Reflections on CBDCs and Stablecoins: European Perspective

The following is from an interview that was conducted by Liv Tschee-Wegert as a part of the DLT Talents program. The participants were assigned the task to contact a subject matter expert and conduct a 15-minute interview on their chosen domain. Please find below the questions that were put to me and my answers.

Introduction

• Where are you from and in which country are you currently living?

I am originally from India, but I have been a resident of Luxembourg since 2007.

• What is your current job?

I am the CEO of a software development company called Nash fintechX, headquartered in Luxembourg. I am a computer scientist by training and my doctorate was on the use of blockchain in financial applications.

Questions

• What kind of contacts do you have with CBDC or stablecoin?

I dealt with CBDCs and stablecoins during my PhD research and I have been teaching a course on ‘Blockchain and Cryptocurrencies’ to MBA students for the last one year, in which I hold a 2-hour session on the topic of CBDCs and stablecoins. I also conduct a case study with the students on the paper titled:?The Quest for Minimally Invasive Technology by Raphael and Rainer. The paper deals with the different design methodologies for CBDCs including stablecoins.

• Are you familiar with activities of the ECB regarding their effort to develop a CBDC more precisely the digital euro?

I did spend time during my PhD research on why ECB was not looking towards blockchain as a potential solution. This made me propose and implement a methodology to ensure GDPR compliance by?using differential privacy through smart contracts, while using blockchain. The main bottleneck for not using blockchain by ECB is that blockchain does not provide the provision to delete/ modify data once it is recorded on the blockchain database. Additionally, as per GDPR each data point should have a legal identity responsible for enforcing the rights of the data subjects, which again is an impediment with blockchain usage. We discussed on the circumvention of these shortcomings in a paper we wrote titled:?Management Plane for Differential Privacy Preservation Through Smart Contracts.

• What are (in your mind) the advantages of a CBDC compared to a stablecoin?

The major advantages can be:

1. CBDC would not require a blockchain for implementation.
2. This implies less changes in the existing infrastructure and little to no user education.
3. Privacy and security conforming to the existing mechanisms that are in place.
4. Mass adoption of CBDCs would not pose a problem as major blockchains still grapple with throughput issues or when providing an adequate throughput, they struggle with storage issues.
5. Stablecoins would be most likely pegged to a fiat currency or a cryptocurrency. When pegging to gold was done away with the dissolution of the Bretton Woods Agreement, what guarantee exists that a peg to a fiat or a cryptocurrency or an exchange-traded commodity would be stable enough for long term deployment??

• Why should the ECB issue a CBDC (digital euro)?

There is an urgent need to issue a CBDC and the reasons can be:

1. Development and growing dependence on a digital infrastructure.
2. Promotion of financial inclusion.
3. Account creation barring the age barrier.
4. Provide a cash equivalent, where anonymity is preserved and yet appropriate regulation exists to ensure that the CBDC is not used for money laundering or in the dark web, where cryptocurrency usage is prevalent on account of its pseudonymous nature and lack of KYC.
5. The financial data would remain under the control of the government as opposed to a corporation or be accessible to the public, where the data can be used for malpractices like tampering with voting during elections as happened through Facebook.
6. Ability to give individuals the freedom to do away with cash, also witnessed through an increase in the usage of card payments and the progression towards a cashless society in Sweden and Finland, for example.

• What is your personal opinion about the digital euro?

I think a digital euro is a much-needed step. People look for cheaper and faster options to conduct payment transactions and it does not matter to them who is the provider. Digital euro would fulfill this need and being regulated would imply adherence to AML and CTF guidelines ensuring safety of all. The fact that financial accounts are in the control of the government would also imply prevention of money laundering and usage in the black markets, which is rampant with cryptocurrencies. I personally feel that digital euro can also help to facilitate micropayments, which would boost the economy, enable financial inclusion and the development of a new market dominated by novel revenue-generating mechanisms relying on using micropayments.

• Do you see advantages or disadvantages regarding the digitale Euro of the ECB?

I see majorly advantages which I enumerated before. We have to keep with the times. If there is a demand in the market for digital currencies and the government doesn’t fulfill it, then other providers would come to the forefront to fulfill the need. This would expose the citizens to many scams that were seen through ICOs and even stablecoins. People majorly want to earn money but might not have the requisite knowledge where they should invest or not and the government protects the citizens from such exploitation. So digital euro is the need of the hour.

• What problems do you see, if the ECB would issue a digital euro without banks as intermediaries?

Banks perform many functions catering to the consumers like lending, investment, portfolio management, credit scoring and financial advice to name a few. These vary depending upon the local customs and ECB cannot function to provide the same level of service without incurring massive upgrades in its own current level of functioning. We can say divide and conquer is the best way forward, which in computer science terminology implies division of a task and delegation to different processing units, resulting in enhancement of speed of operation. Thereafter, all the outputs from the different units are combined to get the desired result. If we consider a similar scenario, then digital euro without banks as intermediaries would provide a slow resolution to problems, whenever they come up. Consumers would lose access to the services provided by banks in the way they were used to, and ECB would need to enhance the existing infrastructure to consolidate the market needs. A single point of failure would exist with the ECB managing everything and become susceptible to hackers, who would want to have access to the data reducing both privacy and security. A digital euro introduction would come with its own novel challenges and minimum disruption in the existing infrastructure would guarantee a greater chance of success as opposed to bringing about a radical change, which works very well for startups and small corporations but won’t work for large government institutions.