Eesti Pank carried out a research project into the technical possibilities for a digital euro alongside the European Central Bank and seven other central banks of the euro area. The experiment established that a novel blockchain-based solution could in theory support almost unlimited numbers of payments being processed at the same time with  a very large money supply and with a smaller carbon footprint than the card payment system. The blockchain-based solution would also permit a good balance between privacy and the need to meet anti-money laundering requirements.

Eesti Pank worked with the European Central Bank and the central banks of Spain, Germany, Italy, Greece, Ireland, Latvia and the Netherlands on the experiment to assess one possible technical solution for the digital euro. The experiment looked into how a technical solution for a digital euro built on the blockchain technology that serves as the basis for the Estonian e-state could perform in terms of the number of payments and money-holders and its energy costs, and how digital identities could be linked and privacy ensured.

The Governing Council of the European Central Bank has not yet taken a decision on introducing a digital euro, but it decided on 14 July to move forward with the preparations needed for introducing one. The Governing Council will take the final decision on whether or not to introduce the digital euro and what technology it should be based on at a later date.

If the digital euro is introduced it would not replace cash, but would provide an alternative alongside cash for all people and companies. Like it does for cash, the central bank would guarantee the value of the digital euro. Introducing the digital euro would further the digitalisation of the economy and could lead to programmable money and reduce the cost of making payments. The digital euro could be used as a means of payment in all the countries of the euro area and would be as secure to use as cash. It would allow banks to build new payment solutions that could be used for purchases in ordinary shops or online and for payments between individual people.

The experiment that Eesti Pank participated in saw payments made in digital money between people with digital identities from Estonia, Latvia, Lithuania and Spain. The conclusion was that the experiment showed the possibilities of blockchain technology and where the technological limits are in the construction of a central bank digital money system (CBDC system).

The conclusions of the technological experiment were:

• The experiment overcame some of the earlier bottlenecks in blockchain technology such as low performance and high energy costs.
• It showed that the innovative digital euro technology based on the blockchain is highly scalable, meaning that the number of payments made with the digital euro can easily be increased if needed. This technology does not set any essential limits on the size of the money supply. The system is able to handle the entire supply of euros in circulation and more, and there are no limits on the number of money-holders or on the number of payments made simultaneously.
• The digital euro system built during the test handled over 300,000 simultaneous payments a second and the money reached the payee in less than two seconds. The estimated carbon footprint of the new system was smaller than that of the card payment system currently in use.
• Electronic ID (eID) can be linked to the digital euro so that security is ensured and various levels of privacy are allowed. The various parties involved can only see information on the payment, but it is still possible to carry out the necessary anti-money laundering controls.

The experiment provides an input to the Project Investigation Phase on the digital euro, which started in the middle of July. This phase will see various user surveys and will bring in banks and other payment service providers to look more deeply into the options for issuing digital euros. This phase should also establish what technical infrastructure may be needed for a digital euro in the future, and how the digital euro could best support the construction of innovative payment solutions in the euro area. Eesti Pank will participate in various working groups in testing the solutions in the project, setting the strategic directions and goals, and taking decisions on the requirements for a digital euro. It is expected that the Investigation Phase will last for two years.

Eesti Pank carried out the experiment as part of the central bank digital currency research project started in October last year.

A report on the experiment is published on the Eesti Pank website.

Background Information

• The European Central Bank published the summary results of the technological experiments on 14 July.
• Programmable money is a digital money that the money-holder can programme to make conditional payments for a set purpose. A digital euro could be used by the government for example to support the economy during a pandemic in a completely new way, by issuing a digital euro to citizens or incoming tourists that could only be used to buy services from the tourism and accommodation sector.

Additional information:
Ingrid Schmuul
Communications Specialist
Eesti Pank
Tel: 668 0965, 5697 9146
Press enquiries: [email protected]