Tokenized securities with payments through stablecoins
The rise of blockchain and tokenization opened a whole new set of business models, such as the DeFi sector. Many of these business models rely on stablecoins as a medium of payment rather than on volatile crypto-currencies. Yet, most stablecoins are denominated in US dollars, leaving hardly any room for euro stablecoins. At the same time, central banks across the world are discussing or developing the use of central bank digital currencies (CBDCs). Setting up a digital Euro or Euro token provides an opportunity to integrate settlements in programmable accounts on a fundamental level. This could lead to a wave of innovation. The ease of incorporating programmable features using a Euro token depends on the design choices yet to be made. In this working group, we will explore several conditions for a Euro token to lead to actual innovation.
There are two main advantages to using stablecoins. First, stablecoins that are administered on a blockchain can be used in atomic transactions. These are transactions in which the stablecoin and the deliverable on the other side of the transaction (another stablecoin, crypto, or token) change ownership at the same time. As a result, there is no settlement risk. This feature works best if both sides of the transaction are administered on the same blockchain. Second, the ability to interact with smart contracts allows for further automation of the transaction process. Together, these advantages help decentralized applications to operate autonomously and without the involvement of (often expensive) trusted third parties. As such, the availability of a euro stablecoin can facilitate a whole wave of innovation and new business models in Europe. The advantages of a euro stablecoin would also apply to a digital euro CBDC, provided that it is (at least in part) administered on a blockchain.
Despite the clear advantages of having a euro stablecoin or CBDC, there are also issues. For example, such a stablecoin needs to have a stable value. This is not a given as evidenced by several stablecoins that collapsed among which Terra USD. Another issue that plays up specifically with a euro CBDC is privacy concerns. Opponents fear that CBDCs can be used for the wide-scale monitoring of citizens. The possible programmability of wallets also poses questions. For example, whether conditioned transactions (based on smart contracts programmability) fit in the design of a public Euro token, a legal tender, which is supposed to be accepted at all times, at all places? Other issues include the compatibility with KYC/AML requirements, regulatory requirements, and the ability of a stablecoin to run a business model and financially sustain itself.
The euro stablecoin working group consists of academics, industry participants, and bankers with an interest to explore premises, potential design choices, and success factors for a euro stablecoin and/or CBDC.
Watch the podcast below to learn more about the Euro Stable Coin working group!
Since 2019, the 2Tokens foundation has worked with the community to define token taxonomies for tokenization use cases in different industries. In all these use cases it became clear that a Digital Euro, Euro token or Euro Stable Coin would greatly help the adoption rate. The Euro Stable Coin could become an essential factor in the growth of a digital (token) economy. The main innovations surrounding the Euro Stable Coin are primarily linked to the renewable energy market as seen in our Energy Token working group, data (and its use and applications), and from a payment perspective. The combination of a Stable Coin and digital or self-sovereign identity enables banks and other companies to explore even broader ideas and innovations, enabling further development of for example the Internet-of-Things and Smart cities. A stable, digital currency that is legally accepted and remains its store of value, is essential to realize the actual innovations mentioned briefly. In addition, it is vital that the value of a Euro Stable Coin does not fluctuate.
An important factor for success is the extent to which there is a link between platforms with minimal human interference. Economies in which systems or devices can make their own choices and can use digital payments based on predefined conditions could accelerate automation to a whole new level.
The current Dutch payment landscape seems to be strongly developed and provides many ways for consumers to pay in ways they prefer. However, there are certain practices which are still not (entirely) possible in the current infrastructure.
Automated payments; fully automated predefined payments without human interference – for example, an automatic payment covering delivery costs when a parcel arrives.
Pay-per-use; real-time payment and settlement of services instead of paying in advance or after – e.g., energy market, transport industry.
Money or accounts only available for specific goals; if money or accounts can be marked as only available for a specific goal or type of payment, you could use it to specify and conditionalize accounts and payments meant for donation and foundations
Nano transactions: providing costless payment services with transactions worth much less than 1 cent could create many opportunities
Making payments on DLT platforms (on-chain transactions); currently, the absence of a Euro Stable Coin is one of the reasons why fully utilised tokenized innovations are not yet possible, especially in the Eurozone
Secured communication through payment infrastructure; because of its low costs, speed and security, the network could also be suitable for other applications not related to payments
The sum of these innovations can not only strengthen the economy, but they can also contribute to strengthening financial inclusion and fighting financial crime. Furthermore, these innovations can also be key in realising a sustainable economy.
Despite the absence of design choices, certain concrete initiatives already exist. Various of these initiatives could possibly be developed even faster by using a broadly accepted Euro Stable Coin as the primary currency. It seems that the common factor of the initiatives is that they are based on making payments with tokenization. Several use cases exist, the first example being a digital notary, which aims to find a way and change the standard in setting up corporations. In reality, it could be any notarial action.
Another use case is digitizing and tokenizing the invoice market, making easier verification and standardization of invoices possible, resulting in better collaboration and lower costs. The factors that the mentioned cases have in common are that tokenization brings opportunities to realize more standardization, transparency, and lower costs. This also goes for applying the concept of tokenization to the energy market. Consumers are no longer dependent on a centralized party (energy companies) but can instead trade excess energy themselves, peer-to-peer. A win-win situation, for both consumers and the climate. Although these tokenization projects bring various benefits in themselves, the full benefit would be reached when the settlement of payments through a Euro Stable Coin would be included in the transaction.
The applications mentioned previously can have large societal consequences. By only describing the applications of a Euro Stable Coin, banks and central banks could possibly enhance feelings of distrust and suspicion. That is why it is essential to take into account the correct checks and balances, regulatory obligations, democratic control and independent supervision/oversight.
The European Central Bank is working on a possible design but awaiting their digital euro’s design choices means risking two things. First, by waiting for the future design we risk not being able to realize innovations as described in this paper. Secondly, it can also delay the development of the European Economy because of a lack of preparation in implementing the digital euro, while other regions in the world are moving fast ahead. This matter should be discussed more widely and not within the financial world only. If ideas on the design and conditions surrounding the framework of a Euro Stable Coin are concrete, more input and useful ideas can be picked up from society. From an innovation perspective, there is still a large appetite for a Euro Stable Coin, and the sooner we can engage knowledgeable people, the higher the chance of success.
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