If Europe continues to develop digitally, the USA will follow
An optimistic approach towards the digital euro, standardisation, and the European Blockchain Service Infrastructure.
Ivaylo Lakov: I am here tonight with Petko Karamotchev, founder and director of INDUSTRIA Technology. We are going to discuss digital currencies and the application of blockchain technology. Hello, can you hear me?
Petko Karamotchev: Yes, hello.
Ivaylo Lakov: I’m glad to see you, thank you for being here for our viewers. Now, let’s talk about what the digital euro actually is, because it’s becoming clear that the European Central Bank is getting ready to put it into circulation and is already conducting the first tests. Experts claim that it might be available by 2023. What is the digital euro?
Petko Karamotchev: First, this is an incredibly interesting project that ECB has undertaken. I doubt that they will be ready by 2023, but this is actually a digital representation of cash money, or cash in digital form. It’s a very interesting concept. To be clear, at this stage ECB does not wish to abolish cash payments as a whole, but, as I gathered from the report as well, they will want to keep the cash, keep the deposits in commercial banks, and introduce a new form of digital cash.
Ivaylo Lakov: Okay, but what is digital about the digital euro? After all, we have non-cash payments now, too, payments that are carried out digitally, we transfer money and so on in a cashless manner. What is un-digital about the current euro, that makes the future euro even more digital?
Petko Karamotchev: Basically, the difference will be comparable to, if you remember the Nokia phones we used to have 15–20 years ago — they were so interesting, we thought they were the best, they had everything. Some of them even had digital screens you could press, everything seemed perfect, and then the iPhone came out and changed absolutely everything. The difference is enormous. The digital cash, the digital euro will, in my opinion, completely transform payments and all the applications that we collectively call Fintech will be completely different in the next few years.
Ivaylo Lakov: But how can we imagine it more precisely? What are the changes that will take place?
Petko Karamotchev: What the ECB is doing right now is not creating the standard and saying “this is how we are going to do it” — they are opening consultations that will take place during several months, and during those consultations different experts from different spheres — including data confidentiality, technology, economy — I am a representative of the technological sphere — all of those people will give their opinion on how the digital euro should be handled. But as far as the end user is concerned, we can imagine it in two different ways, and it is not yet decided which one will be better. One approach will be similar to the current banks’ technologies. As the ECB understands that it cannot be a technological company, it cannot provide those solutions, it will assign private companies to do what we see now in Fintech and in banks, to give the citizens of different European countries the opportunity to have something like accounts, digital wallets with this digital euro. Those will be installed as on phones and on other devices that we have not yet seen. The other option is a little closer to what we know from Bitcoin, which is — each person will have their own digital wallet, with no intermediaries whatsoever, they will be able to access their digital money and to use it in electronic payments, to take it abroad, to transfer it to other entities, without ever needing to use a financial intermediary.
Ivaylo Lakov: And what will change for you and me? Will we receive our salaries in digital euro?
Petko Karamotchev: That will be for each individual vendor to decide. Basically, this is why I’m not overly optimistic that things will happen straight away. I like the idea a lot, I believe it is something that will greatly facilitate the European project and the competitiveness of European business. But what I think will happen in the next several months, there will be a lot of conversations with the banking sphere. There are many risks concerning the liquidity of banks, with regard to the possibility that, under certain conditions, the clients of a bank might want to quickly turn their money into digital euro, so this will have to be decided — what amount of money can be held, and many other aspects that are yet to be determined. But for us, as citizens of the European Union, the best is yet to come.
Ivaylo Lakov: And if you will permit me another analogy with Bitcoin, isn’t Bitcoin finite? I mean, it is not a renewable, inexhaustible resource, but a finite number that corresponds to a number of numerical combinations in its underlying algorithm. Are things going to be similar with the digital euro, or will the central bank be able to emit as much money as it likes, as it is now?
Petko Karamotchev: First, Bitcoin is finite — there’s a limit of 21 million that is yet to be reached. The digital euro will be fiat money, that is a completely different concept, and it will be possible to exchange it for any of the other two kinds of euro — either deposit or cash. So it will be fully managed by the ECB.
Ivaylo Lakov: Completely managed, including its quantity, right?
Petko Karamotchev: Including its quantity, yes. The specific size of the liability on the ECB’s balance sheet.
Ivaylo Lakov: Why are most central banks in the world thinking of creating their own digital currency right now? What are the stakes? Why is this happening?
