The Digital Programmable Euro, Libra and CBDC: Implications for European Banks

Authors: Philipp Sandner, Jonas Gross, Philipp Schulden, Lena Grale

On July 29, 2020 the Frankfurt School Blockchain Center published a working paper that sheds light on the perception of payment initiatives by interviewing more than 50 senior experts. In this study, we analyze the impact of digital programmable Euro initiatives, such as the Libra stablecoin, and CBDCs, on banks. We find that both Libra and a Euro CBDC might heavily affect European banks. With this article, we provide a summary of the study’s research results. The PDF document can be found here.

Introduction

Existing payment systems get more and more disrupted. As a consequence of the global trend of digitizing payments and generating new business models from the use of blockchain-based digital programmable money, several new payment initiatives have been announced recently. Besides “classical” crypto assets, also stablecoins become increasingly important. The announcement of the Facebook-initiated Libra stablecoin is mainly perceived as a game-changer for the financial sector. Today, also central banks discuss the introduction of their own digital currencies, so-called CBDCs. To date, these payment innovations are not sufficiently discussed and analyzed from the perspective of different sectors and industries, as its implications remain unclear since most initiatives have not yet been introduced. At this point, the literature does not sufficiently discuss the implications of these innovations on the financial sector. This paper sheds light on the perception of these payment initiatives by interviewing more than 50 senior experts. In this study, we analyze the impact of digital programmable Euro initiatives, such as the Libra stablecoin, and CBDCs, on banks. We find that both Libra and a Euro CBDC might heavily affect European banks. Experts fear that large-scale financial disintermediation of the financial sector could take place, and digital bank runs could be triggered. Besides these risks, our findings suggest that banks also have the opportunity to develop new business models stemming from these initiatives. Therefore, Libra and a CBDC Euro should not only be seen as threats but also as opportunities.

Key results of the expert interviews

In the following, only selected key findings of our study are outlined. For a more comprehensive description of the results and methodology please see our underlying study.

  • First, a digital programmable Euro is demanded by most of the surveyed experts in order to address inefficiencies of the current financial system and increase automation due to a programmable means of payments. This needs to be highlighted as the majority of the surveyed experts leave no doubt that a DLT-based digital programmable Euro is needed.
  • Second, Libra and a Euro CBDC will heavily affect banks’ business models, for example, such that disintermediation of the financial sector and digital bank runs could result from an introduction of a Euro CBDC and disintermediation from an introduction of Libra.
  • Thirdly, experts also see various benefits and new business opportunities that retail, industrial and financial companies can develop and realize in the context of Libra, CBDCs and the digital programmable Euro. Therefore, experts suggest to not only perceive these initiatives as a threat but also as an opportunity.

What are the key benefits of the digital programmable Euro?

The conducted survey first assesses the main benefits of the digital programmable Euro in general, Libra and CBDCs. The experts were asked to quantify the importance of key benefits of the digital programmable Euro on a scale from 1 to 5, where 1 indicates not important at all, and 5 indicates very important. As depicted in Figure 1, automation is regarded as the most important benefit of the digital programmable Euro with a mean of 4.34. Higher efficiency in cross-border payments and near real-time settlement with other assets, rights or goods are rated with a mean of 3.90 and 3.91, respectively. Other benefits of a digital programmable Euro mentioned by the experts were higher interoperability, convenience and financial integrity by simplifying anti-money laundering procedures.

Do we need a digital Euro?

37 experts state that a digital programmable Euro is needed for the general public (see Figure 2). 4 experts do not see a particular need for such a digital Euro. They argue that payment systems are already well-functioning and efficient today. In 4 interviews, experts express that a digital programmable Euro is not yet needed; its issuance will, however, become more urgent in the future. Other experts underline that the need for implementing a digital Euro depends on the exact design and the underlying circumstances.

Is DLT the appropriate technology to implement a digital programmable Euro?

In total, 31 experts, mostly working for banks, associations, or in the industrial sector, are convinced that these benefits can only be achieved if the digital Euro is based on a DLT system. As depicted in Figure 3, 10 experts argue that the digital Euro must not necessarily be implemented on a DLT but that using DLT has significant advantages over other technological choices. Academics point out that DLT is not sufficiently mature yet and more research is needed. Still, academics suggest that transparency and interoperability can only be achieved through the use of DLT. 9 experts, mainly central bankers, are undecided whether DLT is the appropriate technology to implement the digital Euro. They do not exclude the possibility that DLT can be used, however, they are also open to other approaches. None of the interviewed experts state that DLT would certainly not be a viable option for implementing the digital Euro.

What are the key benefits of a CBDC?

The surveyed experts see various substantial benefits that a CBDC could bring (see Figure 4). 18 experts, mainly from the industrial sector and academia, expect efficiency gains due to lower transaction costs and higher transaction speed. Further, 7 experts expect decreasing (business) costs due to a higher level of automation. Such automation is particularly promising for IoT and the machine economy and stems from the potential programmability of a CBDC. Furthermore, 12 experts expect higher payment convenience as a CBDC could provide a convenient means of payment. 5 experts in academia and the industrial sector stress that a key benefit of CBDC is that it can act as a safe store of value. They suggest that there is a need for safe digital central bank money, for example, in times of financial distress. 12 experts mention financial integrity as another significant benefit of a CBDC and point out that a CBDC can reduce informality, tax evasion, and illegal activities as the central bank can monitor transaction flows more efficiently than with physical cash and commercial bank money. Additionally, experts mention that privacy of financial transaction data can be reached more efficiently by the public as compared to the private sector.

