Crypto currencies are too volatile to be used as a serious payment tool. Central bank digital currencies are the solution with so much more to offer. How do they stack up against the likes of Bitcoin in the real world?
Central Bank Digital Currency (CBDC) is ‘the next big thing’ in the global currency sector. This is confirmed, among other things, by a study conducted by the Bank for International Settlement in 2020, according to which almost 80% of the world’s central banks are actively working on both this and developing corresponding solutions.
The first pilot projects are already in the test phase. For example, the ECB is currently evaluating the specifications of a digital Euro. China also wants to introduce its digital currency DCEP (Digital Currency Electronic Payment) as early as the Winter Olympics in February 2022.
So, we will soon be dealing with a trio of very different digital means of payment alongside analogue cash: CBDC, Stablecoin and cryptocurrency. While CBDC is still in the project and development phase, ample experience has already been gained with cryptocurrencies and stablecoins. And these give rise to justified doubts as to whether they are suitable or desirable as a universal means of payment for companies. Both digital variants offered so far raise critical questions about transparency, the cost situation and data protection and integrity.
Cryptocurrencies such as Bitcoin are increasingly proving to be pure speculation in view of the recent events surrounding Tesla boss Elon Musk. Their enormous volatility alone makes them unsuitable as a reliable means of payment for companies. Moreover, unlike real currencies, they are neither legally legitimised nor linked to real values, and do not offer universal access to payment transactions.
They require explanation and are on the market in a confusing number of competing formats. They have not yet been able to establish themselves as a universally valid digital means of exchange and payment. And, due to the inherent weaknesses of the system described above, it is not to be expected that they will be able to develop into such a proposition.
In contrast to cryptocurrencies, stablecoins, such as Facebook’s Diem project, promise lower volatility because they are centrally controlled. But beyond that, the same restrictions apply to private digital currencies as to the likes of Bitcoin. They also do not stand for a legally legitimised monetary value backed by a central bank.
A particularly critical point is the security and integrity of company and customer data. In the case of American providers, they are subject to the restrictions and access possibilities by US authorities and intelligence agencies enshrined in the US Global Cloud Act.
In addition, all private-sector stablecoin providers are forced to develop profitable business models from payment transactions and services. Every payment transaction thus generates a service for which a fee is charged. And the success of such business models also depends on ensuring the highest possible customer loyalty, which often translates into making it difficult to switch to other service providers. Both together mean higher costs and growing dependencies. However, an additional cost factor is just as unacceptable for companies as a vendor lock-in.
Central bank digital currencies
The parameters that are indispensable for a currency – anonymity, stability, state sovereignty and data protection – are inadequately or not at all guaranteed by the existing digital means of payment. They are therefore not suitable as a secure digital supplement to cash as a medium of exchange, unit of account and store of value.
This status quo logically leads to the need for a universally valid and available public digital currency, the basic features of which are already being tested in many cases as the Central Bank Digital Currency (CBDC). It combines the advantages of cash with the speed and convenience of digital payment options.
A CBDC is free of charge for the user, meets high security standards and has global acceptance. It allows people, businesses, and organisations to pay each other, make purchases and carry out financial transactions anywhere, anytime. It makes payment easy and accessible to all, without hidden fees or the disclosure of data. Because it is issued by the respective central bank, a CBDC also has a high level of legitimacy, stability and trustworthiness.
The practical implementation of digital currency uses distributed ledger technologies (DLT), the best known of which is the blockchain. Retailers, banks and companies can use it to tap into new forms of automated, ultra-fast payment transactions. These include transactions in the Internet of Things, M2M payments in which machines pay machines (for example when charging an electric car), or automated settlement payments in which smart contracts trigger payment transactions as soon as certain values are reached.
Automated payments in pay-per-use scenarios are also conceivable and feasible, for example when a leased machine independently bills for the time used and this is automatically paid by the lessee. For the digitalisation of business models, this means a huge boost and an enormous relief from routine tasks in payment transactions.
The importance of this topic for economic development and the entrepreneurial future in Great Britain and Europe is also shown by initiatives like the EPI (European Payments Initiative) founded by numerous commercial banks. The aim is to remove the fragmentation of European payment markets and create a pan-European payment solution for business and commerce as a counterweight to non-European payment ecosystems.
Europe and the UK must not sleep through the introduction of a CBDC and must actively shape the framework conditions and rules of the game of the future digital currency order. The introduction of a digital, public currency must therefore be placed prominently on the political agenda in order to secure the economic sovereignty of all European states, their companies and their citizens.