to Atlantic Council CBDC tracker, up to 120 countries have joined the race to launch a central bank digital currency (CBDC). 

Countries such as China, the Bahamas, and nine others have launched CBDCs. Others are discussing, researching, or carrying out their pilot programs. A recent development in that aspect is the European Central Bank (ECB) which has just completed its digital euro prototyping exercise. 

Details of ECB Prototype Exercise of CBDC

In July 2022, the French central bank completed the first phase of the wholesale digital euro (wCBDC) experiments. They also announced commencing phase two of the experiments, which will involve four or five aspects. 

The just-concluded exercise was part of the second phase of Eurosystem preparations which the ECB announced last year. The exercise started in July 2022 after the completion of the first phase and ended in February 2023. 

After completing the second phase, the ECB plans to launch the digital euro-pilot program during the fall of 2023. During the exercise, Eurosystem developed a centralized settlement engine called N€XT. The engine used an “unspent transaction output (UTXO) data model to carry out the testing. 

It aimed to investigate the offline use of a simulated digital euro and to understand four other aspects of using it with already existing payment systems.

As such, private companies provided five prototype customer interfaces representing different use cases. The exercise also involved the testing of self-custody wallets. 

While testing the use cases, the UXTO model protected customer privacy with one-time UTXO addresses to mask the holding wallets. Notably, the exercise’s user experience was the same with non-custodial and custodial wallets.

ECB Experiments Results And Concerns

The ECB report stated that the idea of checking out the offline transactions was to understand how it could “avoid double spending, ensure settlement finality and non-repudiation” by combining hardware and software protocol. But according to the published result, offline transactions with digital euro were complicated but possible.

The results revealed that online and offline digital euro prototypes can be interoperable. Even based on different data models and technical designs.

Further, the ECB mentioned that its concern now is whether the existing technology can deliver a production-ready and secure offline solution in five to seven years. 

While publishing the digital euro second phase testing results, the ECB also published a “Market Research Outcome Report” on its CBDC.  The research looked at 12 digital euro launch technical aspects, including dedicated cash account management, proxy lookup, etc. Respondents favored QR codes or Bluetooth interfaces and near-field communication during the survey. 

After the exercise, the researchers stated that existing offline solutions that meet the Eurosystem requirements would be novel and could create uncertainty about when an offline solution might be ready.

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