Almost all central banks are flirting with a digital currency. It could be a big, wonderful thing and could rejuvenate a currency union like the Eurozone in particular and make it attractive again. But central bankers worldwide seem to lack the courage to leverage the huge potential of blockchains for central banks.
India is planning to do it. China is already cautiously rolling it out. Thailand, Hong Kong, and Australia are planning it, and the EU is researching it. France is running the first tests. Ukraine is cooperating with the Stellar Foundation. The World Economic Forum is issuing a framework, and the Bank for International Settlements is somehow coordinating along.
Reportedly, 80 percent of all global central banks plan to issue a digital currency. The technical term for this is “central bank digital currency” (CBDC). Whenever another central bank announces a CBDC project, the online magazines churn out a few headlines. One or two experts already suspect the hour has come from which “real money” will make blockchain currencies like Bitcoin obsolete. But what happens then is usually rather sobering.
Digital currency has already progressed furthest in China. The People’s Republic has vigorously pushed forward the digital yuan, has come up with a rather well-thought-out design, is pursuing strategic plans with the CBDC that may go as far as a new monetary union under the Chinese umbrella, and is currently beginning to try out the system in initial area-wide tests.
The EU, on the other hand, is bogged down in decision-making committees, orgies, and preliminary studies, so it has been known for five years that the EU is watching and considering the whole thing. In the U.S., even less is happening. The French central bank, after all, recently transferred simulated bonds for two million euros on a blockchain in a test. Bravo!
A digital currency issued by the central bank is a good idea. It can even be a strong, powerful, epoch-making idea. But for that to happen, central banks need to be bold. If all they want to do is replicate the existing system under a fancy new name, they can save themselves the trouble.
Blockchains of cryptocurrencies like Bitcoin or Ethereum are decentralized and stable, liquid, valuable, and geographically widely distributed IT networks. They are powerful artifacts of digital space that are especially useful when you want to move value securely, quickly, and globally. Every central bank should want to have one of these. As an ardent supporter of European unification and as a taxpayer in Europe, I desperately want our EU and our ECB to get a CBDC blockchain worthy of the name. And at any cost. It can’t happen fast enough.
Of course, the EU has to be ready to embrace the technology. Every blockchain is a web of incentives. These incentives reward and punish, forming a balance that leverages all players’ self-interest to create security. A good blockchain is like a social contract or constitution.
A digital euro should also have this. It can provide incentives for politicians, central banks, banks, companies, and individual citizens. This should not be understood as a freestyle to be completed when raising a blockchain but as an opportunity — as a founding monument of a new, future-proof European monetary union.
The EU would also have to dare to do something about regulation. The resistance to regulation that characterizes true cryptocurrencies like Bitcoin is very much more than just a sneak attack for criminals. Anyone who has tried Bitcoin knows what I am talking about: there are zones where there is no room for regulation, such as in one’s wallet, or the contact between the wallet and the blockchain, or, more recently, in the design and use of decentralized exchanges (DEX). This has the effect of eliminating intermediaries, much less friction, but more liquidity and opportunities.
The combination of the wallet Metamask with the decentralized exchange UniSwap is one such example. One logs in with nothing but the wallet. Then you can exchange any tokens, and you can also provide your own tokens as liquidity for exchanges to earn interest. There is no middleman, just the users, and the blockchain. The users form a DAO, a Decentralized Autonomous Organization, and the blockchain ensures that everyone plays by the rules 100 percent of the time. What doesn’t true central bankers feel compelled to idolize such a system? Surely this is the kind of thing the EU must want.
Decentralized exchanges are just one example of a DAO. A stable coin like DAI is another. Here, participants in the maker DAO regulate the price of a DAI dollar, much like an ETF regulates a security price. Other experiments, such as “The DAO,” outlined intriguing blueprints for how a set of rules on the blockchain can create an organization that performs tasks otherwise only seen in corporations or governments. Wouldn’t that be something a confederation of states like the EU should want? Wouldn’t the EU have opportunities here to create impartial institutions that could last for centuries?
If you don’t have the courage, you might as well not do it.
