Digital transformation is now impacting almost all areas of life, including payments. Following the launch of the Sand Dollar pilot program in December 2019, the Bahamas became the first in the world to introduce a nationwide CBDC (Central Bank Digital Currency) in October 2020. After drawing attention to the benefits, other nations such as China, Thailand and Switzerland followed by focusing on the implication of their own CBDC. When it comes to the euro, the European Central Bank (ECB) reigns supreme and regulates the European Union (EU) money supply. This blog post explains what CBDC even is, who can benefit from it, how a digital euro could work, and the role of a DLT (distributed ledger technology).

European Central Bank in Frankfurt

What CBDC is

When explaining CBDC, firstly commercial bank money and central bank money must be distinguished. All the non-banks can only access central bank money via physical banknotes, also known as cash. All the digital money we are using today is commercial bank money. Commercial bank money can be seen as a promise to pay, so the bank promises to convert it into central bank money at any time. The advantage of central bank money is that it is risk-free when there comes a crash. In this regard, commercial bank money has an issue. If a bank gets broke, you are ensured only up to 100.000 Euros in the Euro area. All the money above this line gets lost. Central bank money on the other hand often is referred to as risk-free because a central bank cannot crash. Nevertheless, it must be mentioned that central bank money can inflate. As the name implies, Central Bank Digital Currency (CBDC) is digital central bank money. It has the same exchange properties as the well-known fiat money. However, depending on the model, it can differ significantly from fiat money. This digital money is regulated and does not behave like sometimes highly volatile distributed ledger technology (DLT)-based cryptocurrency.

Two kinds of CBDC

To understand the possibilities with CBDC the next differentiation must be made between a retail CBDC and a wholesale CBDC. The idea with a retail CBDC is that all users can have access to a digital version of secure central bank money. Wholesale CBDC implies that it can only be accessed by banks and therefore be transferred between banks. Nowadays it could be said that there is already a wholesale CBDC in Germany because banks are already allowed to access central bank money in a digital form.

How can a retail CBDC fit into our system?

European Central Bank money positions as a complement to cash. Therefore, the European Central Bank and all the other national central banks in the Euro area do not have an interest in replacing cash. The use case of a CBDC is very close to cash, so a retail CBDC becomes especially relevant if cash disappears. Therefore, it also is referred to as “digital cash”.

“I expect that in twenty or thirty years we will not pay with cash anymore, so we need an alternative.”- Alexander Bechtel

Why do we need a CBDC?

As mentioned, firstly we could need CBDC if we do not have access to physical cash anymore. Without CBDC, this would mean that we would fully have to rely on private payment providers. Moreover, it is a use case for the CB to provide a resilient payment system that works independently of the private sector. Therefore, the first reason for CBDC is to provide a resilient payment system that works independently of the private sector, especially if there is no cash. Moreover, with CBDC a central bank can offer offline payment capabilities. The last important reason is that CBDC can provide privacy and anonymity. All three points are currently not being provided by the private sector.

“I believe the Central Bank should try to solve problems that cannot be solved by the private sector” -Alexander Bechtel.

Implementing a digital Euro

Euro is used in a broad field, such as products paid in physical cash, rent being paid over an IBAN account, stock transactions in the capital market, and more. Therefore, there quite certainly will not be one platform for everything, solving all issues at the same time. Thus, there might be a movement towards a multiple payment infrastructure for various purposes, depending on specific needs. In the capital market, for example, secure and large amounts are being transferred, but the industrial sector might be interested in micropayments. Then there are transactions leaving the country and offline digital cash needs. Thus, there must be a match of the issuer of money, the technical infrastructure, and the reason why a digital Euro is needed. Depending on the reasons for applying the digital Euro it may differ whether it makes more sense for the commercial banks or the central banks to act.