When will a Euro CBDC be issued by the ECB?

As the last question on CBDC, we asked the experts, when the ECB will issue a CBDC. The results are shown in Figure 5. 21 surveyed experts estimate that a Euro CBDC will be issued by the ECB in 3 to 5 years. Another 21 experts expect that a CBDC will be launched in 6 to 10 years. Further, 2 experts expect a Euro CBDC issuance within the next 2 years. 3 experts do not think the ECB will issue a CBDC before 2030. Another 3 experts did not provide an estimate of when or whether at all a CBDC will be introduced in the Euro area.

What are the key benefits of Libra?

According to the experts, the Libra project provides various advantages (see Figure 6). Higher efficiency in payment transactions is the most frequently mentioned advantage, with 18 experts stressing that Libra will enable faster and cheaper transactions, especially for cross-border payments. In this context, 11 experts further point out that Libra will offer more convenient transactions than with currently existing means of payment. 3 experts underline the high interoperability of Libra as a major advantage over CBDCs that are most likely limited in their global use. 12 experts see a significant advantage of Libra in the context of financial inclusion. They stress significant benefits for countries in that the share of unbanked people is particularly high. As another benefit of Libra, experts mention increasing competition in the payments market due to Libra’s disruptive force. 13 experts support the view of Libra being a wake-up call for bankers and central bankers.

Further results can be seen in the following presentation. For a detailed description of the results, please refer to the underlying study.

Conclusion

Our analysis suggests that the introduction of the digital programmable Euro, Libra, and a Euro CBDC would have strong implications for the industry and the financial sector. Our main findings are as follows: First, a digital programmable Euro is demanded by most of the surveyed experts in order to address inefficiencies of the current financial system and increase automation due to a programmable means of payments. Second, Libra and a Euro CBDC will heavily affect banks’ business models, for example, such that disintermediation of the financial sector and digital bank runs could result from an introduction of a Euro CBDC and disintermediation from an introduction of Libra. Thirdly, experts also see various benefits and new business opportunities that retail, industrial and financial companies can develop and realize in the context of Libra, CBDC and the digital programmable Euro. Therefore, experts suggest to not only perceive these initiatives as a threat but also as an opportunity.

Our findings suggest that bank-related opportunities emerge besides the discussed risks for banks. Such a digital programmable Euro can create significantly higher efficiency for cross-border payments, enables near real-time settlement with other assets, rights and goods and, above all, a high degree of automation. As a result, this in turn forms the basis for business models associated with the machine economy in the fields of e.g. Industry 4.0, logistics, mobility, energy and IoT.

Our results provide a number of implications. First, banks should not solely regard Libra and CBDC as a threat, but also as a reason to take innovative action to adjust their business models as well as to generate new profitable services. Second, banks could become essential pillars in the Libra and CBDC system in order to generate returns. In addition, banks may provide services within the scope of their traditional range of operations, such as custody and distribution of digital money, along with services such as AML and KYC. Third, a digital programmable Euro enables the programmability of money through smart contracts and thereby enables automated processes as well as financial services such as interest payments, loans, escrow accounts, leasing and factoring. Therefore, a digital programmable Euro could also yield efficiency gains for banks. Fourth, with the introduction of a digital programmable Euro, a high degree of interoperability could be achieved across multiple payment ecosystems.

Remarks

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Authors

Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). In 2018 and in 2019, he was ranked as one of the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. Since 2017, he is member of the FinTech Council of the Federal Ministry of Finance in Germany. The expertise of Prof. Sandner includes blockchain technology in general, crypto assets such as Bitcoin and Ethereum, the digital programmable Euro, tokenization of assets and rights and digital identity. You can contact him via mail (email@philipp-sandner.de) via LinkedIn or follow him on Twitter (@philippsandner).

Jonas Gross is a research assistant at the University of Bayreuth and project manager at the Frankfurt School Blockchain Center. His research focuses primarily on central bank digital currencies (CBDC) and stablecoin projects such as Libra. You can contact Jonas by mail (jonas.gross@fs-blockchain.de), LinkedIn (https://www.linkedin.com/in/jonasgross94/), and Twitter (@Jonas__Gross).

Philipp Schulden is the chief operations officer of the Frankfurt School Blockchain Center at the Frankfurt School of Finance & Management. In the blockchain environment, he has supervised numerous international projects and research initiatives. He also possesses expertise in the field of application possibilities of blockchain technology in the area of Industry 4.0. He completed his studies in Management (M.Sc.) in Germany, Russia, Peru, and South Korea. You can contact him via mail (philipp.schulden@fs-blockchain.de) and LinkedIn (https://de.linkedin.com/in/philipp-marcello-schulden).

Lena Grale is a final year student at Frankfurt School of Finance & Management studying Business Administration with focus on Management, Philosophy and Economics (B.Sc.). In the course of her bachelor’s thesis, she deals with the implications of a digital Euro on the financial sector. You can contact Lena via mail (lena.grale@fs-students.de) or LinkedIn (www.linkedin.com/in/lenagrale).

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