Cryptocurrencies — When and how will the Digital Euro emerge?
The European Central Bank’s (ECB) public consultation on the Digital Euro concluded on January 12, 2021. Based on the statements received, a fundamental decision on the continuation of this major project is expected in the summer of 2021. In this context, the developments of the private sector cryptocurrencies Bitcoin and Diem (formerly Libra) are also considered. Other central banks’ activities, e.g. in Sweden regarding the “E‑Krona” as well as in China, will certainly have an impact in this regard as well.
Statement of the German Banking Industry Committee
In its statement on the Digital Euro, the German Banking Industry Committee expressed its support for the ECB’s activities and pledged its assistance with the design and project planning.
“For the German Banking Industry Committee, the introduction of a Digital Euro by the Eurosystem has the potential to strengthen Europe’s competitiveness, depending on how it is designed. However, it also carries the risk of fundamentally changing the geometry of the European banking system. Banks in Germany and Europe play a key role in the economic cycle and make an indispensable contribution to the efficient supply of financial resources to companies and consumers. That alone is why it is important to involve the banking industry in the considerations of a digital currency at an early stage.”
Karl-Peter Schackmann-Fallis, Executive Member of the Board of the German Savings Banks Association.
Predominantly positive tenor
The tenor of the German Banking Industry Committee statement is mostly positive. The Digital Euro is considered to be a pioneering payment method in a digital economy, which coherently complements the existing and proven systems and structures. The aim should be to achieve the greatest possible synergies with existing payment transaction solutions in order to ensure access to digital central bank money for end consumers. There is consensus that digitization is changing payment transactions and that the ECB needs to carefully design the Digital Euro to ensure financial stability. To implement the targeted activities, high investments are inevitable for both institutions and the economy. But the use of modern tokenization solutions, e.g. through Distributed Ledger Technology (DLT), enables the implementation of innovative payment solutions. In this context, the use of smart contracts and micropayments, services such as “Blockchain as a Service”, “Smart Contracts as a Service” or payment offers in the Internet-of-Things (IoT) are conceivable.
Need for clarification
It is considered critical that the proven two-tier banking system with central bank and commercial banks could be called into question. According to the German Banking Industry Committee, this constellation is essential for money market stability, the supply of loans to companies and private individuals, and the acceptance of and trust in the payment methods issued. The established banking system is seen as a crucial component for ongoing economic growth.
Another open question is to what extent a Digital Euro is to be regarded as a crypto-asset in the sense of MiCA (Proposal for a regulation on Markets in Crypto-assets) and what implications this might have. The German Banking Industry Committee has also issued a statement on the ECB’s proposed regulation.
There is a need for further clarification with regard to some regulatory issues. In this context, the German Banking Industry Committee proposes an orientation towards existing standards. All parties involved should at least comply with the requirements of
- CRR (Capital Requirements Regulation),
- PSD2 (Payment Service Directive),
- AML5 (Money Laundering Directive) and
- EMD2 (E‑Money Directive) and should hold a full banking license. It also remains to be seen if the implementation of existing EBA IT standards will also apply to the digital currency.
From the German Banking Industry Committee‘s point of view, legal certainty, uniform specifications for a token-based fiat money and an appropriate regulatory standard are the basic prerequisites for consumer acceptance and trust in the Digital Euro.
Courses of action for payment institutions
The discussion on the Digital Euro has to be seen in the context of the general increase in the importance of cryptocurrencies. Many companies have long since recognized that Distributed Ledger Technology can help to efficiently digitize complex supply relationships. It is therefore a logical consequence that there is also growing interest in using this new technology to process payments as well. In the future, it will certainly not only be central bank-issued cryptocurrencies that will be used. For payment institutions, the generally growing interest in cryptocurrencies increasingly results in the need to offer their own customers storage of and trading in cryptocurrencies. In addition, opportunities may also arise for institutions that offer their corporate customers self-issued cryptocurrencies to support them in the digitalization of their business processes.
The SRC experts will keep an eye on the exciting developments in the field of cryptocurrency and the Digital Euro for you and support you in the realization of your crypto storage service. We will gladly inform you about the options to get involved in this innovative sector.