Like cash, only digital – the task ahead for the digital euro
As Head of the Security Printing Division at Bundesdruckerei GmbH, Dr. Dieter Sauter is the ‘Lord of the Banknotes’. And yet he and his team have been working on the topic of the digital euro (digital central bank currencies) for some time now. In this expert tip, he explains how this digital currency would differ from established cryptocurrencies, the opportunities it offers and the importance of data protection in the process.
Digital central bank money – convenient, anonymous and secure
We already have credit cards and the range of online payment services is growing. So why do we need a digital currency at all?
First of all, we need to take a look at the huge advantage that cash offers, i.e., it can always be used and is always anonymous. Not so with bank money where each and every transaction can be traced. What’s more, a private bank only covers the money in an account up to 150,000 euro, so, if the bank goes bankrupt, you could lose money through no fault of your own. We should also remember that bank money is only depicted online, i.e., it is in fact not digital at all. Only cryptocurrencies feature this characteristic since they are usually based on encryption tools, such as the blockchain and digital signatures. But there are differences: Currencies like Bitcoin or Diem, for instance, are issued by private providers and are usually not backed by an equivalent value. We at Bundesdruckerei GmbH therefore see greater potential in the so-called Central Bank Digital Currency (CBDC). Like cash, this currency would be issued directly to citizens by a central bank. It would be anonymous and would even have offline capability, i.e., it could always be used. However, the exact technical design has admittedly yet to be defined.
Why should digital central bank money prevail over private cryptocurrencies which are already established?
I think it’s a matter of trust. A central bank stands for stability and guarantees its means of payment. It should also be noted that it does not earn any money from citizens using money. With private providers, on the other hand, we need to look at the underlying business model.
It is said that a digital currency would promote innovation in retail payments. What kind of innovations are we talking about?
It is not just citizens who would use the CBDC. New forms of payment and business models would also be introduced. Up to now, we are familiar with business-to-consumer (B2C), business-to-business (B2B) and consumer-to-consumer (C2C) business models. With the help of a digital currency, however, communication between machines could be expanded and payments automated even further. One example: When I fill up my car at the gas station, my car would then pay the bill automatically.
That sounds very convenient, but the convenience offered by digital technologies inevitably raises questions about data protection ...
Data protection is vital for digital central bank money. Personally, I think it simply has to be preserved at all costs – unless doing so would compromise the Money Laundering Act or other regulations. Data protection is also likely to be crucial for public acceptance of a CBDC. The European Central Bank (ECB) surveyed over 8,000 Europeans regarding the digital euro earlier this year. The survey revealed that 47 percent consider data protection to be the most important criterion for this kind of currency. The survey also showed that the digital euro should be secure and usable both throughout the EU and offline. And, of course, it shouldn’t lead to any additional costs.
Talking about security, security features on banknotes are designed to prevent counterfeiting. How do you protect a digital currency?
Banknotes are high-security products where protection is provided by the material used and the production processes. Using high-security features, we try to stay one step ahead of counterfeiters. With a digital currency, the nuts and bolts are a decentralized database structure and cryptographic keys. And it is precisely these technologies that should be as exclusive as the materials and processes that go into making a banknote. There is one thing we can definitely rely on – before a central bank issues a digital currency, it will have tested it sufficiently. That’s why I am optimistic that the disadvantages and risks will be close to zero.
Bundesdruckerei GmbH is a leading provider of security printing. To what extent is it working on the digital euro topic?
Our customers are the central banks. Since 86 percent of central banks around the globe are already addressing CBDCs, it goes without saying that we are too.
Which in turn leads to the inevitable question of whether cryptocurrencies mean the end of cash?
The ECB has stated quite clearly that a digital euro will be introduced parallel to cash. I see no reason to doubt that. In my opinion, cash will continue to exist and circulate in other parts of the world for a very long time. But, of course, at the rate at which the world is currently changing, it is difficult to make clear predictions for the future. And although everything is becoming more digital, we are also seeing a trend towards physical back-up solutions to protect us from blackouts, for example.
There are different views on how quickly a European cryptocurrency will become available. The optimists think that there will only be limited technical challenges. Is that right? Or, to put it another way, what kind of technology could be used for a digital euro – are we basically talking about a blockchain solution?
A number of CBDCs have already been issued in the world. This means that there are already technologies available to implement these cryptocurrencies along with a number of different approaches. Developing countries that lack a mature banking system but have widespread mobile phone coverage are likely to opt for a different solution than countries with a strong banking system. And whether a digital euro will be based on blockchain technology is, of course, something only the ECB can answer.