A blockchain can be so unspeakably useful for Europe. It starts with a decentralized exchange where European bonds and shares are traded, and anyone can add liquidity; it goes to special euro tokens, such as a scarcer Edeleuro, to DAOs that take over functions of municipal or intergovernmental fund management and perhaps integrate citizens; via tokenized European ID cards or grant tokens too — the range of possibilities is gigantic.
To unlock this huge potential, the EU needs to be one thing: Bold. It must not drown blockchain in regulatory desires. It must not allow itself to become the servant of existing interests when it comes to planning. And it must not overlook the fact that a blockchain must be one thing above all — open. Blockchains must interact, and they must be free for everyone to use. The incredibly vital crypto-economy shows just how powerful this is.
Once there are the usual regulatory constraints, the paperwork and friction start. Then everything gets complicated and slow, and then the blockchain wouldn’t work half as well as PayPal, where a for-profit company does everything it can to hide the regulatory injected friction from the customer. The EU can do many things , but providing the kind of customer service that a business provides is not one of them.
You can see this in China: the central bank’s CBDC is currently rolling out the first tests where a few thousand people can use a wallet on their smartphone to pay in stores. So? Is there anything new about that? People have yuan in their accounts, and they’ve been paying for a long, long time by holding a credit card or their smartphone up to a terminal. Any cryptocurrency that an IT student can set up in his shared room accomplishes the same thing.
Even the forward-looking Chinese CBDC has so little new about it other than the term “digital currency” that it’s downright painful. If anything, such attempts show that you don’t need a CBDC.
The French central bank transferred simulated bonds worth two million via blockchain in a test on Dec. 17. That’s a step, after all — but a rather timid one.
The Banque de France could have issued an ERC20 token on Ethereum. Any reasonably experienced blockchain developer could have programmed that in two working days. If they had more time, they could add any bank’s regulatory requests to the smart contract. Any citizen accustomed to the Internet would only need Idea-like instructions in three steps to use the token. The two million euros would arrive in seconds. And you could also invest them in DeFi. They would be in contact with all other blockchains and fiat currencies via exchanges, and — and — and -.
But instead: The Bank of France uses a “private blockchain platform.” The technology is made by SETL, a third-country vendor from the United Kingdom. SETL’s technology is, in its own words, “proprietary, market-leading, and specifically designed for high-performance, low-latency regulated applications.”
The consensus mechanism is called “proof of identity,” which means that only authorized parties can share in the consensus process. Therefore, it only takes a small number of servers — usually less than 10 — to maintain integrity. After all, anyone can download a node and verify the blockchain. Details are unknown, however, because the software is closed source. It reportedly manages a billion transactions a day.
It may be that it could be worse. After all, whoever pays the license fee, I suppose, can get a node up. After all, companies that pay the license fee can run wallets and set up block explorers. But how can there be free software development if the main software is closed source? Microsoft and Google are building the right interfaces and drivers for this. But is SETL the Microsoft of blockchains?
And why trust the digital euro if you don’t know the software and the consensus mechanism? How can software that turns central banks into beta testers be as secure as one that has been stalled in the free war field for more than a decade? And is it really secure enough if there are fewer than 10 consensus nodes? Will such a blockchain ever enjoy a level of trust comparable to bitcoin? Will it ever attract as many developers as Ethereum, who voluntarily form apps and dapps and give life to the whole story in the first place? Will it become the center of a free ecosystem whose creativity creates more projects each year than anyone can imagine?
Probably not. Presumably, such a blockchain, if it ever runs, will remain closed. People will continue to trust the ECB instead of the Blockchain, applications will be limited to what a panel of ECB and other banks decide at the round table, and a SETl developer then implements in the Blockchain design. It will remain a rather boring thing, much like DEMail, GiroPay, the “PayPal of the Volksbanken,” or — or …
If there will be beneficial effects, they will remain in banking, and only one or the other technical expert will understand that this or that runs this way or that because you build on a Blockchain. Dawn of a new era looks different. If it is true that Ukraine plans to issue a CBDC on the Stellar blockchain, at some point, it will be seen that the digital hryvnia fits better into Germany’s fintech ecosystem than the digital euro.
Of course, this is all conjecture. Maybe things will turn out differently. But so far, it doesn’t seem like the ECB — or any other central bank, except Ukraine’s — has the courage to even tap into blockchain’s huge potential.
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