Priorities for Europe and Germany: Both, the Euro and Identities Should run on Blockchain
Authors: Philipp Sandner, Jonas Gross. See German version here.
Currently, a solid technological and regulatory basis for blockchain technology emerges both in Europe and especially in Germany. But when we look at the USA and China, blockchain projects are now being set up which have the potential to change the global financial architecture faster than many people expect — just within a couple of years. Europe and Germany have to intensify their efforts. Two major projects have to be addressed immediately: both the Euro and identities have to run on blockchain-based systems. This will enable Euro-denominated smart contracts and the digital representations of individuals, companies and machines — this will be essential for the German and European industry. The core issue, however, is that blockchain technology is often not yet properly understood by decision-makers in governments and corporations in a broad way. In addition, larger budgets need to be assigned to finance blockchain projects; also, decision-makers’ knowledge and awareness of the importance of blockchain technology has to be increased.
Asia and the USA: Currencies are coming on the blockchain
The blockchain area develops in a very dynamic way. The current focus: Libra, China and Binance. Recently, the project Libra was announced, a cryptocurrency developed by an international consortium that in the future will consist of 100 organizations. Even though the blockchain technology (as originally implemented in Bitcoin) is not employed here, it still can be framed as a blockchain-based platform. The fact that Facebook, with its base of more than two billion users, has initiated this project will make it a success, as there is a user base that is “guaranteed” on the day the project launches to the market. It has been estimated that Libra’s market capitalization could amount to several hundred billion Euros almost overnight when Libra will be initiated as planned in 2020. For comparison: Bitcoin currently has a market capitalization of around 200 billion Euros (August 2019).
Shortly after the announcement of Libra, the Chinese central bank has revealed that it is also working on its digital currency — it has been doing so for almost five years. Apparently — according to experts involved in the project — this digital currency is almost ready to be launched; blockchain technology will also be used here as well. Of course, experiments testing this version of a digital currency still have to be conducted. Nevertheless, the path is clear: Sooner or later there will be a digital version of the Chinese currency and blockchain technology will be a major technological component.
Finally, Binance, one of the world’s largest crypto exchanges, has announced its blockchain-based stable coin platform. Binance may not be familiar to everyone, but it is one of the most important companies within the very dynamic blockchain ecosystem. Their platform will enable the tokenization of various traditional fiat currencies. Hence, Binance does not plan to list and offer just one single digital currency on its system but it intends to provide a platform that allows a broad array of digital blockchain-based currencies to be ran.
What about Europe in general and Germany in particular?
But what is currently happening in Europe and Germany? Not too much; at least compared to these major projects with a global impact. Concretely: Over here in Europe, such large-scale projects are missing. Yes, there exists a dynamic start-up scene in the field of blockchain, which is mainly located in Berlin, Zurich, London and Paris. Companies such as Bosch, Daimler, Commerzbank and others maintain blockchain departments. Authorities such as the German regulator BaFin or their equivalents in Switzerland and Liechtenstein, together with the relevant ministries, create a truly solid legal basis for blockchain adaption. The European Central Bank is building up expertise and the German central bank (Deutsche Bundesbank) is conducting some DLT experiments. These efforts are leading the way and are highly appreciated. But it will not be enough in order to compete with the global projects mentioned above.
As one can see from the projects described above, blockchain technology is increasingly becoming a geopolitical topic with the potential to change the financial infrastructure. What does this mean? Libra has — according to all information currently available — a clear US focus with respect to the members of the Libra Association, Binance is an international company with Chinese origins and the digital version of the Chinese currency is designed for one of the largest economies in the world. These are all projects that will change and transform the financial sector — at an international level. A few studies here or a few prototypes there are important but will not be enough. No doubt, experiments by central banks and corporations are important in order to get to know and understand this new technology. But what we need now is not very difficult to express: Budget. Large organizations of all kinds — e.g. governments, ministries, authorities, industrial corporations, banks, investors, universities — should invest now. Start-ups and companies have already developed the technological basis and have proven the usefulness of blockchain technology. Particularly in Germany, Switzerland and Liechtenstein, the legal basis is now being developed step by step. According to plans by the German government, the blockchain strategy for Germany will be announced in September. Then, Angela Merkel or a speaker of the German government will probably use the word “blockchain”, maybe even the word “Bitcoin”. In short: the technological and legal basis already exists to some degree and is currently being developed further; the German government creates further attention.
