SUERF: Europe’s answer to Libra – potential and prerequisites of a programmable euro

09 July 2020

The programmable euro is an important innovation to secure Europe’s long-term competitiveness in the global economy. Europe needs to act swiftly and decisively since Asian and US initiatives such as the digital Renminbi or Libra threaten to pre-empt European projects.

A programmable euro needs to take account of the different requirements that a payment system in an advanced economy has to meet. These requirements are defined by the differing needs of individual user groups. For the vast majority of payment transactions, private-sector solutions – especially those provided by the banking industry – should be able to satisfy these needs of the users. Nevertheless, a European currency area that can be competitive and sovereign in the long term also requires CBDC in the form of a programmable euro issued by the ECB.

 

Introduction

The announcement by the Libra Association in June 2019 that it would issue a private cryptocurrency with a global reach in the foreseeable future provided an important impetus to the discussion about the future of payments. During the months that followed, the Libra Association accepted the criticism of its plan and completely revised it within nine months. With the “new” Libra white paper, published on 16 April 2020, the probability of the Libra Association starting to issue a programmable euro, dollar, pound sterling and other currencies has increased fundamentally.

But the Libra project is not the only one of its kind. Numerous parallel initiatives surrounding the issue of “digital currency” can be observed around the world. A few weeks ago, the Chinese central bank launched a pilot project for a digital renminbi in several Chinese metropolises. Simultaneously, countries such as Sweden, Great Britain, Canada and South Korea are working intensively on the introduction of a central bank digital currency (CBDC). And German Finance Minister Olaf Scholz is backing “innovative European responses” to projects such as Libra. The innovative aspects of all these initiatives essentially focus on two elements: first, stablecoins2 are to be created and used as new additional private-sector forms of money. Second, money is to be given a previously unknown quality: it is to become programmable. Programmable means that digital means of payment are combined with smart contracts. The latter allow the money to be integrated into digitalised value-added processes, enabling money to be clearly allocated to individual process steps, where payment can be fully automated.

The discussion following the publication of the first Libra white paper revealed that there are a number of issues surrounding the nature of this new form of money, the future demand and the question of the issuer. To clarify the issues involved, a distinction needs to be made between the following three levels.

• At the level of individual “economic entities”, the question is what needs they have and what contribution digital money can make to satisfy these needs.
• The macroeconomic level and thus the question of precisely what form of money a stablecoin actually represents is probably the central aspect. Closely related to this are questions about the effects on the stability of the system, including the stability of the banking sector, and on the economic policy sovereignty of states and the scope for monetary policy control.
• At the technological level, answers must be provided to questions concerning issues such as volumes, scalability and interoperability.

Differing needs with respect to means of payment require different programmable euro solutions

A prerequisite for the successful implementation of a future payments strategy is an accurate forecast of the future needs of different user groups. It is difficult to make such a forecast because of the problem of reliably predicting the development of a new technology and its impact on households, businesses, banks and the stability of the financial system. In the complex economies of industrialised countries, moreover, there are no uniform expectations of what a payment system is supposed to be capable of. The needs of different user groups are simply not identical.

• Households are primarily interested in the functionality of money. They do not, as a rule, distinguish between the issuers of different forms of money, i.e. between central bank and bank money. Households are interested above all in the availability, usability, reliability and security of the means of payment; there is no special focus on central bank money.
• Businesses differentiate a bit more. For them, it is possible to identify a need for crypto-based forms of money on two levels.
  • First, there is the increasing demand for programmable money. The background: DLT will make an increasing contribution to solving technical and economic problems in the coming years. There are already a large number of pilot projects in areas such as securities or logistics. In future, however, increasing emphasis will be placed on applications in the area of “digital transformation” in the form of the Internet of Things (IoT), for example. If DLT is to effectively develop its potential here, a means of payment on the same technological basis will be needed – and that means the programmable euro.
  • In contrast to households, businesses normally have large bank deposits to manage, so CBDC is likely to represent an interesting alternative since deposits in CBDC would tend to offer them greater security than bank deposits.
• The interest of the state is primarily to guarantee households and businesses a secure and stable currency and, based on this, an efficient payment system. It will only embrace technological innovations if they are necessary to safeguard the security of the currency, the stability of the monetary order and competitiveness....

Full paper  SUERF Policy Note, Issue No 182 (0.75 MB)

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