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Home » ECB Using Bitcoin’s UTXO For Digital Euro

ECB Using Bitcoin’s UTXO For Digital Euro

The European Union’s central bank revealed some technology to design the future digital currency.

According to the document shared by the bank, the prototype of the digital euro implements a data model based on the results of unspent transactions or UTXO, a concept born with Bitcoin.

In the published technical document, the European Central Bank clarified that it is testing new technologies to increase its knowledge and assess the feasibility of the digital euro to improve the payment system. It also noted that the experiments conducted with the digital euro do not commit the bank or the Eurosystem to issue this currency.


What are UTXOs?

An unspent transaction output or UTXO is a model implemented in blockchain technology to perform cryptocurrency transactions in a network and avoid the risk of double spending. Traditional financial institutions do not use this model. As reported by Ledger Insights, in addition to the European Central Bank, the Boston Federal Reserve also used the UXTO model with the Massachusetts Institute of Technology (MIT) in the Hamilton project. The latter is an initiative tasked with driving the development of the U.S. digital dollar.


ECB digital euro

The Eurosystem is building front-end prototypes for the digital euro. They’re working with five banks and companies the bank selected in mid-September. After launching a request for proposals in April, the ECB established five banks and companies to participate in prototyping user interfaces for the digital euro. The central bank said that those selected are CaixaBank, Worldline, European Payments Initiative (EPI), Nexi, and Amazon. Each company is developing a specific use case for digital currency. This research phase explores what the digital euro could look like, its innovation, potential, and use cases.

The potential use cases the ECB explores are user applications and wallet services. The central bank noted that the user applications developed with the five selected entities. These include smartphone applications. Payment acceptance devices for merchants, such as card readers and Offline payments, are payments between devices without an internet connection are also included.


Centralization and financial control

However, centralization is the main feature of these prototypes for the digital euro. Thus, users will not hold the private keys of the digital currency. Wallet providers are responsible for the custody of the keys. This model is not risk-free, considering what happened recently with the FTX collapse.

Also, statements made last week by ECB President Christine Lagarde confirmed that privacy would not be a feature of the digital euro either. Analyst and geopolitical expert Pedro Baños said that CBDCs would mean the end of what little privacy we have left as citizens. Banks will impose total control over our consumption habits, he said.


CBDC at central banks

The irruption of cryptocurrencies in the financial system and the ease they offer users to perform peer-to-peer transactions. Their ability to work without the intervention of third parties has prompted central banks worldwide to consider and evaluate the issuance of a CBDC or central bank digital currency. CBDCs exist for different purposes, either for wholesale or retail use.

The tests and experiments developed by the ECB focus on exploring different front-end technologies. They plan prototypes created by companies with extensive experience in the payments industry. This digital euro research and exploration phase will finish in the first quarter of 2023. The ECB indicated that it would publish a series of findings on the tests and experiments conducted on the CBDC digital currency at the end of this phase.


New tax rules for the crypto industry

While the ECB focuses on the digital euro, Europe has introduced new tax rules. They try to mitigate fraud and evasion with cryptocurrency transactions. The European Commission wants companies that offer services with crypto assets to provide tax information about their users and transactions. It will, it reported, equalize the tax rules for crypto assets with those applied to traditional companies. The aim is to help Europe increase its tax revenues.

Meanwhile, ECB board member Fabio Panetta has called on the Commission to ban cryptocurrencies with a high environmental impact. He also pointed out that crypto assets are not a form of money, comparing technology to gambling. Last week, the ECB published an article strongly criticizing Bitcoin. It noted that the cryptocurrency’s operation is highly polluting and headed for irrelevance.

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