Now it is time for organizations to allocate budget to blockchain-related projects. Investments in startups, IT development and the integration of existing processes and systems would be important in particular. Further studies and working papers are not urgently necessary. These investments will successful, as the potential of blockchain technology has undoubtedly been recognized (see Libra, Chinese digital currency and Binance). Today, there exists a wide range of opportunities for companies. Those companies who disregard this technology might face severe risks in the future. Here, a trivial “risk” is leaving out this opportunity. This also applies for employees: Those who decide to engage with the topic of blockchain now, in autumn 2019, will be pretty busy for the next 10 to 20 years and most probably compensate potential job losses in the future; these people will design the digital transformation of the economy instead of having to observe passively how their workplace is being transformed or vanishing at all.
The Euro on the blockchain
The additional budget should be invested primarily in the following: Developing a blockchain-based Euro and bringing identities on the blockchain. These two initiatives provide the foundations for the digital economy of the future: Blockchain experts cannot imagine an economy without the Euro and identities on a blockchain basis.
The Euro on the blockchain will be very important for the German industry (e.g. engineering, mobility): Companies denominate their invoices in Euros and also their accounting systems operate in Euro. A world in which BMW, for example, sends an invoice in Bitcoin is at this point in time not imaginable. Bitcoin’s general acceptance as a means of payment is too low and both volatility and regulatory hurdles are too high. “Euro on blockchain” means that a blockchain network would be used to technically organize balances of (bank) accounts. Opponents argue that blockchain technology is not necessary for such a digital Euro. However, these people have probably not understood the technology sufficiently. Below we outline three key reasons why blockchain technology will sooner or later be the technological basis for the digital Euro. It is clear that the 10-year-old Bitcoin blockchain appears to be technologically outdated for several reasons. However, in this article, the word “blockchain” is used here as “blockchain in a broader sense” and actually refers to DLT systems that were inspired by blockchain technology and share some common technical features with the “original blockchain” of Bitcoin.
1. Machine Economy. It is estimated that more than 20 billion devices will be connected to the Internet in 2025 — three times as many devices as people currently living on earth. Some of these devices will sooner or later also be integrated into a payment network. Blockchain technology is best suited for equipping millions of devices with a computer chip and therefore with an own wallet. Then, a device can receive payments (revenues) and transfer money (costs). It is reasonable to argue that such transfers of funds will be conducted in Euro since then accounting systems would not have to be changed. Additionally, there would not be any exchange rate risks. For these millions of devices, blockchain technology can easily provide the opportunity to participate in a payment network and integrate them into automated business processes (i.e. through smart contracts). This requires the Euro on the blockchain. Technologically speaking, blockchain systems must of course be further developed to increase transaction speed. Assuming the technological development of recent years for the future, however, this should not be a “roadblock”. Also, the increasing storage capacity due to redundant data is uncritical, if one considers that an autonomous car will soon generate hundreds of gigabytes of data. Per day. Per car.
2. Euro as a token. The Euro represents value — similar to stocks, real estate and other assets. Today, for example, there are IT systems processing Euro transactions and other IT systems for securities trading. In the financial system of the future, both silo-like IT systems will merge into integrated platforms. They will be based on a blockchain-based infrastructure, on which the Euro is listed as well as various stocks, securities and numerous other assets. All these assets are tokens on “integrated” blockchain systems. Then, trading across tokens happens such as buying a Daimler stock for Euro. Payment versus delivery then takes place at the same time. Assets no longer have to be transferred or matched between silo-like IT systems. Blockchain systems are best suited to map different types of assets (i.e., tokens) in an integrated way without creating new silo-like structures.
3.Smart contracts. Actually, the whole discussion is not solely about conducting transactions, but also about integrating a payment into a business logic or a business process. Examples are escrow accounts, regularly transferals, interest payments, factoring, leasing, loans, etc. — such processes can ideally be automated and “programmed” with smart contracts. Today, there are various process interruptions and inconsistent interfaces in existing processes and IT systems. Euro-denoted smart contracts can improve this and can enable better, faster and more efficient processes. Smart contracts are an integral part of advanced blockchain systems.
