Building the Digital Euro Block by Block
How Blockchain Transforms the Euro into a Digital Currency
As early as 2026, the digital euro (Retail CBDC) of the European Central Bank (ECB) and the Eurosystem could be introduced in the euro area. The final design decisions are still pending. One of the most important questions is which technology the digital euro should be based on.
The Blockchain Bundesverband e. V. (Bundesblock) advocates the use of Distributed-Ledger-Technology (DLT) in general and blockchain technology in particular. With this position paper, the Bundesblock shows the ECB and the Eurosystem the advantages these technologies could have for the digital euro.
1. The digital euro (retail CBDC) — a project of the European Central Bank and the Eurosystem
The European Central Bank (ECB) and the Eurosystem have been considering the introduction of a digital form of cash since 2018. In July 2021, it was decided that a two-year investigation phase would be launched from Q1/2022. During this, the various design options for the digital euro (retail CBDC) will be worked out. On June 28, 2023, the European Commission will deal with the digital euro in a meeting. This will be followed by the publication of the legislative proposal declaring the digital euro as legal tender. It is expected that a decision will be made in the fall of 2023 as to whether the two-year investigation phase will be followed by a two- to three-year implementation phase. The digital euro could be introduced as early as 2026 if the Eurosystem decides to do so, probably in 2024. The question of which technology the digital euro will be based on has not yet been clarified. In point of view of the Blockchain Bundesverband e. V (Bundesblock), this question is being evaluated too late and with insufficient priority. In our view, the digital euro must offer clear added value for citizens and companies and therefore make the best possible use of the advantages of blockchain or distributed ledger technology (DLT).
From the perspective of the ECB and the Eurosystem, it is necessary to provide digital cash for citizens in order to achieve European sovereignty. Currently, holding cash is the only way consumers can hold central bank money. The largest amount of money is provided by banks — so-called commercial bank money or book money, which is under limited influence of the central banks. In the future, the digital euro will enable central banks to issue digital central bank money in addition to cash and use it, for example, to fight inflation.
2. Demands and Requirements for the Implementation of a Digital Euro
The German Blockchain Association has the following demands and requirements for the implementation of a digital Euro:
- Utilize blockchain or distributed ledger technology.
- Cater to the needs of Industry 4.0 initiatives and support new startups.
- Ensure decentralized infrastructure.
- Minimize risks associated with privacy, security, and data protection.
- Guarantee interoperability with existing blockchains and payment systems.
- Provide high accessibility, similar to cash, across physical, technical, financial, and social dimensions.
- Support diverse use cases, including PoS, E-commerce, P2P, and G2X transactions.
- Incorporate privacy and data protection measures, with anonymity for small transactions.
- Offer offline functionality, both temporary and permanent, for various situations.
- Integrate programmability with Smart Contracts to enable automation and decentralized financial services.
- Entrust issuance and custody to regulated and experienced entities, such as banks and payment service providers.
- Establish a clear governance structure with credit institutions and payment service providers as validators.
- Implement effective strategies to mitigate risks associated with technical, data privacy, regulatory, market, acceptance, currency, and financial market stability factors.
3. Impact of the Digital Euro
The digital Euro should provide a convenient, secure, and cost-effective method for transactions, benefiting both consumers and businesses. Its introduction should also create new business opportunities, particularly for fintech companies and Industry 4.0 initiatives.
3.1 Wholesale CBDC
Wholesale CBDCs should be designed to offer advantages such as faster and more efficient transaction settlement, reduced costs, and increased security. Challenges such as ensuring system security against cyberattacks and considering the impacts on the existing banking system, regulatory authorities, and monetary policy must be addressed.
It is welcome that the ECB and the Eurosystem are exploring the benefits of DLT in the development of the Wholesale CBDC.
3.2 The Digital Euro vs. Stablecoins
The digital Euro should be differentiated from stablecoins, as it is a central bank-issued digital currency rather than a digital token pegged to a stable asset like a fiat currency or commodity.
3.3. Commercial Bank Money Token (CBMT) as a Complement to the Digital Euro
Commercial Bank Money Tokens (CBMTs) should serve as a bridge between the traditional financial system and the digital Euro, facilitating the conversion of commercial bank money into digital currencies and promoting the adoption of digital currencies in an increasingly digital economy.
4. User Groups
The most users, which will be influenced by launching the digital Euro will be private citizens and businesses, which could pay and could be payed with digital Euro.
4.1. Citizens
Protecting citizens’ privacy and data should be a top priority in developing a digital Euro. Appropriate data protection measures should be implemented, ensuring strong encryption and multi-factor authentication.
4.2. Businesses
The digital Euro should provide seamless integration into existing systems for efficient processing of intra- and inter-company transactions. It should also serve as a basis for tokenization of assets in the future and enable the development of standardized interfaces and processes for Industry 4.0 businesses.
5. Functionalities
The digital Euro has to address use cases which aren’t served with cash, and has to bring new functionalities in the European payment system.
5.1. Use Cases
The digital Euro should support various use cases, including Point of Sale (PoS), E-commerce, Peer-to-Peer (P2P), and Government-to-Individual (G2X) transactions.
5.2. Privacy and Data Protection
Privacy and data protection should be paramount for the digital Euro, with anonymity for small transactions up to €3,000, similar to cash payments.
5.3. Offline Capability
The digital Euro should offer offline functionality, both temporary and permanent, to cater to various situations such as short-term internet outages, remote locations, or long-term outages due to weather events.
5.4. Programmability
Integration of Smart Contracts into the digital Euro should be considered to revolutionize the European financial market while meeting European regulatory requirements.
5.5. Interoperability
Interoperability of the digital Euro with existing blockchains and payment systems should be carefully designed to ensure smooth transactions, security, and financial system stability.
5.6. Accessibility
High accessibility should be a priority for the digital Euro to be widely used in the Eurozone, ensuring it is similar to cash in terms of physical, technical, financial, and social accessibility.
6. Node Operators
For a digital Euro based on blockchain technology, credit institutions and payment service providers should act as validators, with a clear governance structure and balance between user privacy and regulatory requirements.
7. Risks of the Digital Euro
Introducing the digital Euro presents various risks, including technical, data privacy, regulatory, market, acceptance, currency, and financial market stability risks. To mitigate these risks, it is essential to ensure stable and secure infrastructure, proper data protection and security, effective regulatory collaboration, and comprehensive communication strategies. Additionally, monitoring and regulating the digital Euro’s impact on the foreign exchange market and setting holding limits can help maintain financial market stability. These risks must be considered and addressed during the digital Euro’s development and implementation phase.
Summary
In conclusion, the German Blockchain Association (Bundesblock) demands that the design of the digital Euro should:
- Leverage blockchain technology for new use cases.
- Address the needs of Industry 4.0 companies and enable new startups.
- Be built on a decentralized infrastructure like blockchain or distributed ledger technology.
- Minimize risks and protect user privacy and data.
- Offer unique advantages compared to other countries’ digital currencies.
Remarks
Please note: This is a summary of the position paper of the Blockchain Bundesverband e.V. (Bundesblock). The complete position paper was published in german on Monday, May 8, 2023 and in english on Friday, May 12, 2023.
If you want to criticize or endorse the position paper or parts of it, feel free to contact me via E-Mail or on any other social network.
If you like this position paper, I would be happy if you would forward it to friends, colleagues or share it on social media channels.
Philipp J.A. Hartmannsgruber holds a master’s degree in Finance & Accounting. He is a Board Member of the Blockchain Bundesverband (Bundesblock) and leads the working group “Digital Euro”.
In 2019 he founded PJAH Consulting, a blockchain- and digital assets-consultancy.
