Authors: Jonas Gross, Manuel Klein, Philipp Sandner
Recently, the Digital Euro Association, a thinktank around the digitization of money, was launched to help shaping the discussion around the digitization of money — especially in the Euro area — to stimulate public discourse and act as a unified voice on digital money. In this article, we discuss current initiatives around the digitization of money and outline how the Digital Euro Association fits into this discussion.
While digital money is becoming increasingly relevant, cash has been losing its importance as a means of payment steadily over the past years. This trend is also being exacerbated by the current COVID-19 pandemic. In times of global lockdowns and fears of infections via banknotes, the change in the individual payment behavior of citizens towards digital payment methods is inevitably accelerated.
According to representative surveys by the Bundesbank on the payment behavior of German citizens, 53% of all transactions in 2014 were conducted in cash. While cash still accounted for 48% of all transactions in 2017, this ratio fell sharply to only 32% in 2020. As a result of this global decline in the importance of cash as a means of payment, central banks worldwide are now considering the introduction of their own digital currencies, so-called central bank digital currencies (CBDCs). According to a recent study by the Bank for International Settlements (BIS), 86 % of the surveyed central banks are either actively researching CBDCs or already developing first CBDC prototypes. In October 2020, the Bahamas already launched the world’s first CBDC. Also the European Central Bank (ECB) is now reviewing the introduction of a CBDC for the euro area, a (public) digital euro.
In addition to these public sector-driven initiatives, the private sector is also working on promising solutions for the digitization of money, mainly motivated by leveraging the benefits of distributed ledger technology (DLT). By “tokenizing” commercial bank money or e-money, new business models can be realized. These business models utilize the benefits of DLT in payments, such as the elimination of intermediaries and the resulting decrease in transaction costs. Furthermore, transaction systems are available 24/7, payments can be programmed, and machines and devices can be integrated into these payment systems.
The role of the Digital Euro Association (DEA)
The Digital Euro Association (DEA) aims to help shaping the discussion around the digitization of money — especially in the Euro area — to stimulate public discourse and act as a unified voice on digital money. As founding members of the DEA, we expect the DLT to transform numerous industries whilst enabling various innovative business models, both for the financial sector and the manufacturing industry.
In the financial sector, DLT enables the transfer of tokenized assets and the corresponding euro-denominated payments to be processed on the same platform. Settlement can occur almost instantaneously, thereby reducing counterparty risks, increasing liquidity, and enabling so-called “delivery vs. payment” (DvP) processes, i.e., the simultaneous exchange of assets with money on the same platform. DvP could be enabled primarily by a wholesale CBDC issued by central banks. This new digital form of central bank money would make central bank reserves, which already exist in digital form today, transferable as tokens via distributed ledgers. In addition, payments of, e.g., coupons or dividends in the asset lifecycle, can be transferred in a more efficient, automated, and simplified way through transparent documentation of the owners of the digital securities on chain.
In the manufacturing industry, pay-per-use models for capital-intensive machines will be enabled, providing new financing options for production equipment by linking payments to the actual usage. A DLT-based digital euro in the form of tokenized e-money or commercial bank money would enable micropayments directly between machines (machine economy), which will become particularly important in the Internet of Things (IoT). In general, code-based “smart contracts” will enable programmable and, therefore, more efficient and automated payments.
What does it take to realize these concepts and make the digital euro a success? The Digital Euro Association is dedicated to educating people about the advantages of the tokenization of money. The DEA also wants to assist in solving the immense challenge the eurozone with its 19 member states and many different parties faces and create an innovative and open environment for digital tokenized money. It is our strong belief as founding members of the DEA that through shared knowledge and meaningful collaboration among the members of the DEA community, who have backgrounds in a wide range of industries, a significant contribution to the development of the digital euro can be created. On the basis of this interdisciplinarity, it is possible to develop solutions jointly and, under consideration of all interests, to formulate the necessary requirements for politics and the financial sector. In this way, the DEA hopes to offer every citizen, entrepreneur, (central) banker, and politician a platform that helps to understand the enormous impact of the digitization of money on the economy and to define design principles of the digital euro.
The DEA Community
Over the past few months, the DEA community has grown significantly. From its initial seven founding members, the community has now grown to almost 170 members. These include, for example, Sonja Davidovic, economist at the International Monetary Fund (IMF), Miguel Fernández Ordóñez, former President of the Spanish Central Bank, Peter Dittus, Former Secretary General at the BIS, or numerous other experts from academia, the financial sector, manufacturing industry or associations. Recently, the DEA established a strategy on how companies and associations can join and support the DEA, in addition to individual experts and interested parties.
How can I join or benefit from the work of the DEA?
The content of the DEA is developed by the research fellows. The DEA acts as a platform to disseminate the work of the fellows and to shape the discourse on the digitization of money through panel discussions, webinars, and other events. Academics, decision-makers from the (financial) industry, policy-makers, as well as experts from the field of DLT who are involved in the development of the digital euro can become research fellows at the DEA. Additionally, there is the possibility to subscribe to the DEA newsletter and to follow the DEA via social media platforms such as LinkedIn and Twitter, where the DEA regularly shares the content of the fellows and draws attention to DEA events. The DEA is happy to welcome more research fellows also from other European countries and hopes to support the European project of a monetary union also in the digital, DLT-based future.
About the authors
Jonas Gross is a founding member of the Digital Euro Association. He also works as a project manager at the Frankfurt School Blockchain Center and is writing his PhD thesis on digital currencies at the University of Bayreuth.
Manuel Klein is a founding member of the Digital Euro Association and works as a consultant at a leading business consultancy firm. His consulting focus is on the application of distributed ledger technology in finance with a focus on digital money, as well as digital assets. Manuel is also a board member of the association Monetative e.V., which provides education about the existing monetary system and alternative monetary systems.
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 a member of the FinTech Council of the Federal Ministry of Finance in Germany.