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What is the digital Euro currency and how will it work?

What is the digital Euro currency and how will it work?
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In July 2021, the European Central Bank (ECB) gave permission to start a multi-year project to create a digital version of the euro, the currency of the 27-nation strong European Union.
The investigation will involve how currency, also known as Central Bank Digital Currency (CBDC), should be designed and distributed, and what impact it will have on the market. It will also involve discussing the changes in EU legislation that may be required with the advent of this digital currency.

Start of Investigation

However, he said that this does not necessarily mean that the ECB will issue a digital euro, but that they are preparing to possibly issue it. The investigation will start in October 2021 and will continue for about two years, after which the digital currency will have to be approved by the ECB's board of directors.
If approved, various options will be tested along with consultations with various banks and financial institutions in order to develop the best possible technology and ease of payment.

The digital euro will be worked on for at least three more years before its final launch, in addition to the time needed for EU bloc member states to make the necessary legislative changes.

The EU's definitive plans come after other countries have taken big steps towards launching their own CBDCs, none more so than China, which in April 2021 launched its ambitious digital yuan in several cities and will try to use it in cities. Next Winter Olympics of the Year .
It is also part of major European financial policy reforms that began in September 2020, when the EU published its comprehensive Digital Finance Package, which includes the comprehensive Cryptographic Asset Markets (MiCA) proposal. This was followed by another anti-money laundering legislation (AML) targeting cryptographic assets in July 2021. All of these new changes will converge into cohesive new legislation over the next two years.

What is a digital euro?

According to the ECB, “a digital euro would guarantee the citizens of the euro zone free access to a simple, universally accepted, secure and reliable means of payment”.
Most payments today are made digitally, whether through debit, credit or electronic funds transfer (EFTs) cards. An EU Central Bank digital currency (CBDC) would be just another form of digital payment. Like its physical note and equivalent currency, it would be issued by the Eurosystem, which includes the ECB and the national central banks.
Since it is backed by the European Central Bank, holders of the digital euro will have a claim against the ECB. So, in essence, the goal is to provide users with the efficiency of a digital payment method, along with the security and protection of a central bank's currency.

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What is the purpose behind Euro Digital?

The proposed virtual version of the euro is part of an effort by global central banks to meet consumer demand for electronic payment options in a bid to catch up with private sector digital currencies such as Bitcoin.
The ECB wants to provide citizens of the European bloc, who no longer wish to use cash, a digital payment option and avoid the need to rely on other digital payment methods controlled outside the EU jurisdiction, such as mega payment processors: Visa and Mastercard .

By providing EU citizens with a digital euro, the EU will be able to control some of the control over transaction data and, in turn, prevent the money laundering and tax evasion activities it struggles to control in the unregulated space of cryptocurrencies. The move to start planning an EU CBDC was accelerated after news of Facebook's Diem (then Pound) currency was announced in 2019, as well as a rapid adoption of stablecoins, which threatened to undermine the ECB's leading role.

How will Euro Digital work?

According to the ECB, a digital euro would not replace money, but rather complement it. He claims that the digital euro will be a “quick, easy and secure tool for your daily payments”. The aim is to provide consumers with more choice of payment methods.

According to Reuters, the digital euro will likely look like an online bank account or wallet that will be kept at the ECB, rather than at a third-party financial institution. This is an important distinction because the ECB cannot run out of euros because it is the issuer, which makes it much safer than its trading counterparts.
The ECB probably sees the risk in this – the security of the digital euro will entice users to opt for its full use, threatening the existence of other financial institutions and organizations. This would likely mean that there would be a limit imposed on the amount of digital euros an individual can own at one time.

The ECB has stated that it will leave the issuance of digital bank accounts in euros to banks and a number of regulated fintech institutions, which will then offer wallets to customers on behalf of the ECB.

Will Euro Digital use Blockchain technology?

Using the technology behind cryptocurrencies is an option the ECB may decide to adopt for the digital euro. However, transaction speed will remain an issue.

The ECB experimented with its own instant payment system, in combination with blockchain authorized to issue and distribute digital currency. However, at this point, it's unclear what technology they will decide to go with.

Will the digital euro be available outside the EU bloc?

Because of the strength of the euro, the limit that will likely be placed on the amount of digital euros an individual can own at one time (say, 3.000 euros) would be a lot of money for families in poorer countries outside the EU. Therefore, making the digital euro available outside the eurozone would potentially drain local bank deposits if other countries decide to launch CBDCs. However, it could make payments to and from the eurozone cheaper, faster and more convenient.

Disclaimer: The views and opinions expressed by the author, or anyone mentioned in this article, are for informational purposes only and do not constitute financial, investment or other advice. Investing or trading cryptocurrencies carries a risk of financial loss.
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