What the digital euro means for Europe’s future prosperity

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eantime, the ECB is approaching the next phase of its digital euro development project. Officially called ‘a formal investigation phase’, it will within the next two years explore the applications of the digital euro in a series of focus groups and prototyping.

The ECB will look at how the digital euro could be designed and how it could be distributed to merchants and citizens, as well as the impact it would have on the market and the changes to European legislation that might be needed.

The digital euro pilot project move comes amid a boom in crypto and other digital currencies and the overall rise of the digital economy. According to a survey from the Bank of International Settlement (BIS), more than 110 central banks are conducting studies or pilots for CBDC, while the Central Bank of the Bahamas has issued the Digital Sand Dollar and China plans to launch its e-Yuan early 2022.

Given these worldwide initiatives to issue digital money as a legal tender in addition to cash, the digital euro launch is an important signal for the sovereignty and stability of the European payment landscape and would offer people greater choice in how they pay. But what does it mean for commercial banks?

While central banks will be in charge of the creation and destruction of the digital euro, commercial banks will be vital to its deployment. Commercial banks are the best players to take on a customer-facing role in the CBDC ecosystem and to be responsible for the distribution – just as they are now with physical money. But more than that, CBDC offers the opportunity to develop new financial products and services.

In the future scenario, they not only retain their previous role and function, they can even expand their position as service providers. The introduction of a general CBDC paves the way for new digital business models and additional revenue and growth opportunities. For example, automated functions in e-commerce can be used and further developed.

Linked value chains and smart contracts ensure that the rules stored in electronic contracts trigger defined actions at certain trigger values and monitor their execution independently.

There is no need to fear competition from central banks; the proven division of roles and tasks between central banks, customer banks and financial service providers, in which consumers are supplied and serviced in a decentralised manner, remains intact. Commercial banks can also use the introduction of a CBDC to bind customers even more closely to themselves with special apps for the use and custody of CBDC, and to link them with new CBDC-based customer services.

CBDCs present many opportunities for banks, businesses and citizens. As an inclusive digital payment medium, the digital euro would be available to both EU and non-EU citizens, regardless of their social status and ability to access bank accounts, payment service providers or the internet. It would provide a secure and legal alternative to speculative cryptocurrencies and unregulated and uncontrolled stablecoins.

Apart from fostering inclusion, the digital euro will nurture economic growth, modernise payment infrastructure and improve payment efficiency. CBDC does not replace cash, but rather opens up new markets for the currency. It is a platform for the growth of the digital economy. One key feature that plays into all of these is programmability.

Programmable payments enable automatic transfers of money when pre-determined conditions are met, similar to today’s standing orders but with added complexity. This presents an enormous potential with the rising “economy of things” and connected devices as payments can be automated and money can be sent at the same time as receiving services. This would significantly improve business productivity, make transactions more convenient, and empower new services, processes and workflows.

If properly designed from the beginning, a CBDC with programmable features will also be ready for future innovations. It is no less a door opener to new markets giving way to entirely new business models. Pioneering programmability solutions are needed that form the basis for innovation rather than affect the properties of the currency itself. The programmability logic doesn’t have to reside at the core layer of a CBDC, but rather with financial service providers, such as commercial banks. This would also improve the overall performance and reduce complexity of a CBDC ecosystem.

If central banks provide a basic currency infrastructure on which all other functions are built on, it could be a driver for digital innovation. Programmable payments can be triggered in secure digital wallets. Such smart wallets can be issued by financial service providers and provide value-added services to businesses and consumers on top of a CBDC.

Programmable payments enable automatic transfers of money when pre-determined conditions are met, similar to today’s standing orders but with added complexity. This presents an enormous potential with the rising “economy of things” and connected devices as payments can be automated and money can be sent at the same time as receiving services. This would significantly improve business productivity, make transactions more convenient, and empower new services, processes and workflows.

If properly designed from the beginning, a CBDC with programmable features will also be ready for future innovations. It is no less a door opener to new markets giving way to entirely new business models. Pioneering programmability solutions are needed that form the basis for innovation rather than affect the properties of the currency itself. The programmability logic doesn’t have to reside at the core layer of a CBDC, but rather with financial service providers, such as commercial banks. This would also improve the overall performance and reduce complexity of a CBDC ecosystem.

If central banks provide a basic currency infrastructure on which all other functions are built on, it could be a driver for digital innovation. Programmable payments can be triggered in secure digital wallets. Such smart wallets can be issued by financial service providers and provide value-added services to businesses and consumers on top of a CBDC.

Dr Wolfram Seidemann is CEO of G+D Currency Technology