The European Central Bank (ECB) announced that it has just concluded an insightful prototyping phase for the Digital Euro, paving the way for the long-anticipated pilot launch.

Over an eight-month period from July 2022 to February 2023, the ECB conducted exhaustive technical exercises, exploring potential design configurations for the Digital currency and evaluating how it can seamlessly integrate into Europe’s existing payment landscape.

The prototyping exercise is a crucial part of the digital euro project’s investigation phase, intended to prepare the euro for an increasingly digital age.

Progress and promise: The ECB’s digital euro prototyping exercise

The ECB’s prototype involved creating a settlement engine and five front-end user interfaces. These were designed with a focus on five specific use cases for the digital euro, including online and offline person-to-person payments, payer and payee-initiated payments in shops, and e-commerce transactions.

The process was facilitated by private firms chosen following a public call for expressions of interest, demonstrating a high level of private sector involvement in this initiative.

The exercise allowed the ECB to develop the back-end prototype – a settlement engine called N€XT. This engine, based on a widely used data model for digital currency transactions, demonstrated its ability to support different types of transactions while ensuring privacy for users.

Importantly, the prototyping exercise also incorporated offline payments, requiring no third-party intervention or network connectivity. This aspect is essential for ensuring that the digital euro is versatile and can adapt to various user needs.

Next steps and considerations for the digital euro

Although the prototypes generated through the exercise were used only for research purposes and won’t be utilized in developing future payment solutions, they provided invaluable insights for further work.

The results highlighted areas that could benefit from performance optimization and alternative technologies. It also signaled the need for additional prototyping work, specifically focusing on areas not covered in this exercise, such as cross-currency payments, dispute management, and fraud management.

The prototype’s UTXO transaction format was particularly promising, as it supports various transaction types with a common message format.

Moreover, it is flexible and future-proof, meaning it can be easily expanded to accommodate more transaction types. It also demonstrated that it is possible to implement conditional payments without relying on smart contracts.

The ECB’s prototypes shed light on crucial considerations for the digital euro, including scalability, performance, privacy, and fund recovery processes.

However, they also underlined that further explorations are necessary to ensure that the digital euro is ready for production and secure enough to meet Eurosystem’s requirements in the short to medium term (five to seven years).

The ECB’s commitment to further exploratory work, including evaluating performance optimisation options and alternative technologies, is a testament to its dedication to getting the digital euro right.

As the prototyping exercise has revealed, the ECB is edging closer to the launch of the digital euro pilot.

This is an important step in ensuring that central bank money remains accessible in an increasingly digital age. The world will be eagerly watching as Europe navigates these uncharted waters.