With such a strong focus on the use of digital currencies within recent weeks, it’s really important that fintechs fully understand all of the options that are available to them.
To illustrate this point, and specifically the important differences between cryptocurrencies and central bank digital currencies (CBDCs), is Dr. Wolfram Seidemann.
Seidemann is CEO of the Giesecke+Devrient Currency Technology GmbH (G+D). He was appointed Group Executive Banknote in November 2016. Seidemann joined G+D in 1999 as Head of International Research and Development Chipcard. He subsequently held various senior management positions at G+D subsidiaries, among them Managing Director G+D Asia in Singapore, President of G+D Teco Taiwan, Taipei and Member of the Board G+D India, New Delhi.
Practically all over the world, central banks are working under high pressure on digital currencies. The British Central Bank recently set up a task force, Sweden extended the test phase for its own Central Bank Digital Currency (CBDC), and China announced the launch of its digital currency DCEP (Digital Currency Electronic Payment) as early as the Winter Olympics in February 2022.
Just recently the European Central Bank (ECB) gave the go-ahead for the possible issuance of a digital euro. Fintechs should be paying attention because CBDCs form the platform for the digitisation of the financial system and open up new opportunities. Central bank digital currencies are designed as a digital supplement to analogue central bank currencies. They are intended to provide a stable, universal, user-friendly, state-authorised and protected currency to counter digital means of payment such as stablecoins and cryptocurrencies, which should be viewed critically.
Currency or speculative object?
Both cryptocurrencies and stablecoins raise critical questions about transparency, the cost situation as well as data protection and integrity. Especially the so-called cryptocurrencies such as Bitcoin are increasingly proving to be purely speculative in light of recent events. 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 also require a lot of explanation and are on the market in a confusing number of competing formats.
Centrally controlled private digital currencies or stablecoins promise lower volatility. But beyond that, the same restrictions apply to them as to cryptocurrencies. They also do not stand for a legally legitimised monetary value backed by a central bank. This makes them unsuitable as a secure digital supplement to cash in the sense of a medium of exchange, unit of account and store of value.
New technologies open up new business models
In contrast to the weaknesses of these already existing digital means of payment, a CBDC fulfils the parameters of anonymity, stability, state sovereignty and data protection that are indispensable for a currency. A CBDC combines the advantages of cash with the speed, convenience and efficiency of digital payment options, is free of charge for the user, meets high security standards and has global acceptance.
For fintechs, a CBDC can provide risk-free cash along with a high level of standardisation. What’s more, it introduces greater opportunities for network building and access to new markets. Another advantage is that new automated and decentralised financial products can be developed on the CBDC’s basic function. By using distributed ledger technologies (DLT), fintechs can use a CBDC to open up new forms of automated, ultra-fast payment transactions.
In addition to digital payment transactions, the new application possibilities are manifold and include the most diverse fields of use. Automated payments in pay-per-use scenarios are conceivable and feasible, for example when a rented machine independently bills for the time used and this is automatically paid by the tenant.
Other possible applications include transactions in the Internet of Things, machine-to-machine (M2M) payments in which machines pay machines, for example when charging an electric car, automated settlement payments in which smart contracts trigger payment processes as soon as certain values are reached or in automated supply chains. For the digitalisation of business models, this means an enormous boost and at the same time an enormous relief from routine tasks in payment transactions.
A CBDC thus becomes the engine of the digital economy, provided it is properly conceived and designed for these application scenarios from the outset. The requirement profiles, rules and framework conditions for a future digital monetary order are being defined now. A CBDC has the potential to revolutionise the economy, accelerate the economy of things and lead our world into an increasingly digitised future.