The digital euro

SYSTEM

The digital euro

Needs of industry must not be neglected in establishment process

28. September 2022

A digital currency for Europe

Digital currencies have become an integral feature on the innovation horizon of payment services. This has also become clear to the major central banks around the world and they are working on a digital version of their central bank money. In October 2021, the European Central Bank launched a project to intensively investigate the establishment of a digital euro. A decision on the possible implementation of this project is slated for October 2023. Until then, extensive analyses will be conducted to investigate the possible impact of a digital euro on a wide range of disciplines.

Design of digital euro should trigger firms’ innovation potential

A digital euro as an additional means of payment alongside notes and coins would be a step forward both for citizens and for German industrial enterprises. The digital version of European Central Bank money or certain regulated private sector alternatives could serve as a catalyst for the digitalisation projects of these firms, leading to efficiency gains in payment transactions and commercial processes and creating new innovation potential. If private sector alternatives, such as tokenised commercial bank money, prove necessary, these should conform to uniform standards.

The functional design of the digital euro is key to ensuring that the potential of the digital euro is fully exploited. We support the approach of making the concerns of citizens a top priority in order to achieve the broadest possible acceptance of the digital currency. Trust and reliability are key elements in the success of a digital currency. However, the full innovation potential of the digital euro can only be tapped if the needs of businesses are also sufficiently considered. The central concerns of industry are the programmability of payments, the governance system, data protection considerations and some practical design issues, such as availability and denomination. We would also urge that aspects such as international competition and the related issue of the time factor are taken into account in the current analyses. We believe that regulatory sandboxes or test environments will be needed to test different applications in the best possible way.

Content

General context 3

Move swiftly to introduce a digital currency solution for both consumers and enterprises ................... 3

Digital currency is a key component of digital ecosystems 4

Competitiveness of EU also depends on the digital progress of its payments system 4

Avoid squandering significance and trustworthiness of euro in international trade

5

Financial stability and climate change also important aspects 5

Programmability

5

Governance and data protection 6

Practical features 7

Imprint 8

The digital euro | Needs of industry must not be neglected in establishment process

General context

Digital currencies have been a key topic in discussions on payment systems for the past few years. Driven by crypto currencies such as bitcoin, more and more central banks are looking to digitalise their national currencies. Among the major central banks, the Canadian and Chinese central banks are leading the way, announcing a digital revision of their central bank money (Central Bank Digital Currency, CBDC) in 2016 (Canada, Jasper) and 2017 (China, e yuan) respectively.1 Central bank money includes all the central bank deposits of commercial banks and cash in the form of notes and coins. A digital version of central bank money will allow these payments to be made in electronic form. Thanks to the digital component, depending on the design of the digital currency, it will be possible to integrate payment transactions much more deeply into business processes in a customised way. This will open the door to innovations that go far beyond the features of our current electronic payment system such as regular transfers using standing orders.

In June 2021, the European Central Bank (ECB) announced its plan to run a five year project to intensively examine the establishment of a digital version of the euro.2 The two year initial investigation phase was launched in October 2021. It focuses on various aspects including the possible effects of the digital euro on the financial market, the overall economy and the Eurosystem mechanism, e.g. in the definition and implementation of monetary policy. Various legal aspects will also be investigated such as the legal framework for establishing a digital euro and the occurrence and handling of possible legal consequences of different design characteristics. Lastly, the ECB will be investigating the functional design possibilities and the technical and organisational approaches to digital euro services. This will include an analysis of the widest possible range of potential applications and their strengths and weaknesses.3 Based on the results of this analysis, a decision will be made at the end of this phase on whether or not to introduce a digital euro.

Move swiftly to introduce a digital currency solution for both consumers and enterprises

The project to investigate the introduction of a digital euro comes rather late, but it is still a good idea Due to the high degree of complexity involved, it is important and right to adequately investigate and discuss all the basic aspects with all stakeholders. The project should also consider the progress made by central banks in other key economic regions and the speed at which the market is developing, including the resulting market expectations and requirements. In view of the significant head start some other central banks have here, Europe is in danger of being left behind. This is particularly the case for the use of the digital euro by enterprises (e.g. in supply chain management). Political decisionmakers and the responsible monetary authorities should bear in mind that decisions regarding the design features relevant to industry need to be made swiftly. If this process takes too long, the ensuing competitive disadvantages could well be difficult to overcome

Various options for the technical design of the digital euro are available, with different user groups likely to prefer different options. For example, citizens may regard the greatest possible anonymity in payment transactions, similar to cash purchases, as more important than a feature such as programmability. Many of these different design options will be analysed in the scope of the ECB

1 CBDC Tracker (2022) Today's Central Bank Digital Currencies Status July.

2 European Central Bank (2021). Eurosystem Launches Digital Euro Project. July.

3 European Central Bank (2022). Report on a Digital Euro October

The digital euro | Needs of industry must not be neglected in establishment process

project, including considerations to limit the use of the digital euro to specific user groups (financial institutions, etc.).

