Digital, Programmable Euro: From Paper to Programmable Money

Digital, Programmable Euro: From Paper to Programmable Money

Guneet Kaur, Devesh Kumar Vishwakarma
Copyright: © 2023 |Pages: 20
DOI: 10.4018/978-1-6684-6381-9.ch009
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Abstract

The financial system has been changing rapidly with the recent advancements in technologies underlying the money and payment systems. With the increase in the involvement of technology in the financial world and the emergence of new technologies like distributed ledger technologies (DLT), there has been a rising trend of creating private cryptocurrencies and stablecoins to replace existing currencies and assets. The increasing influence of big-tech companies in the financial systems and the usage of unregulated cryptocurrencies and stablecoins pose many challenges for financial authorities worldwide, generating the need for government intervention. As a result, numerous central banks worldwide are looking for possibilities to change their monetary systems by including central bank digital currencies (CBDCs) like the digital euro in their offerings. However, it is uncertain how these CBDCs and other digital money initiatives will impact the existing systems and provide solutions to existing problems and benefit the citizens and other stakeholders.
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Introduction

In recent years, there has been exponential growth in the awareness and implementation of blockchain technology in the last four years. Starting from 2015, blockchain technology has gained widespread usage, compared to the awareness and trust that blockchain technology had at the time of its introduction in 2008 (Yli-Huumo et al., 2016). There has been significant research and innovation going on blockchain technology around the world, along with finding the possible applications of the immutable, trustless, decentralized, and consensus characteristics to find its applications in the field of finance, industrial and social sectors. Due to this hype about blockchain technology and the exaggeration of its benefits, there have been misplaced expectations and also unknown misunderstandings of this technology. The existing financial industry is based on a centralized trust-based infrastructure. Blockchain promises a secure distributed framework to facilitate sharing, exchanging and integrating digital information across all users and third parties (Yaga et al., 2019). Adopting blockchain in the finance industry and its databases and smart contracts in automated transaction systems can increase the dependability and provenance of financial systems. Blockchain is immutable and trustless, giving a new opportunity for people to send money to people in a peer-to-peer mechanism across the world in an insignificant time (Zheng et al., 2017).

Blockchain technology led to the development of cryptocurrencies that aim to disrupt fiat money. These are digital currencies with different monetary supply systems and transaction networks, much like Bitcoin. Cryptocurrencies are community-based digital currencies developed and widely adopted as instruments for incentive and governance programs, internal rewards, and customer loyalty programs in closed-form environments. To protect the customers' interests in the traditional banking system and compete with digital currencies, central banks worldwide have also started exploring distributed ledger technology to develop central bank digital currencies (CBDCs) (Barrdear & Kumhof, 2021). A critical difference between CBDCs and cryptocurrencies is that the rules governing CBDC networks are set by a central bank. In crypto networks, the user base, which makes decisions by consensus, is given authority. In this context, this research discusses using distributed ledger technologies and smart contracts in creating CBDCs using digital euro as a case study of existing experiments around this concept.

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