Some companies are already issuing Euro on a blockchain system or will soon offer Euro on a blockchain basis. Commerzbank has already conducted transaction based on a blockchain-based Euro; these transactions have conducted in compliance with all regulatory requirements and will be part of the bank’s balance sheet — proving that it has been real money. The German startup Cash on Ledger offers Euro-denominated smart contracts for the implementation of first projects. The Frankfurt-based startup Finbc processes invoices with a blockchain-based Euro and will soon offer this service. Monerium, an Iceland-based startup, soon offers the Euro and other currencies on the public Ethereum network. Stasis, a startup located in Malta, also offers a Euro-denominated token on Ethereum. Fnality International — a project in which also German banks are involved — will soon offer the blockchain Euro for money transfers between banks. These projects are the reality and they work. Further similar projects have been announced, for example, by the US bank JP Morgan or the DAX company Allianz.
Identity on the Blockchain
The Euro on blockchain systems is only one side of the coin because transactions take place between multiple parties. Of course, these are normally individuals and companies but such parties will soon also be “things” such as devices or machines. Identity on the blockchain has far-reaching implications and ensure that transaction parties receive a “digital identity” on the blockchain-based on their physical identity (identity card for individuals, commercial register entry for companies). Based on a digital blockchain-based identity, transactions between an individual and a company (example: car sharing) but also between an individual and a machine (example: passenger transport of an autonomous car) or between two machines (example: autonomous car pays for waiting on a parking lot) can be processed efficiently — i.e. with fast transaction speed and low transaction costs.
In the future, money will be transferred between individuals, companies and machines. By 2025, more than 20 billion devices will be connected to the internet. Some of these devices will also begin to participate in payment processes. Therefore, a completely new (possibly decentralized) payment infrastructure will be required. Individuals, organizations and machines must be registered with their digital identities on blockchain systems. Identity management on a blockchain, therefore, will play a key role. Of course, this has to happen in compliance with data protection laws. However, the fundamental blockchain critique rooted in insufficient data protection is not appropriate, since blockchain technology with its access systems and encryption processes is better able to, first, protect data “by design”, second, to organize the ownership of data and, third, to enable the monetization of data than non-blockchain-based systems — even for those who generate the data. Note that a blockchain system should not be seen as a substitute for a conventional database, but rather as a complement to store transaction data and secure audit trails.
Again, there are companies in Germany that are currently working on this topic, mainly in experiments. A real use is not yet possible but will come sooner or later. Commerzbank is a role model with respect to blockchain and stands out with projects using the Sovrin framework. Deutsche Telekom and Daimler are also very actively engaged in blockchain-related research in this domain. Bosch is worth to mention with regard to identity management for machines and sensors. Also, the start-up Spherity offers cross-platform identity and register solutions, e.g. for cars and machines. The Frankfurt-based company Esatus offers blockchain-based access systems (e.g. key cards, access control for buildings), simply a different perspective of identity management. All these companies — and plenty more — are experimenting with identities of different types on blockchain systems. A widespread adoption can be expected in the next year. This also requires larger budgets to foster the development of blockchain-based identity management. Not surprisingly, foreign companies are also very active in this field.
Decision-makers in companies, governments etc. must accept that they have to deal with blockchain technology. They must provide additional budgets, initiate blockchain-based projects, make decisions, put teams together, hire new colleagues and educate employees in blockchain technology. The most important point is that blockchain technology will often require an in-house developer, as IT will be of strategic relevance and will directly influence numerous processes. If the Euro and identities run on blockchain-based systems, then indirectly every product and every payment recipient is affected. The strategy of simply outsourcing this to an external IT service provider will not work. Hoping that blockchain technology will only become relevant later when the successor took over one’s job, is pointless because the technology is already here. It is truly risky to ignore developments such as Libra, the Chinese digital currency and Binance — and also Bitcoin. Bitcoin will not disappear — as many still believe — but will grow into a system of global relevance. Ignoring this fact is dangerous and endangers the future of our economy and our companies.
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Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner in particular includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (firstname.lastname@example.org), via LinkedIn (https://www.linkedin.com/in/philippsandner/) or follow him on Twitter (@philippsandner).
Jonas Groß is a project manager and research assistant of the Frankfurt School Blockchain Center (FSBC). His fields of interests are primarily crypto currencies. Besides, in the context of his PhD he analyzes the impact of blockchain technology on monetary policy of worldwide central banks. He mainly studies innovations as central bank digital currencies (CBDC) and central bank crypto currencies (CBCC). You can contact him via mail (email@example.com), LinkedIn (https://www.linkedin.com/in/jonasgross94/) and via Xing (https://www.xing.com/profile/Jonas_Gross4).