Simone Suriano | E*finance Consulting Reply
Blockchain and bitcoin have become commonly used words, especially in the financial field: an aspect also demonstrated by the figures reached over the last few years when it comes to the value of bitcoins. In the last year, another commonly discussed expression has been “Central Bank Digital Currencies (CBDC)”. These are digital currencies issued by central banks which, concerned by the ongoing diffusion of currencies issued by private individuals (including cryptocurrencies), have begun to take steps to provide a concrete answer to this phenomenon. In this context, the European Central Bank (ECB) published a report in October 2020 entitled “Report on a digital euro”. The report describes the results of the first round of analyses conducted with a view to being able to issue its own CBDC in the future, the Digital Euro.
The ECB deemed it necessary to prepare for the launch of its very own CBDC for specific reasons:
to respond to the growing diffusion of digital currencies issued by private institutions or other central banks
to support European monetary policy and the progressive digitalisation of the economy
to ensure the European deployment of an alternative payment instrument to cash
Reply, whose approach has always been focused on technological innovation, has partnered with the Italian Banking Association (ABI) Lab, a research centre for innovation that includes the main players in the Italian banking sector and technological partners for the experimentation of the Digital Euro.
The objective of the study, directed by ABI with Reply’s support, was to analyse the characteristics and potential of the Digital Euro through direct experimentation. The study involved not only an empirical analysis, but also the development of working demos applied to real cases. This has allowed key players in the sector to approach a complex issue and to carry out an effective analysis of the possible market applications.
Two main focus areas were explored:
An analysis of the underlying infrastructure of the Digital Euro
The experimentation of different use cases enabled by the digital currency
The first focus area was developed in collaboration with SIA and with the ABI Lab Chain banks' infrastructure. Its objective was a study of the technical feasibility of a digital euro based on blockchain technology, or the Distributed Ledger Technology (DLT); in other words, a system of distributed ledgers.
The second focus area explored the possible use cases enabled by the programmability of digital currency. A concrete example of programmability consists of being able to define specific rules for the use of the currency. Let’s think, for example, of the case of a company that wants to make sure the advance payment on a contract is spent only on the purchase of raw materials necessary for the supplier’s production. A programmable currency enables this process by constraining the use of money along the supply chain only for certain types of transactions, such as the purchase of raw materials.
Reply has explored the possible applications of the Digital Euro to the “special-purpose loans” use case: the provision of credit to companies or individuals by financial institutions, linked to the use of the loan under certain purpose-related conditions (e.g. renovation of buildings, territorial production chain, etc.).
The aim of the project was to simplify the disbursement of a mortgage and the management of the related payments through a streamlined user experience, thanks to the features enabled by the DLT technology (smart contracts, split payments, the programmability of money, etc.).
The project also saw an implementation phase, through the creation of a demo of the “SIMPLY HOME” platform, through which the management of the mortgage is automated and connected to specific events. One such example is the automated way with which the various transactions towards the seller, the Bank, the Notary and the estate agency can be managed when the Deed is signed. Thanks to the programmability of money, it is in fact possible to provide special-purpose loans, programming the specific rules and spending conditions “within” the money itself and thus directing the use of the loan.
Spending conditions can be easily defined by the financial institution and approved by the creditor. Such conditions can be related to:
Spending constraints towards certain product categories
Spending constraints over time (spending limit within x months/years from the time of the loan)
Spending constraints by geographical area (e.g. only in the local territory, in order to protect the territory)
The path outlined by the work carried out by Reply and ABI represents a concrete starting point for Italian banks and for the ECB, which has not yet defined any consolidated guidelines in terms of the underlying technological infrastructure and use cases enabled by the Digital Euro.
The analysis process undertaken by BCE and the market itself is, in fact, still ongoing: in July 2021, the ECB made official its intention to continue the analysis for the next 24 months. At the end of this time, the characteristics that the Digital Euro will need to have will be defined.
In this context, banks will have to be ready to implement the resulting changes and innovations in an agile manner.