The Bank of Estonia has launched a multi-year project in collaboration with the technology companies Guardtime and The SW7 Group to research how technologically suitable the Estonian e-government core technology is for operating a central bank digital currency.
A central bank digital currency would in theory give people and companies a new way to deposit and use money alongside their accounts at commercial banks and cash.
It would be similar to cash, as both are a claim on the central bank, meaning the central bank directly backs up the value of the money, the Bank of Estonia said in a statement.
The rapid development of financial services and technology has led customers to change their payment habits, prompting several central banks to start research into technologies that could be suitable for use in digital currencies.
Following a decision taken last week by the Governing Council of the European Central Bank, the central banks of the euro area will carry out coordinated research into the benefits and drawbacks of issuing central bank digital currency and possible digital currency solutions.
The aim of the Bank of Estonia's research project is to investigate how suitable a solution based on the KSI Blockchain, a core technology of e-government in Estonia, could be for operating the digital money infrastructure of a central bank.
The same project will also examine new payment solutions that could be made possible by using electronic identity and other Estonian e-government solutions. The research project will not make choices about the use of specific individual technologies.
Rainer Olt, head of the payment and settlement systems department of the central bank, said: "The Bank of Estonia, as a small central bank, chooses carefully which Eurosystem development projects we are able to contribute to meaningfully. Estonia has over the years developed a unique know-how in running a digital government that prioritizes security, privacy and efficiency. This experience gives us good grounds for launching a project to explore the technological frontiers of digital money with the technology companies SW7 and Guardtime. Guardtime is the Estonian government's long-term blockchain partner and is a global leader in its field."
The joint research program will run in multiple phases and is initially planned to last for around two years. The first phase will determine how to create a scalable, practically useable, and cryptographically secure platform to meet the needs of a central bank digital currency, including stringent requirements for speed, security, privacy and resilience.
The central bank digital currency research project is the first practical example of the central bank's new strategic direction of looking for ways to cooperate with the private sector and research topics that will encourage the development of the financial and payments markets in Estonia.
The European Central Bank published a comprehensive report on Friday analyzing scenarios in which it might consider introducing a digital euro. The report examines the advantages and disadvantages of the digital euro in the different scenarios and the various features and options it could have, and also the wider impact it could have on the financial system and the core activities of the central bank.
Editor: Helen Wright