Petko Karamotchev: The stakes are the higher competition. Right now we are seeing competition on different levels, not just between companies, as in the private sector, but also between companies and countries. Several main factors brought about the digital euro. The concept itself and the technology have been around for maybe five-six years, but the current rush was caused by several things. The first is China. I suppose it is no secret to your viewers that centralised decisions like this can very easily be implemented in China, unlike the EU or the USA, where there are a lot of concerns about what information will be available to the central bank, what data will be available to to the authorities, about the money that will be in circulation in the form of digital money. These things happened quickly, however, and the digital yuan quickly showed great potential to make China a much more competitive economy that we have seen before. This sparked the ECB’s interest as well, we were talking about this last year and the year before that. Another interesting factor is the existence of Libra. Europe does not want, under any circumstance, to allow a big technological giant like Facebook, or Google, or anyone similar, to have access to information about the money in circulation or about the payments that European citizens make, so this naturally moved this issue to the forefront. What is more, I can see that the ECB is doing very well, thinking of the digital euro, and if they do it well, it will make our economies much more competitive.
Ivaylo Lakov: And how far did Facebook’s Libra project get?
Petko Karamotchev: The Libra project got to a revised version that has been suggested, but I think the regulator will not let it be realised, even in this version, at least in Europe, or at least they will stall for a long time.
Ivaylo Lakov: And in America?
Petko Karamotchev: Similarly, if Europe is not in, then Libra is out.
Ivaylo Lakov: Is it possible that consumers will trust private companies, like Facebook for example, more than central banks, as far as emitting currency is concerned?
Petko Karamotchev: Combined with the information they have on us, about what we like, what we shop for, I think we will go back to our old banks and we will trust our central banks more than a technological giant.
Ivaylo Lakov: These new digital currencies, like the digital euro or Estonia’s digital money that the Central Bank of Estonia has been working with, will be based on the Blockchain technology, right?
Petko Karamotchev: They could be based on the Blockchain technology, or they could be realised in a centralised way.
Ivaylo Lakov: So it is not a requirement?
Petko Karamotchev: It is not a requirement, of course. Of course, for us, as vendors of technological solutions in the blockchain sphere, it will be better if they were indeed based on distributed ledger technology, and we have thousands of facts that we can offer in support of this. Most of all, when we talk about blockchain, we are talking about decentralisation, which means the central bank will give different participants the opportunity to store the information, it will not all be stored in the same place, which reduces the risk of loss or misuse of data. The cyber risk is also reduced in a situation like this. It is important that we are talking about a centralised database, and this is not something that central banks specialise in, so maybe they will prefer to have that risk be decentralised, to have it be based on the distributed ledger technology, on blockchain. But to return to the issue of IT giants, right now there is a very serious process going on in Europe, and it has been going on for a long time, and I remember your original question before the studio about the Digital Services Act. The more decentralised a solution for Europe is, and the more European it is, the better it will be received in Brussels and on the European stage.
Ivaylo Lakov: If you’ll allow me to go back to the question about competition and what the stakes are, you say that China is the big threat. What exactly is China doing that will allow them to overtake Europe and America?
Petko Karamotchev: China is an absolute leader in electronic payments, especially retail payments. Make no mistake, Europe is very behind in these things. I will try to make a comparison. The country in Europe that is doing the best where electronic payments are concerned, the one that can be compared to China and AliPay and other systems, is Sweden — only 8% of payments in Sweden are made in cash. In the UK this percentage goes above 30%, thirty-something. In some parts of Europe the percentage is over 80%, more than 80% percent, and only 54% of the value of all payments are digital. This slows the economy down immensely, and does not allow for new, innovative services to take off.
Ivaylo Lakov: And these processes we are speaking of, how are they transforming the financial sector? Banks, insurance companies? What changes are taking place?
Petko Karamotchev: What is happening is, firstly, the ECB wants these payments to be free of charge. Which means that actually the ECB is taking into consideration the high value that is being paid for the maintenance of paper money, of physical money, and that is also in fact added to the subsequent market participants who have to deal with collection, and they want to do away with that. Which means that all companies which provide payment services will have to completely rethink their business model in the next four to five years. If this takes off and if people start making their payments digitally, and if this is free and provided by the ECB, many payment providers will be in a lot of trouble.
Ivaylo Lakov: Including the banks?
Petko Karamotchev: Including the commercial banks. Right now we have the situation with the negative interest rates. When we speak of the digital euro, and again, I am a technologist, I am not an economist, I will be happy to talk to economists here in the studio at some point, but when we speak of the digital euro, this actually means zero costs and no more negative interest rates like the ones we have seen in the last year or two. This means that it will be very interesting and much less risky for the end user to keep their money and their payments in digital euro, compared to dealing with a commercial bank.
Ivaylo Lakov: And the COVID-19 pandemic that is going on now has accelerated many processes in many different sectors. In this case, what changes does the pandemic bring?
Petko Karamotchev: COVID-19 made it so that 15 months of work was compressed in 6 months. This means that people also started thinking about whether viruses or other diseases can be transmitted through paper money, that paper money is difficult to manage. It’s just a mental change that happened almost instantaneously, and it’s something that we believed, when we talked about this last year, would take a much longer time.
