A digital euro would have huge benefits across multiple industries – but what technology would underpin it? Philipp Sandner of the Frankfurt School Blockchain Center unpacks the possibilities
Business processes in the real economy and in the financial sector are becoming increasingly complex, with automation and digitisation taking centre stage. Current payment infrastructures such as the SEPA or TARGET2 systems cannot fully address the needs of new business models because their complex data synchronisation processes lead to system discontinuities, and counterparty risks arising from the asynchrony between delivery of a good or service and payment cannot be entirely avoided yet. Accordingly, there is a growing demand for payment solutions that eliminate the inefficiencies of current infrastructures and lay a foundation for innovative business models.
One promising way to address these limitations and to exploit the full potential of such innovative business models is to draw on a blockchain-based, programmable euro that enables programmable payments. Here, the private sector should act and not wait for the development of a public digital euro by the European Central Bank (ECB), which is unlikely to occur before 2026 – and might not even be based on a blockchain.
Advantages of a DLT-based programmable euro
The current SEPA system takes up to one working day until a payment is settled, thereby creating counterparty risk. Due to this asynchronicity, a customer could receive a delivery of a good without actually paying the merchant, because the delivery is conducted prior to the payment, or vice versa.
Additionally, there is the issue of system discontinuities if a digital service is provided. If, for example, a client buys a digital asset, the change of ownership of the asset and the respective payment is documented in different infrastructures. The synchronisation of databases leads to high transaction costs, potential errors, and low speed of payment and asset transfer settlement.
In contrast to today’s systems, DLT-based (distributed ledger technology) solutions enable seamless and automated payment execution directly between two parties without intermediaries and in real-time. These solutions can map process logics using smart contracts without the process logic being interrupted by an outstanding transaction confirmation from an intermediary, thereby avoiding counterparty risk. Also, payment and asset transfers can be processed within one transaction on a single platform.
Smart contracts are scripts saved and executed on a DLT which use the blockchain and thus the decentral computing capacity of the nodes as a system environment. Conditional, programmable payments via smart contracts offer great automation potential and are significantly more flexible than the simpler, currently existing automation forms of programmable payments, such as standing orders. Inventories can, for example, be precisely controlled (restocked and paid) without any human support using sensors and corresponding framework contracts.
The use of a blockchain and smart contracts makes it possible to record and process both the service (e.g., the transfer of a security) and the corresponding payment the same platform. In such a situation, the time-intensive and often error-prone synchronisation of various infrastructures is no longer required, encountered for instance in today’s systems for settling assets. As a result, costs can be decreased and transaction speed can be increased.
Possible forms of a programmable euro
One form of the programmable euro can be a central bank digital currency (CBDC), a digital currency issued by the central bank that – when using a DLT as a technological basis – can also achieve the advantages described above. A CBDC is therefore central bank money and thus differs from private bank money. As a consequence, it has lower risk than private bank money. However, the ECB has not yet decided whether to issue a digital euro. Experts predict that a publicly-issued digital euro could become a reality by 2026. Whether it will be based on blockchain technology remains to be seen.
A programmable euro issued by the private sector based on DLT could meet the requirements of the real economy and the financial sector and address the limitations of the current monetary system. Potential forms for such a private digital euro are:
- Stablecoins issued by (as yet) unregulated companies.
- Tokenised commercial bank money issued by financial institutions.
- Tokenised e-money issued by e-money institutions.
- Trigger solutions combining conventional payment infrastructures and DLTs.
A programmable euro supports numerous innovative use cases for the financial sector and the real-economy and will be the backbone of the industry of the future. This digital euro has the potential to have huge benefits across multiple industries, including manufacturing, supply chain management, energy and the financial sector.
Example 1: Pay-per-use
Manufacturing companies require a high utilisation rate of their production capacities in order to be profitable. Even small changes in demand can lead to significant profit losses. To address this risk, fixed costs can be reduced by utilising pay-per-use models. In contrast to traditional leasing of plant and equipment, for which fixed monthly instalments are incurred and which generally do not change for the entire term of the contract, payment fees of pay-per-use models are charged purely on a use-basis and are therefore variable. One practical example comes from Daimler AG, which offers pay-per-use leasing for HGVs. Further, CashOnLedger provides pay-per-use leasing for tractors.
Example 2: Tokenisation of real estate
In the DLT context, tokenisation refers to the digital representation and transferability of assets and rights in the form of a digital token. A token can represent any form of asset, such as ownership rights to real estate, a company, or a physical asset. Tokens are generally issued via smart contracts on a blockchain and can be traded on digital, decentralised marketplaces, for which only a digital wallet that is connected to the internet is required.
Real estate purchases are currently long, protracted processes and are generally associated with a high administrative and regulatory burden, for example, involving required land registrations and the non-divisibility of real estate. The tokenisation of real estate makes it possible to sell property on a peer-to-peer basis without an intermediary. In addition, partial ownership of property is enabled, which is then represented in the form of a token. This fractionalisation is of particular importance for illiquid assets such as real estate and makes it possible for even small-scale investors to invest in such assets, thereby extending real estate target groups. The tokens can represent the shared claim of the investor to rental income, the right to sell their tokens on a secondary market, but also obligations such as the payment of property tax and insurance premiums.
Agreeing common guidelines
To promote the development of the programmable euro, all relevant stakeholders, including policy-makers, financial supervisory authorities, financial sector organisations, private companies, and consumers, must engage in close consultation. Cross-company collaboration within industries is also necessary to guarantee the standardisation, interoperability, and fungibility of the payment solutions. In particular, the interoperability of the various DLT protocols should be a focus for all parties, since the potential of DLT can only be fully realised through services that can be used interoperably.
The European business community should agree on common guidelines so that the euro can foster its role as a global means of payment. A far-sighted, transparent and technology-neutral legal framework for the programmable euro is essential. Key points include the compatibility of the programmable euro with data protection provisions, contract law, and securities law. The resulting legal certainty is required to gain investors’ trust and exploit the full potential of the programmable euro.
About the author
Prof. Dr. Philipp Sandner is the founder of the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was ranked as one of the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ). Since 2017, he has been a member of the FinTech Council of the Federal Ministry of Finance in Germany. His expertise includes blockchain technology in general, crypto assets, decentralised finance, the digital euro, tokenisation of assets and rights and digital identity. The article is based on a study by the FSBC for the Munich Financial Centre Initiative (FPMI).
Prof. Sandner would like to thank his co-authors at the FSBC: Jonas Gross (PhD candidate at the University of Bayreuth, Germany) Jong-Chan Chung (a venture developer at the Blockchain Founders Group), and Valentin Seehausen, (COO of the Digital Euro Association).