In parallel to the ECB project, expert groups are also discussing private sector proposals. These could come into play if the digital euro is not equipped with the functionalities important to enterprises or is introduced too late to meet the needs of the market participants. One of these proposals is tokenised bank money, which basically corresponds to the payment units of the standard cashless payment transactions of banks, but is based on distributed ledger technologies (DLT). In this context, one token corresponds to a digital asset created by commercial banks on the basis of bank money in the blockchain. Other notable alternatives are so called trigger solutions that would enable the continued use of existing payment systems

The final design of the digital euro should meet the needs of consumers and enterprises in equal measure. If the needs of enterprises are not sufficiently met, private sector solutions would have to temporarily fill the gaps In this case, it would be very important to avoid fragmentation. The tokenised bank money created by commercial banks would have to be equally applicable within the entire financial industry, not just at selected banks.

Digital currency is a key component of digital ecosystems

The innovation capacity of Germany and Europe is key to the economic success of these regions. This particularly applies to the global competition with the United States and China. To secure its innovation capacity, a public innovation framework is required that suits the dynamic developments in the market. One of these dynamic developments is Industry 4.0, where industrial production is increasingly digitally connected via its complex value chains. The expansion of digital ecosystems facilitates new business models and innovation. A digital means of payment is the currency of these ecosystems. In our view, it is therefore essential to establish a digital euro.

If there are legal obstacles to testing the digital euro, we suggest swiftly setting up test environments or regulatory sandboxes along the path to implementation. These would give enterprises the opportunity to test new technologies and business models that are not yet legally authorised or are still in the testing phase under real life conditions and in an interdisciplinary way. This kind of test environment would be particularly suitable for the development of a digital currency. It would also enable the legislator to use the test results to adapt regulations to a new technology or social reality.

Competitiveness of EU also depends on the digital progress of its payments system

The digitalisation of the European economy harbours enormous potential, including significant efficiency gains in the structure and flow of commercial order placement and order processing. The introduction of a digital and programmable euro is also likely to further reduce transaction costs of both payments within the currency area and of cross currency payments and to have positive effects on the speed of the mutual value date. Both these factors would encourage the broadest possible application, which would, in turn, lead to a high level of acceptance of the digital euro in global trade.

Furthermore, the introduction of a digital euro has the potential to substantially accelerate the digitalisation of the European economy. Given the digital progress of other currency regions, this kind of catalyst is urgently needed and could support both small and medium sized enterprises and large corporations in their digitalisation projects.

The digital euro | Needs of industry must not be neglected in establishment process

Avoid squandering significance and trustworthiness of euro in international trade

The introduction of the euro led to the elimination of currency fluctuations and corresponding savings in transaction and currency hedging costs within the euro area, and also brought advantages in international trade. In the global exchange of goods and services, German and European enterprises greatly benefit from the strong and globally accepted common European currency. This strength and the trust placed in the euro must be maintained and further consolidated by ensuring that it keeps pace with international technological developments. The swift establishment of a digital euro with attractive features is the logical consequence here

In view of the globally increasing uncertainties, the preparatory analyses should also consider generating additional reliability in the international payments system. As one of the key currencies, the euro in its digital form should meet the technical conditions required for the secure documentation and handling of payment transactions in international trade. As digitalisation deepens, it is increasingly important that the documentation of payments in business transactions as part of supply chain management cannot subsequently be changed and that the usual standards of business confidentiality are maintained

Financial stability and climate change also important aspects

The analysis of how to design the digital euro must focus strongly on maintaining financial stability. The introduction of digital central bank money must not have a negative impact on the stability of the financial markets. The main risk to counter is that the digital euro, as a supplement to cash, replaces conventional customer deposits at commercial banks. This could exert excessive pressure on financial institutions in member states facing severe economic crises and could lead to a loss of confidence in the banking system among the population. Uncontrolled outflows of customer deposits and the ensuing loss of stability in the affected financial institutions would have a negative impact on both credit availability and financing costs. The digital euro must serve primarily as a means of payment. It should not feature saving or investing incentives.

A further important consideration is the aspect of sustainability. As part of the European Green Deal, the European Union is targeting climate neutrality by 2050. The financial system needs to play its part in reaching this goal. The establishment of the digital euro must not make it more difficult to reach the European climate targets. The issue and administration of the digital euro must therefore be designed to be energy efficient.

Programmability

Many enterprises are currently working on the data supported development of their business models. Both smart contracts (technology supported contracts) and clearly identifiable data sources (sensors) play a central role here. Functionable payment processes linked to conditions are needed to tap the full potential of these opportunities for further development. Automated payments, also called programmable payments, 4 are already used today in the form of standing orders, for example. However, due to technological restrictions, such functions can currently only be used for very simple cases. In order to apply more complex processes and make full use of the potential of a digital currency,

4 Note: Programmable payments (carried out once predefined criteria have been met) are fundamentally different from programmable money (monetary units based on DLT, tokenisation). In this statement, the term programmable euro stands for programmable payments.

