Does the ECB Work on a Blockchain-based Digital Euro?

Introduction

Source: Central bank survey on CBDCs (BIS, 2020).

ECB addresses anonymity concerns

ECB addresses financial stability concerns

Source: Bindseil, 2020.

Should a CBDC be blockchain-based?

  • Data privacy: By design, using blockchain technology can be beneficial in reaching a high degree of data privacy. The underlying cryptography can easily be implemented in a way to feature anonymity. The CBDC could become similar to cash, which is an anonymous means of payment.
  • Security: Due to the underlying cryptography, DLT systems are typically very secure and hard to hack. This mechanism makes transactions very secure and operationally resilient.
  • Speed: Today, in the classical payment systems, transactions, especially in form of cross-border payments, are typically not efficient. According to data from the World Bank, transaction fees on average amount to 7% of the transaction value and take several days to process. These limitations can be addressed by using a CBDC operating on a DLT system featuring cryptography and energy-efficient consensus mechanisms, such as proof of stake or proof of authority.
  • Smart contracts: A blockchain-based CBDC would make the Euro programmable. Euro-denominated smart contracts would make it possible that IoT devices, such as machines, cars and sensors, can offer services directly on a pay-per-use basis including leasing and factoring. The implications of such a digital fiat currency are especially promising in the context of the machine economy. It is estimated that more than 20 billion devices will be connected to the Internet in 2025 — three times as many devices as there are people currently living on earth. Some of these devices will also be integrated into payment networks. These networks will soon cover hundreds of millions of devices, such as cars, sensors and machines. Blockchain technology is best suited for equipping millions of devices with a computer chip and, with it, with their own wallet. Consequently, a device will be able to receive payments and transfer money — and produce SAP-based accounting records and invoices in Euro denomination. For these millions of devices, blockchain technology can easily provide the opportunity to participate in a payment network and integrate these devices into automated business processes (e.g. through smart contracts).

Conclusion

Remarks

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Jonas Gross

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