Motives for Central banks to develop a CBDC

Central Banks explore the topic to allow efficient cross border payments. The Bank of Thailand for example is heavily interested in a CBDC because they want to build a more efficient payment corridor between Hong Kong and Thailand. The European Central Bank has a different motive for CBDC. They want to build a better payment infrastructure to create an addition to physical cash because the usage of physical cash is decreasing. Currently, more and more mobile payments are being executed by Apple pay, Google pay, PayPal, Visa, Mastercard etc. Therefore, if someone in Germany buys a German product in the German market, then parts of the transactions go via US servers. Thus, US companies are earning money from that. The Chinese central bank follows their motive to leverage the technology to create a better payment system, that companies might adopt that payment infrastructure for their own payments.

Will a CBDC increase financial stability?

CBDC is a double-edged sword. On the one hand, central bank money delivers a secure means of payment and store of value. It is inflating over time but compared to the commercial bank money, there is no institution that can fail and let their users lose their money. Thus, it is positive for financial stability from an end-user perspective. On the other hand, there is a challenge every central bank that wants to introduce CBDC is facing now. If end-users can shift their wealth to a central bank that cannot default, they will immediately do this. If everyone does this, the banking sector is disintermediated. The deposits that banks are holding from customers are a very important funding source for banks, as they need it to function. Therefore, if the CBDC is made too attractive by the central bank, it would threaten the banking sector. That is not in the favour of central banks because the banking sector takes care of some important functions in our economy.

Why a DLT solution should play a role in CBDC

One day Central Banks will conclude that DLT (distributed ledger technology) does make sense, because it is not just about money transactions, but also doing something with the money. It is about purchasing security, stock, products and services etc. Therefore, there is always trade involved. This trade is the perfect requirement for tokens to make sense. Here DLT comes in as the currently best system to run multiple tokens on one platform. If one of these tokens were called Euro we could execute trades, engage settlements and more without needing intermediaries.

Furthermore, a CBDC should be based on a DLT for the same reasons why a CBDC itself is needed. Provide a resilient payment system, offering offline payment capabilities, and providing privacy and anonymity. Specifically, offline payments and privacy and anonymity can be implemented with a token that sits on a blockchain. We cannot reach a truly private payment if an account is involved. With every payment over an account, there always is an intermediate needed who checks and channels the payment somewhere.

At a certain time in the future, cash is going to disappear, not because it has been regulated that way, but because we decide not to use cash anymore. Until then we must make sure that we have a CBDC that has certain characteristics which resemble cash. Nowadays in Germany, we can make fully anonymous payments up to an amount of 10.000 Euros with cash. The goal should be to have something very similar in a digital world. The ECB was suggesting guaranteeing privacy by deleting the data a user sent them after three weeks. In this case, users would still have to trust the European Central Bank that it deletes our data. A better way of not sending metadata with every payment can be for example with zero-knowledge proofs. The only proof users would need when doing a payment is that it is below 10.000 Euro. The only thing the ECB would need to check is that the payment is below the threshold. Then they could execute it without needing any additional information. To sum it up, DLT has such a huge potential, that it will probably play a major role in the CBDC world, sooner or later.

“True anonymity or privacy means that when I make a payment, the data I am sending to the one who is executing the payment does not provide any information about myself.” -Alexander Bechtel

CBDC: The overdue evolution of money?

Learn more about CBDC and the future of money and gain deeper insights into the topics mentioned in this article. Watch the full BLOCKCHANCE Online LIVE show, where Philipp Sandner, Head at Frankfurt School Blockchain Center, Fintech Council at the German Federal Ministry of Finance, and Chairman at ITSA and Alexander Bechtel, Head of DLT and Digital Asset Strategy at Deutsche Bank and PhD Candidate at the University of St. Gallen discuss CBDC as the overdue evolution of money. BLOCKCHANCE Online LIVE is a regularly hosted live show on YouTube, where you can ask renowned experts in their field your questions and gain glimpses of our future. Stefan Brunnhuber will also be a speaker at the upcoming BLOCKCHANCE Europe 2021 conference! Get your ticket here and take a deep dive into the universe of future technologies.


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