- The Internet Economy Foundation (IEF) published a research paper with Chainlink Labs about how to create a European Central Bank Digital Currency (CBDC) and hypothetically, what it could look like in the real world. The IEF assumes from the beginning that the Euro is a “central pillar of Europe’s political strength in the international arena.” Also asserting, “However, there is no guarantee that the Euro strength can last.”
- The IEF is publishing this research in order to recommend policy for the Euro CBDC in addition to technological guidance with things like blockchain, security, privacy, governance, and sovereignty. The primary goal of a Central Bank is to maintain monetary stability and the functioning of the overall payments systems.
- China is more advanced and better positioned politically to beat the US to market with their CBDC, or digital Yuan (eCNY). Fun fact: we have seen eCNY pilot programs in 5 major Chinese cities, more notably one of the programs introduces “decaying money” to the digital yuan. This allows the Central Bank to program a time limit for the consumer to spend the specific bill/denomination before it expires and is worth nothing.
- The European Central Bank (ECB) revealed recently that a “well designed euro” entails privacy, security, and the ability to pay in a cash-like manner across the eurozone. The IEF believes the window of opportunity to “foster the Euro as a future-oriented stable currency” is now closing rapidly.
- In a more modern study of the Chicago Plan (proposed in the 1930’s to help avert a future cyclical crisis with a collection of banking reforms) the authors agreed upon the benefits from a transition to a full reserve banking system in order to avoid cyclical financial crises derived from bank runs.
- There is still a risk associated with a Euro CBDC in the sense that end users could be influenced (many reasons) to rebalance their deposits from the commercial bank to Central Bank, again, causing a bank run. One solution is to impose regulations upon the end users, for example emplacing a maximum deposit limit.
- ECB wants a CBDC for “helicopter money”, in order to give the economy a boost in times of crisis. When American’s received $1200 stimulus checks, the economy received the liquidity boost it so desperately needed in a new locked-down state. However, many of the checks came late, were sent to dead people, or fraudulently claimed. In a world that needs universal basic income (or even occasionally), reducing the process of delivering the money and increasing accountability/transparency is crucial.
- Due to the fact that aid given (when facing a crisis) to national banks in the Euro region varies depending on past performance and the country’s financial reputation, further political complications arise along with favoritism. To solve this problem and “achieve a monetary union closer to the optimum”, the Eurozone is theorizing a “single bank resolution fund and a common bank deposit insurance scheme.” The IEF believes “the existence of risk-free Digital Euro would cut the high cost ensuring uniform and efficient application of resolution tools for resolving bank failure.”
- There are 3 architectures being examined currently. Direct, Indirect, and Hybrid approach. The indirect approach is when end users have a claim on intermediaries, and the intermediaries would need to back their liabilities from retail clients with claims on the central bank. Commercial banks would handle all consumer-facing interaction and retail payments, while the Central Bank would handle wholesale payments. Right now, this is the most favored approach by many CB’s because “there would be no substantial structural changes that would lead to banking disintermediation.”
- Chainlink labs is researching and developing CCIP, cross-chain interoperability protocol, to facilitate interoperability and composability across multiple blockchains. Noting the importance of sovereignty multiple times, there is a high probability that a future Euro CBDC will have its own sovereign blockchain. Theoretically CCIP can connect the CBDC euro chain to the rest of the defi ecosystem (ethereum, solana,etc) providing utility and demand for the Euro CBDC. Chainlink enterprise middleware provides regulators with plug and play tooling enabling easy AML/tracking capabilities. One of the most appealing features of chainlinks middleware, is that it is already compatible with existing compliance solutions, which simplifies the execution for institutions that need easy CBDC cross chain integration.
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