Bitkom publishes information paper “Digital Euro on the Blockchain“
Not only practically all central banks worldwide are discussing the topic of digital central bank money, but also commercial banks, technology- and financial companies and, of course, politicians are involved in the wide-ranging discussion about the advantages and disadvantages of CBDCs. One thing seems clear to all of them: CBDCs have the potential to fundamentally change our financial system.
Central Bank Digital Currencies (CBDCs) on the block chain have been an intensively discussed topic since 2018. A study published by the Bank for International Settlements (BIS) in January 2020 shows that 10% of the world’s central banks plan to introduce a CBDC for the general public (so-called retail CBDC) in the short term and 20% in the medium term. Since mid-April 2020, the People’s Bank of China has been testing its digital central bank currency, initially on a local basis. However, not only practically all central banks worldwide are discussing the topic, but also commercial banks, technology- and finance companies and, of course, politicians are involved in the far-reaching discussion on the advantages and disadvantages of CBDCs. CBDCs or the digital euro (in this text: CBDC for the euro area) have the potential to fundamentally change our financial system. The consequences of their introduction are seen partly as a great opportunity and partly as a risk that must be avoided at all costs.
In the current discussion about the digital euro, there is a lack of a common basic understanding of finance, regulation and technology. This lack is evident in many facets: For example, when people talk about a “digital” or “programmable” euro, it does not necessarily have to be a CBDC.
It could also refer to money issued by private organizations (e.g. banks, e-money institutions or other FinTechs). Such as the Libra project, initiated by Facebook and led by a consortium of private companies, which was recently realigned after strong political opposition and is planning to launch this year.
Frequently, and also in the Bitkom information paper, the block chain technology, which belongs to the family of Distributed Ledger Technologies (DLT), is traded as the technical basis for CBDCs and the digital Euro. Theoretically, however, CBDCs that are not based on DLT are also possible. A distinction must also be made between currency and money: A currency is a legal tender, i.e. a “de jure” standard. The term money, on the other hand, describes a “de facto” standard, as soon as it is an accepted means of exchange, even if it is not a legal means of payment. For example: the euro is a currency; the digital Euro would be a digital version of this currency. The Libra project, on the other hand, is more of a vision of digital money – not currency. These examples make it clear, that there is a need for education about CBDCs and the digital Euro.
For this reason, the association would like to use the information paper to first draw a conceptual distinction between central bank reserves, cash, commercial bank money, e-money, cryptovalue, stablecoins and digital central bank money (CBDC). In addition, the paper aims to reflect the current state of discussion on the digital Euro on the block chain and to address central issues: What forms of a digital Euro are there? What are the motives for its introduction? How can feared risks be dealt with? And why is the block chain technology so promising for the digital Euro?
With this information paper, Bitkom wants to contribute to intensify the discussion in economy, society and politics and to develop the clout it needs, in order to be “ahead of the curve on digital currency” worldwide, in the words of the new ECB President Christine Lagarde. Especially in the current broad debate on Europe’s digital sovereignty, it should not be overlooked that China is currently leading the way in the development of a CBDC.
In a digital and globalized world, currencies can provide a competitive advantage for business locations. On the one hand by raising process efficiencies and on the other hand by new business models that are made possible. The chances of a digital Euro must therefore not only be analyzed politically, but also economically: The digital Euro can contribute significantly to an innovation-friendly ecosystem in Europe.
The digital association Bitkom warns that Europe is being left behind internationally in the discussion about digital currencies. While countries around the world are already experimenting with digital central bank money, Germany and Europe often still lack basic understanding. For this reason, Bitkom today published an information paper “Digital Euro on the Blockchain” to explain basic concepts, to name opportunities and risks and thus create the basis for a broad public debate. “Currently, China is leading the way in the development of a digital currency, and there are also a number of private initiatives already working on digital money. Also, with regard to the discussion on digital sovereignty, we must succeed in ensuring that Europe takes on a global leadership role,” says Bitkom financial expert Julian Grigo.
“Digital currencies can become a decisive competitive advantage in a digital and globalized world. There is a huge potential for Europe in block-chain applications in the financial industry – we must seize these opportunities”.
The information paper “Digital Euro on the Blockchain” first defines basic concepts, such as the distinction between money and currency or digital central bank money (CBDC, Central Bank Digital Currency). It then explains possible forms of a digital Euro and describes possible risks and challenges. A separate chapter is devoted to the special opportunities offered by block-chain technology for digital currencies.
In particular, it is about faster and cheaper payment processing, whether for cross-border transactions, micro-payments or the settlement of securities and other financial instruments. “The block chain technology as the basis of a digital Euro offers a variety of advantages. For example, such programmable money could lay the foundation for a real digitalization of the industry with machine-to-machine payments,” says Bitkom Blockchain expert Patrick Hansen. “For many blockchain applications in an industrial context, the euro on the blockchain is the missing piece of the puzzle. Europe can be a global pioneer in this area, but when looking at the dynamic developments, it must increase the pace significantly”.
The information paper “Digital Euro on the Blockchain” is available for download:
To the authors:
Julian Grigo is head of the Digital Banking & Financial Services division at Bitkom
Patrick Hansen is head of the block chain at Bitkom