The digital euro | Needs of industry must not be neglected in establishment process

the programmability of the entire payment process (payment initiation system and infrastructure) needs to be expanded, for example through the use of DLT. This would create a more flexible automation of payment processes, in other words a more individualised design of payment modalities including payment settlement standards. Aspects such as reliability, finality and complete transparency through documentation would be safeguarded through the direct link of the digital payment with the business transaction. Furthermore, the new standards thus created would significantly improve the quality and reliability of business and payment transactions and generate efficiency gains in the processes of users due to the higher degree of automation.

We are currently still in the early stages of development regarding conceivable applications. The following examples nonetheless give an idea of the huge potential of the expanded programmability of payment processes. It is therefore our main concern that the digital euro is designed to support this important functionality.

Condition and performance dependent automated (micro)payments between machines (machine to machine, M2M) or physical objects (internet of things, IoT)

Bidirectional settlement of receivables between business partners

Integrated automated payments in autonomous supply chains

A direct fulfilment of service with the corresponding payment between business partners (delivery vs payment, DvP).

Governance and data protection

Digital central bank money and digital commercial bank money enable a highly automated payment system not only between citizens but also between enterprises or public sector organisations. In order to create trust, acceptance and legal certainty, a digital currency should always be issued by a regulated entity.

At the same time, the payments system needs a uniform or interoperable infrastructure in order to make transactions secure and traceable. Proof of identity plays a key role here. Alongside the natural identities of citizens, the infrastructure in question should also enable the provision of identities for legal entities, machines or other entities. It should be possible to integrate identities into existing payment systems as seamlessly as possible. While maximum privacy is paramount for citizens, the needs of the commercial sector are different. Despite these divergent needs, both areas must be interoperable.

For legal entities, on the other hand, the most important aspects are the legally compliant documentation of a transaction and the participating parties and a proof of payment. At the same time, the resulting data on all the transactions made and the resulting metadata are highly sensitive information as they provide a detailed picture of business activities and business relations. In order to technically rule out data misuse it must be ensured that the regulated entity that issues the money and any intermediaries do not comprehensively store information on transactions and identities. The data that needs to be collected for legal reasons must be adequately protected.

It should also be possible to use the digital euro with digital identities provided by the state. Restricting use to only commercial providers would limit the range of possible uses and create a dependency on a third, commercial instance. A publicly provided identity infrastructure should enable legal entities that

The digital euro | Needs of industry must not be neglected in establishment process

have acquired a digital root identity to independently issue subidentities for machines or other entities in their corporation. This would enable transactions that are not relevant to tax or banking regulations to participate independently in the payment system. To ensure a legally certain allocation of the subidentities, it would be possible at every stage to trace these back to the issuing root identity.

Practical features

The establishment of a digital variant of the euro also throws up a wealth of questions regarding its operational implementation. For example, the digital euro must consist of a standard solution that is fully interoperable with other payment systems (foreign currency or crypto assets). Payments outside of the EU must be easy and convenient to perform through the future European programmable and digital payment infrastructure. The degree of interoperability will have a direct impact on the acceptance and appeal of the digital euro on the international level. Furthermore, it must be easy to integrate the digital euro and the technical systems on which it is based into existing payment networks and processes, irrespective of the specific payment system and form of money into which it is to be exchanged (cash, demand deposits, etc.) and of the type of business partner involved (citizens, enterprises, automated systems).

The denomination and availability of the digital euro should have a high degree of flexibility. The denomination in general should be based on that of the SEPA payment system but should also include the option of up and downscaling as required. We think it is already clear today that the use of sub cent amounts is an important functionality. From a business perspective it is also essential to be able to work with very high amounts (e.g. in connection with corporate financing and acquisitions for example) as this is commonplace in payments between enterprises. In terms of availability, the standards should be equally high. Payment in digital euros should generally be possible at all times and everywhere. If the paying party and/or recipient of the payment is outside the data network, it should be possible at least to a limited extent to use the digital euro via a local, secure infrastructure (offline function). Citizens and enterprises outside of the EU should also be able to use the digital euro.

The digital euro | Needs of industry must not be neglected in establishment process

Imprint

Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu

T: +49 30 2028 0

German Lobbyregister Number R000534

Authors

Sven Schönborn

Senior Representative Research, Industrial and Economic Policy

T: +32 2 7922 1011 s.schoenborn@bdi.eu

Christian Rudelt

Senior Manager Digitalisation and Innovation

T: +49 30 2028 1572 c.rudelt@bdi.eu

BDI Publication Number D1620

The digital euro | Needs of industry must not be neglected in establishment process