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  • Norbert Gehrke

A digital, programmable Euro

The FinTech Council at the German Ministry of Finance has published a position paper on the future digital, and especially programmable forms of money on Thursday. The programmability of payment flows could therefore lead to an increase in the efficiency of payment transactions and could significantly boost innovation in the digitization of industry.


As the paper is currently only available in German, the following provides an English translation of the conclusions to make the key points accessible to a broader audience.

Central demands: discourse and a uniform regulatory framework


The programmable Euro can be the result of a long-term transformation process, which would consist of many manageable steps. However, politics in particular should also support private approaches by banks and e-money institutions. The challenge for the private sector is to quickly find a common position and a standard, neither of which was previously possible.


This process should be started as soon as possible through an intensive discourse involving all stakeholders. This includes in particular the industry as user of the programmable Euros. It is essential to create a uniform regulatory framework.


The need for a broad discourse between finance, industry, trade and institutions


In the current discussion about the digital Euro, the European Central Bank (ECB) is working jointly with other central banks, which is to be welcomed. However, the ECB has so far hardly exchanged information with other stakeholders who would be greatly affected by the introduction of a programmable, digital Euro: these include, for example, banks and other financial organizations that might make the digital Euro available to end-customers. Even the users of a programmable Euro, such as industrial or trading companies, are hardly included in the discourse. The implementation should be carried out by the ECB in close coordination with all other players in the European market for financial services and payments. Above all, the involvement of end-customers in the discourse is a critical gap, especially as far as industrial and trade associations, industrial companies, etc. are concerned — because ultimately, the programmable Euro creates entirely new business models. The digital transformation in certain areas, such as for example Industry 4.0, Logistics 4.0, can be supported through the programmable Euro and can be raised to a completely new level through the connection of machines. A round table with all stakeholders should be initiated in order to promote the discourse on the programmable Euro, to listen to and discuss the perspectives of the individual interest groups. National associations, such as banking associations and industry associations, should also be represented. Naturally, the topic of the digital Euro is interdisciplinary, which is why an exchange with all the groups involved is essential. At the German level, the Federal Chancellery and the Bundesbank can take the lead, at the European level the European Commission together with the ECB.


Europe urgently needs a cross-industry discourse to raise awareness of the threat posed by Asian and US initiatives and to drive digital transformation. The ECB, with the support of the national central banks and the European Commission, should lead the discussion. The discourse must be conducted with the greatest foresight. It must question existing infrastructure, analyze threat scenarios and raise awareness across all industries of the need for the programmable Euro. The aim of the discourse must be to sustainably maintain or strengthen Europe’s competitiveness.


Testing the programmable euro for different applications


In order to gain experience and quantify the economic impact of a programmable Euro, various tests under the leadership of the ECB and the European Commission should be carried out, using the programmable Euro for different applications, with the participation of associations, industrial partners and academia. An important goal of this should be the learning process based on concrete use cases that must extend beyond the financial sector in order to derive regulatory, political and technological requirements.


The need for a uniform regulatory framework


A uniform, harmonious regulatory framework must be created at the European level. The European Commission should act urgently. A roadmap for the entire EU would be desirable. This applies to a uniform EU-wide regulatory classification of private stablecoins, as well as the treatment of crypto assets or their safekeeping. If this does not succeed, regulatory arbitrage effects between individual EU member states can be expected. The problem here is that the meaningfulness and necessity of the programmable Euro has not yet been sufficiently understood at the supranational level. There needs to be a focus on added value for cross-border payments (i.e. reference to export and import activities), securities transactions and use in the growing machine economy (i.e. Industry 4.0, autonomous driving, logistics, Internet of Things).


Global interest in the blockchain-based programmable euro

Blockchain technology as a suitable choice


Blockchain technology is often proposed in the public debate as the technological basis for the introduction of a digital Euro. In theory, this technological choice is not absolutely necessary, but the advantages of blockchain technology in the context of a digital, programmable Euro are particularly great according to the current state of knowledge. Central banks opted for blockchain technology as part of their prototypes (e.g. the central banks in China and Sweden) and euro test bookings from the first small and large private companies (in Germany, France and Iceland) show the advantage of blockchain technology in this context.


International interest in blockchain-based currencies


Over the past year, numerous countries and jurisdictions have announced that they will introduce state-guaranteed digital money in the near future to the general public. According to a survey by the Bank for International Settlements (BI), 10% of global central banks plan to issue such a digital central bank currency in the next 1–3 years.


China as the leader


China is already testing a digital variant of the Yuan; the Swedish central bank has also announced a prototype for a blockchain-based digital E-Krona. Central banks hope that the introduction of a digital currency will essentially increase the security and efficiency of payment systems.


Experiments in Europe and the US


So the direction of travel is clear: more and more central banks are experimenting with a blockchain-based digital currency and are planning to introduce it. The Bundesbank and the ECB have analyzed the digital Euro in numerous experiments. Both the Bundesbank and the ECB have recently launched internal CBDC task forces to intensify efforts around the digital Euro. Nevertheless, it has to be stressed that the Chinese central bank is probably two to three years ahead of Europe with the launch of its digital currency. The developments in the USA are at the experimental stage, similar to the Eurozone, and are also years away from an introduction.


However, current market developments require quick and decisive action. In addition to regulated financial institutions in various markets (USA, China, Scandinavia, etc.), also private initiatives and “big tech” organizations are moving forward. New global and unregulated, or lightly regulated digital money could pose a high risk to the stability of the financial markets and entire economies. In this regard, it should be ensured that privately issued digital money from unregulated companies does not develop from a purely medium of exchange to a de facto currency with its own credit money creation. A regulated, digital Euro could also address the intended benefits for the end customer.


Implementation options for the programmable Euro

Wholesale and retail CBDC: First access for banks, then for everyone


The ECB could introduce the digital Euro in a two-stage process: since the digital Euro as a pure wholesale central bank digital currency (CBDC) does not yet have an interface with the end customer, a blockchain-based wholesale CBDC could be developed, tested and implemented solely between the central bank and the financial institutions, without the general public being affected by any difficulties that may arise.


After the successful implementation of the digital Euro as a wholesale CBDC, the interface to the customer could be opened up sequentially via the existing touchpoints. This includes access to the digital Euro for the general public and for companies.


Private industry solutions from commercial banks and financial service providers


Complementary solutions for the programmable Euro from regulated financial institutions are desirable and already available. These are based on commercial bank money and not on central bank money and would be available to the entire customer base (private customers, corporate customers, partner banks) of the issuer.


The programmable Euro can also be provided by institutions as part of their e-money license. This would allow the required use case in the area of the machine economy to be implemented quickly, so that machines could be equipped with their own wallets and could even carry out micro payments. It can be assumed that such innovations will be made available by the private sector much faster and not as part of the ECB’s CBDC solution.


Design principles of the programmable Euro: stability and anonymity


The following basic principles are central to the design of the programmable Euro: first, the stability of the financial system must be ensured in the event of a crisis. In a distress situation, the digital Euro could make it much easier for end customers to exchange all of their deposits and tradable financial products into the secure cash-equivalent digital Euro. This phenomenon of “bank runs through a click” risks the stability of the financial markets in times of crisis. Effective mechanisms should therefore be implemented in a digital Euro system to prevent disintermediation of the banking sector.


Furthermore, societal questions and concerns should be taken into account in the design: the introduction of the digital Euro touches on many sociopolitical questions, such as the anonymity of payments while combating money laundering or government intervention, for example based on access to digital transaction data.

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