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ECB names 4 scenarios for digital Euro

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October 5th 2020

  • The European Central Bank (ECB) has identified 4 scenarios that would force them to issue a digital euro.
  • A public consultation for a digital currency, as well as an experimental phase, will start as early as mid-October.

The development of a digital euro continues to gather pace. Last Friday the European Central Bank (ECB) published a 50-page report in which it acknowledges its importance. The report, drafted by the Task Force to create a central bank digital currency (CBDC), outlines the need for a digital euro, but also makes clear that it will complement an existing cash-based economy.

Just how seriously the ECB is taking the creation of a digital euro is shown by the fact that last week it filed a trademark application with the European Union Intellectual Property Office for a “digital euro”. In addition, the European Central Bank will start “experimenting” and at the same time conduct a public consultation to “listen to the views of the public and interested stakeholders”. The consultation will start on 12th October while the experiment will run in parallel.

Nevertheless, no decision has yet been taken whether a digital euro will come. The ECB said it would decide around mid 2021 whether it would launch a digital euro project, which would start with a “public consultation phase”.

In addition, in the report published on Friday, the ECB also pointed out that there are four scenarios that would force them to issue a digital currency, including an increase in electronic payments or a decline in cash use, the entry of private actors into the cryptocurrency payment industry and the issuance of digital currencies by other central banks.

As the report also noted, there are two design approaches that are being considered, with the decision for one still open. The first approach would record all digital euro transactions in the central bank’s own ledger. In a second approach, the ECB would define the rules for transactions processed and recorded by supervised intermediaries.

The first option would allow deposits to be placed directly with the ECB. This is normally only possible for commercial lenders, governments and other central banks, so the implications for monetary policy and financial stability will be studied. In the same vein, the report also urges consideration of “whether a digital euro should be accessible to households and businesses directly or indirectly through intermediaries, whether it would be remunerated and whether the digital euro holdings of individual users should be limited”.

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