As both financial institutions and political entities brace for the emergence of decentralized technologies, we are starting to see more and more blockchain products; this time a digital euro. On October 2nd, the European Central Bank (ECB) published yet another report showcasing the benefits of digital currency. Inside it, the central bank reveals its public plans, explaining how it will utilize the digital euro both locally and globally.
Rumors of a Central Bank Digital Currency (CBDC) have circulated the net ever since the emergence of Bitcoin in 2009. Today, we finally have concrete evidence that some of the largest institutions in the world plan to implement the once niche technology. Moreover, this is not just a one-sided implementation. What we have been seeing over recent years is a global competition comparable to that of the space race in the 50s and 60s.
In the 21st century, the global race truly is global. The world is no longer dominated by one or two superpowers and countries who would not be considered powerful within their regions are getting involved as they see the benefits of this new technology. In this article, we will turn our focus on the two candidates who seem the most likely to launch a digital currency in the next two years.
The slow bureaucrat
On one side we have the bureaucratic European Union, a competitor that will push away innovation until a full legal infrastructure has been put into place. In the past, some of Europe’s most powerful figures have talked about a potential future for blockchain. In 2016, Christine Lagarde stated in an interview with the Wall Street Journal that banks will adopt digital currencies in five years. Now, as the President of the ECB, she is supposed to spearhead the development of a digital euro.
In 2019, several external factors pushed not just Europe, but the rest of the world to speed up the process. Upon realizing that Facebook’s Mark Zuckerberg may be about to launch the Libra stablecoin, fears of a massively adopted but corporate-owned digital asset sparked panic. Although the Libra stalled, it did cause the idea of digital dollars, yens, and euros to be reborn once again.
Despite all of ECB’s reports on blockchain technology and native digital currencies in the past two years, we still do not know if the EU hides its progress of digitalizing finance or if it simply delays it. So far, the ECB has published several papers on the matter, like October’s ‘Report on a digital euro.’
In its newest report, the ECB reveals that it plans to limit the digital euro to payments only and will not classify it as a cryptocurrency or stablecoin. Additionally, the report shows us that the EU plans to analyze and test how a digital currency could fit in the Eurosystem.
A series of assessments would be conducted until the first half of 2021, after which we expect that the EU will finalize its plans and start developing the currency. These assessments also include the traditional regulatory sandbox in which both private and state-owned blockchain technologies are tested.
Global or local; currency or investment?
According to the report, the advantages of a digital euro would include providing citizens access to a fast-changing digital world. As the landscape of digital retail payments changes, Europe wishes to stay competitive by adopting a digital currency and reaping all the advantages it can.
To do that, the digital euro must be interoperable with solutions inside the EU, as well as private payment solutions in the rest of the world. Moreover, it must match the ‘distinctive features of cash.’ Such a currency should also have functionalities that make it attractive as a payment solution compared to foreign and unregulated currencies.
But the digital euro will not only be for Europe. Instead, the ECB plans to turn the native digital currency into a global monetary force. One part in the report notes that ‘If non-euro area residents were to rebalance their portfolios significantly towards the digital euro, the size of and risks to the Eurosystem’s balance sheet would increase.’ But per tradition, there are several seemingly abstract and bureaucratic roadblocks that prevent the digital euro from surfacing any time soon.
The report argues that the digital euro should be designed in such a way that it minimizes ecological footprints. Moreover, it cannot be used as an investment vehicle, nor can it be considered a cryptocurrency or stablecoin. How much these specific requirements will delay the digital euro’s launch is unknown. However, we at least know that all research may end exactly two years from now.
Aside from reports, the European Union have also created tangible organizations and associations that are working together on a solution. In recent years, the EU even created a few blockchain organizations, such as the European Blockchain Partnership (EBP) and the European Blockchain Services Infrastructure (EBSI). However, besides anecdotes, representations, and announcements of regulatory sandboxes, we still have no proof that Europe is actively developing a digital euro. But no matter what, there is still time for Europe to be at least the second global economic power to launch a CBDC.
The dragon in the East
Europe’s eastern rival, China, is using the opposite strategy. In all spheres of life, the Asian economic superpower strives to be the first in every industry. Laws are malleable in a largely authoritarian regime, as such China can move quickly developing blockchain technology unhindered by laborious infrastructure building. We have seen this recently with 5G technology, developed not without controversy in the west.
But to focus on blockchain technology and CBDCs specifically, we can take a better look at the Blockchain Service Network (BSN.) Ever since Xi Jinping’s famous blockchain speech in October 2019, the world got a taste of China’s deep fervor for everything decentralized. But even before that, the People’s Bank of China (PBoC) mentioned on several occasions that it had already finished its blockchain research, which it had been conducting over several years. Not only did the central bank finish its due diligence, but it also hired a team to develop the digital yuan.
After Xi’s speech in October, China began the second phase of the blockchain race by creating the BSN. Simply put, the BSN will serve as a blockchain-based infrastructure network through which vendors, customers, and companies can transfer value via the digital yuan. After finishing its pilot test in late 2019, the BSN became ready to provide support for medium-sized businesses in several key-regions in China, notably Shenzhen.
But when will we see the Chinese government finalize its digital yuan project? According to a major partner of the BSN, Red Date Technology CEO Yifan He, the BSN may integrate stablecoin support as soon as 2021. While he did not reveal whether those stablecoins would be private stablecoins or the state-owned digital yuan, the latter option is far more likely.
As with Europe, we do not know whether the digital yuan will try to scale as a global solution. Chinese authorities are reluctant to share any official information regarding the project, and if they do, it happens rarely. For one, it is known that in its initial phase the digital yuan will only be functional in select economical strongholds within China. As to whether China will offer the digital currency for use outside the country, this is not the real question. A more important question is whether the rest of the world will accept China’s new currency.
At this time, we only know about two serious contenders in the blockchain race. While one appears meek and waits diligently for the perfect moment, the other is aggressively developing a new solution for digital payments. In the end, China may ultimately be the first country in the world to launch a digital currency, but will anyone outside China ever accept it? For Europe, it is far more probable that a well-regulated and secure digital euro will be accepted by countries in the rest of the world.
There also appears to be at least one thing found in both digital assets, they will be adopted solely for payments in the form of currency. Neither Europe nor China plans to offer their digital currency as an investment vehicle. Moreover, they both seem to be pushing away any sign of cryptocurrency or stablecoin similarity. While this may be bullish for global blockchain adoption, it is not helpful for the existing cryptocurrency ecosystem. If true, powerful global institutions will seek to build upon what developers have worked so hard on in the past decade by replacing modern cryptocurrencies with legacy-based solutions. Based on recent regulatory pressure from the FCA, SEC, and CFTC, a future where cryptocurrencies are ‘regulated to death’ is not outside the realm of possibilities.
In summary, what can we say about the future of a digital euro and how it will affect the rest of the world? Based on recent public information, it seems that the CBDC will be solely used for massive adoption within the digital payments landscape for retail consumers. The digital euro will be a currency and not an asset which individuals can invest in. Furthermore, it will take at least until the middle of 2021 before the ECB develops the currency technologically.