Central banks around the globe are grappling with the digitization of their currencies. Numerous pros and cons for digital central bank currencies (CBDCs) are hotly debated. The perspective of Deutsche Bank’s Head of Digital Assets & Currency, Alex Bechtel.
Digital central bank currencies (CBDCs) offer a number of compelling benefits, including the prospect of near-instant payments and settlements, the elimination of black market transactions, reduced cash management costs, and accounting efficiencies. Cash acquisition costs decrease using CBDCs. Smart contracts that initiate payment transactions between machines become legally compliant and micropayments are enabled. Measures around money laundering and terrorist financing can also be implemented more easily. However, they also carry certain risks. Most mentioned by critics is privacy. CBDCs can theoretically be programmed to control citizens’ spending, force negative returns on deposits and bail-ins, and monitor income and spending.
Alex Bechtel, Head of Digital Assets & Currency at Deutsche Bank, will be a speaker at the CryptX Fintech Conference, which will take place on November 18 in Offenbach, Germany. National and international specialists from the digital economy will come together and give an outlook on future-oriented developments in Bitcoin & Co. Thus, new bridges between the banking world and the crypto world will be built. A conversation with the Crypto Valley Journal.
CVJ.CH: What is your vision for the future of digital assets?
Alex Bechtel: Digital currencies are a broad term. I’ll interpret it as tokenized money or money that sits on a blockchain. On the one hand, that can be a cryptocurrency like Bitcoin or Ether, but on the other hand, it can also be a stablecoin or maybe even a central bank digital currency (CBDC). I assume that the use of cryptocurrencies will grow significantly in the next few years and that we will increasingly pay with digital currencies in the future. However, I would make a very clear distinction between a tokenized euro and a tokenized U.S. dollar, for example in the form of a stablecoin or in the form of a digital central bank currency and a cryptocurrency. I don’t think we’ll see large-scale Bitcoin or Ether payments in the future but rather tokenized fiat money, in the form of stablecoins or the central bank currencies I mentioned.
I believe that in the future, people will use tokenized money rather than account-based money as they do today. With tokenized money, you can just do more, fractionalize it and use it to process something like micropayments. It’s available 24 hours a day, seven days a week, I can program that money, and a lot more. So I have greater flexibility in terms of deployment, which will open up new use cases and existing use cases will be able to be served more efficiently. Therefore, in the long run, it will come down to tokenized money.
Also importantly, the infrastructure we need for this is still absolutely in its infancy. We are still a long way from building our current payment system on tokenized money. So I think we’re going to be relying on account-based money for a very long time, and this process is going to be a long-term one. So for some processes, we will already be using tokenized money and for others, we will be using account-based money.
What is Deutsche Bank’s overall strategy with regard to crypto-assets?
Alex Bechtel: The overall strategy is probably beyond the scope of this interview, but it is definitely the case that we are looking at the issue closely and taking it seriously. We face, like all large and highly regulated banks, certain challenges when it comes to crypto. Those are mainly things like money laundering guidelines, anti-terrorism financing and the like. So big institutions can’t just buy and sell Bitcoin or Ether, but some processes have to be set up first, regulators have to be convinced and licenses have to be applied for. We are keeping a very close eye on this.
Do the political and regulatory frameworks need to change to enable the emergence of digital currencies?
I definitely see a conflict between the way we design and regulate our financial system today and how a decentralized financial system would look and need to be regulated. This idea that I have a central authority where I can start and also enforce regulations, I don’t have that anymore in a DeFi ecosystem, for example. This means that it is necessary for the regulator to rethink to some extent and to say from first principles, as it were, how this new type of financial market can be brought under control in regulatory terms.
I don’t think it can be allowed to remain completely unregulated, but it needs a new kind of regulation. By the way, many regulators in Europe are already very far along here and also have a good understanding of the facts. It is always important to have a good exchange between the regulators and the financial, or crypto and DeFi industry. This can ensure that innovation can germinate despite regulation and that it is not stifled again directly.
What strategy do you propose regarding the design of a CBDC, and can it be reconciled with current anti-money laundering and counter-terrorist financing regulations?
In a research paper, we published a few months ago, we show that it is indeed possible that you can create a central bank digital currency that has anonymity features and at the same time is in line with applicable money laundering and counter-terrorist financing laws. Unfortunately, this is still being overlooked by many central banks. It is pretended that true anonymity in compliance with money laundering guidelines is not possible. However, I firmly believe that it can be achieved. When I talk about anonymity, I actually mean real, cash-like anonymity.
In this example, that means that I can use a digital central bank currency and pay with it in such a way that I don’t even share any data with any payment provider. This works through a technology called Zero Knowledge Proofs. This has nothing to do with blockchain, by the way. But there is cryptography behind it. When I make a payment, I’m proving that I’m following certain rules. So for example, I am over 18, I am a German citizen, and my payment is less than 1,000 euros.
So I’m just proving that I’m complying with those restrictions, but I’m not disclosing any other information. This means that the ECB, which would ultimately approve these payments as an institution, would see that a payment has been made that meets these conditions and nothing more. Thus validated, it can then be executed.
What the ECB doesn’t need to know in this context: my name, my place of residence, the exact amount of my payment and the name of the online store. So that’s our proposal: via Zero Knowledge Proofs, not to share this information with the ECB in the first place. The other proposals that are floating around are always about sharing this information first and then deleting it after two weeks. But of course, these are things where I can’t track myself to what extent what I’m doing is really anonymous. Via Zero Knowledge Proofs, I have control over what data I share and what I don’t share.
A digital euro must meet the needs of Europeans while helping to prevent illegal activity and avoid undesirable effects on financial stability and monetary policy. Is this possible in due course?
The first CBDCs have already gone live, for example in the Bahamas. A few other nations are also quite a bit further ahead than we are here in Europe or the United States. One of these, of course, is China, which has been testing in this area for many years and plans to roll out its CBDC for the upcoming Olympic Games.
In Europe, we are starting an investigation phase in the fourth quarter of this year, which will last for two years. This will be followed by an implementation phase, which will certainly take another two to three years. So it will be at least another five years before we see a CBDC in the eurozone. Switzerland, for example, is not currently working on a CBDC at all. The focus here is more on a CBDC for banks.
We often hear the argument that we are losing time to the Chinese and, accordingly, possibly losing market share in terms of payments or the use of the currency. I am comparatively relaxed about this. It is not the case that we urgently need a retail CBDC, i.e., a CBDC for the end-user. That will become topical when cash usage declines even further. For me, this retail CBDC is more of a replacement for cash. What we need much more urgently is a so-called wholesale CBDC. This is a digital central bank currency for the financial market that allows tokenized assets to be traded and settled, for example.
When should we then expect the first digital central bank currency (CBDC) in Europe approximately?
In the next five years, it is definitely possible to design a CBDC that avoids undesirable effects on financial stability and monetary policy. In the next two years, however, I don’t think we need a retail CBDC. We should rather take our cue from Switzerland in Europe during this period and devote ourselves to a wholesale CBDC.
Alex Bechtel is Head of Digital Assets & Currencies Strategy at Deutsche Bank, as well as Research and Teaching Assistant at the University of St. Gallen. Until 2018, he was an External Consultant at the European Central Bank.