The European Central Bank (ECB) has been exploring the development of a digital euro as a potential new format for the EU's fiat currency. Recently, the ECB finalized prototypes for this digital euro, which it believes can help boost innovation in the payment landscape. However, the ECB has shown skepticism towards using distributed ledger technology and smart contracts.

According to ECB Executive Board member Fabio Panetta, "this exercise shows that it is possible to smoothly integrate the digital euro design choices into the existing payment landscape while leaving ample scope for innovative features and technologies." The finalized prototypes will serve as input for both the functional and technical design of a digital euro.

While the idea for a digital euro was initially proposed as a response to Facebook's Libra (now Diem), the prototypes have faced controversy due to Amazon's involvement. EU lawmakers have called for a U-turn on this plan. However, Panetta has emphasized that the prototypes are a "lab experiment" to be discarded and not used further.

Regarding the back-end of the prototype, the ECB rejected distributed ledger technology but favored a centralized model based on unspent transaction outputs (UTXO) found in crypto transactions. The UTXO system allows for fast and efficient validation of transactions and supports different payment types while protecting user privacy. Additionally, it allows for conditional payments to be made without relying on smart contracts.

In June, the European Commission will publish a bill covering digital euro privacy safeguards and other major issues. Lawmakers have expressed skepticism about the benefits of central bank digital currencies (CBDCs), particularly if they do not allow for programmable money where users can control how funds are subsequently used.

The EU is one of many jurisdictions contemplating a CBDC, including the Bank of England. As the development decision looms, it will be interesting to see how the ECB proceeds with its digital euro prototypes.