Ivaylo Lakov: Is standartisation on a global level necessary, or at least on a European level? Some sort of standard, so that we would not have everyone doing whatever they like?
Petko Karamotchev: What I think will happen with the digital euro in Europe is that there will be a single standard that will be enforced by the ECB. What we used to call digital euro, we’ve talked about this with you here in the studio, those are attempts that are being made in Germany, in France, in Estonia, but these things can’t happen, it won’t be retail money. It’s digital money for their local payment systems to work with, but they will only be used between their own commercial banks, not on the free market in the way the digital euro will be. So basically the ECB will introduce the standard. There are other standards in the sphere of blockchain technologies, there are several working groups on an European level, and on a global level there is the ISO, the International Standartisation Organisation, which I am a member of.
Ivaylo Lakov: And what is the European Blockchain Services Infrastructure, or EBSI?
Petko Karamotchev: It’s a very interesting new project that started about a year ago, we are now in its first phases. EBSI is an incredibly interesting project that concerns connecting all European countries in a single system for secure data transfers. This means that if you have a diploma issued in Bulgaria, and you need to go study in France, your diploma will be automatically transferred to France, without any need for you to translate it or verify it, and on the other side the university will be able to receive it at the touch of a button, and, of course, with your consent as an individual. Imagine the same thing, but applied in many different services, like later tonight there will be a meeting about SME Financing, or Small and Medium Enterprises Financing, document notarisation… This infrastructure will be used like a high-speed digital infrastructure of modern Europe. I am very optimistic.
Ivaylo Lakov: It sounds very interesting. And how do you see the future of blockchain technology as a whole? What is next?
Petko Karamotchev: We can see the future of blockchain technologies in several directions. Its original form is that of the digital currencies, the decentralised finances, different projects that are being carried out without the consent of the country, without the consent of the central banks — these are the original cryptocurrencies that have become very popular lately, and decentralised finance. Another very interesting project concerns the corporate connectivity of big organisations. Especially in supply chain and trade financing. A project took off recently… These are projects that have officially started, they are not prototypes or ideas, these are real systems that money is flowing on as we speak. Another interesting project is, of course, on the national level, and on the international level. This is EBSI, the project we were just speaking about.
Ivaylo Lakov: And where is Bulgaria in the context of those processes?
Petko Karamotchev: Unfortunately right now there is no conversation about creating a blockchain infrastructure on the national level. A lot of companies work in that sector. Sometimes a couple of companies get a lot of media attention, but they are far from the only ones who are working with these technologies. Of course, there are pyramid schemes everywhere, including in Germany, there was a scandal recently, but a lot of technological companies are working in Bulgaria, Bulgaria is a part of the European blockchain infrastructure, in a few months we will see pilot projects and realised projects dealing with connectivity between Bulgaria and the rest of the world. We are in no way isolated.
Ivaylo Lakov: Do you think it’s a myth that Europe is technologically behind China and the USA?
Petko Karamotchev: If Europe follows through with this infrastructure, the USA will follow.
Ivaylo Lakov: The USA will follow?
Petko Karamotchev: In this case, yes. The interests of the commercial banks are very different over there. I’ll give you an example, even Trump gave that example a few times, during the pandemic they have had cheques paid out to people who have passed away. So, imagine the level this is happening on. Cheques, and to deceased people. So this is what they are doing.
Ivaylo Lakov: Okay, what can we say in conclusion? The future is interesting. The financial sector will undergo tremendous change.
Petko Karamotchev: In this case we have an integration of technologies, financial sector and state. We should be very happy that we live in Europe and not somewhere else. Europe is still the freest continent, despite the skepticism of recent years, the pessimism of some people, especially here in the East, and especially with the processes going on in Sofia right now. The truth is that Europe flexed its muscles and showed that it can handle very interesting projects. The digital euro and EBSI are both part of those changes. I am very proud to be a part of them and to give our contribution, as Bulgarians, to show that we have a place in Europe, that these processes will help us and our children live better, and more innovatively, and even more efficiently.
Being one of the founders of the R3-partner enterprise blockchain/DLT solutions provider and development company INDUSTRIA, Petko Karamotchev is an experienced and hands-on leader developing innovative products and services relating to distributed ledger technology, smart legal contracts, and sovereign identity technologies while building and supporting teams through ideation to production.
Holds degrees from the University of Portsmouth, UK and Cotrugli Business School. Completed programmes at Saïd Business School, University of Oxford. Member of the British Blockchain Association and the Nordic Blockchain Association. An advisor to the All-Party Parliamentary Group on Blockchain in London and a liaison expert to the ISO/TC 307 Committee on Blockchain and distributed ledger technologies.
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