Competition for Bitcoin Ignited by Eurosystem

• The Eurosystem trials for Digital Euro have commenced with calls for participants.
• As an alternative payment system, this directly competes with Bitcoin but at the moment, BTC price remains steady.

Recent reports have revealed that the Eurosystem has begun trials for its digital euro, a crucial step toward modernizing digital securities and challenging cryptocurrencies like Bitcoin’s (BTC) dominance. 

The trials aim to explore the potential of Distributed Ledger Technology (DLT) networks using central bank money for wholesale settlements, particularly for transactions involving DLT-based digital securities.

Overview of the Digital Euro Trials

The Eurosystem’s trials involve two waves, with applications for the first wave due by January 31, 2024, and the second wave by April 30, 2024. Notably, the deadline for submitting questions is set for January 12. 

The trials aim to settle delivery versus payment transactions involving DLT-based digital securities using Central Bank money. The participant pool is diverse, including banks with access to the TARGET payment system, qualifying central securities depositories, platform operators under the DLT Pilot Regime, and licensed institutions operating DLT platforms. National Central Banks will assess the eligibility of certain institutions on a case-by-case basis.

Three solutions are being tested, including Germany’s trigger solution, Italy’s TIPS Hash link solution, and a ‘Full-DLT interoperability’ solution from the Banque de France. These trials involve both real central bank money and simulations, providing insights into the viability of these solutions in a controlled environment.

Volume limits have been established for the number of transactions per day and participants, with variations among the three solutions. The Trigger solution from Germany, for instance, has higher volume limits and participant allowances compared to the French and Italian solutions. These limits aim to ensure the safety and fairness of the services provided during the trials.

Uncertainties Surrounding the Trials

Despite the progress made, there are still uncertainties surrounding the Digital Euro. Questions regarding the expiration features and technical foundations, including the use of blockchain technology, remain unanswered. 

ECB Executive Board member Fabio Panetta and Director General for Market Infrastructure and Payments Ulrich Bindseil have suggested a preference for existing systems, such as Italy’s TIPS, as the technical foundation, deviating from the blockchain model employed by Bitcoin.

If the Digital Euro progresses, citizens are likely to receive digital wallets or apps from banks to store digital euros, providing a direct claim against the Central Bank. However, the specific details are yet to be finalized. 

Privacy concerns have been raised, with fears that a digital euro could compromise personal privacy and become a surveillance tool. ECB President Christine Lagarde has emphasized the need for privacy without granting full anonymity, aiming to strike a balance that ensures user-friendly, free, and universally accessible digital currency.

Overall, the Eurosystem’s digital euro trial is a crucial step toward integrating digital currencies into the mainstream banking system. As the trials progress, the competition with existing cryptocurrencies, especially Bitcoin, and the transformative impact on digital securities will become clearer.

As of the latest available data, Bitcoin is not showing signs it is being threatened by the development with a trading price of $42,483, up 1.3% in the past 24 hours. The token’s market capitalization is pegged at $837.1 billion, with a 24-hour trading volume of $23.6 billion.

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