What would happen if the ECB issued a crypto-Euro?

A hobby of mine is to develop visions of future scenarios. For it you just need to give as certain one event and think about how this event would reverberate in the rest of reality.

For example, what would happen if teleportation was made available? We could imagine that this would immediately be a game changer for the housing sector. Everyone would prefer to live by the coast or in the country, and every morning teleport to work. It would as well change radically the shape of cities, as cars would no longer be needed. CO2 emissions would be reduced, ending global warming. Car manufacturers, taxi drivers, truck drivers would suddenly be jobless as their services would be substituted by teleportation services, both of passengers and things. Country borders would also disappear, as it would no longer be possible to guard them… You get the idea.

Whereas teleportation is not likely in the near future, here’s a more interesting vision to discuss: what would happen if the ECB issued a crypto-Euro? (currently BoE, ECB and FED, among others, are researching the potential)

cryptoeuro

I imagine this would take the shape of a permissioned blockchain where the nodes would be run by the central banks of the euro-area countries. Each Central bank would run one node, and be the issuer of wallets for the citizens of their respective countries. This wallet would probably be embedded into the chip of each citizen’s id card. The ID card would change to hold NFC (near field communication) similar to today’s visa cards that you can pay with just by holding the card close to the point of payment. Through a mixture of fingerprint readers in our iphones (something you are), an NFC ID card (something you have), and a password (something you know), the person could be identified and authorized to operate. This should take care of KYC/AML regulation issues.

Once we can imagine a user is authorized to send a payment through the ECB-run blockchain to another user we have a system where bank accounts would no longer be needed and would be substituted by these wallets. Debit cards would not be needed. As for Credit Cards such as Visa, the credit service would still be useful, and Visa would probably have to start providing their service through this blockchain.

ECB could guarantee a 1 to 1 parity between euro and cryptoeuro. With this, the current extreme volatility that cryptocurrencies like bitcoin are facing would disappear. Without fx risk, european citizens would not have issues changing their fiat vs crypto and spending it freely. (Today I’m afraid of spending my bitcoins because in a week they could have increased their value in 30%)

Salaries would be paid in cryptoeuros, groceries would be bought in this cryptocurrency, and slowly but surely, cash in paper or metal would eventually disappear. Having a cashless society would mean more efficient (automatic) tax collection, and less tax evasion, which would allow governments to lower taxes to their citizens.

Once payments on this blockchain are ubiquituous, the next logical step is to accept that people ( and corporations, and robots, and cars… on the internet nobody knows you are a refrigerator) will give and receive loans on this blockchain. These loans could take the form of a standardized smart contract by which the receiver of the loan would be permissioned to take the funds and the issuer of the loan would deposit the lent funds into the smart contract. Upon interest payment date, the smart contract would send funds from the smart contract to the issuer. It would be the responsibility of the receiver of the loan to ensure sufficient funds are deposited into the smart loan to pay for the interest. In case of default the smart contract could automatically warn the authorities to update the rating of the defaulting party, and trigger if appropriate guarantees from insurers to cover the payment.

Bonds would follow the exact same mechanism, adding the possibility to the lender to unwind his position by selling the bond on a blockchain operated secondary market.

Settlement of all exchanges would be minutes instead of days. No Backoffice tasks would be needed since everything would be automatically settled. Regulatory reporting would become trivial and automatic since all the information would be held in the blockchain.

Security of this system must of course be watertight. A security error could lead to the funds of any individual or corporation being stolen. On a nightmare scenario, an organized cyber-criminal organization could attack every node of the blockchain and delete all possessions, debts and ratings leaving Europe bankrupt, with a clean slate and total chaos.

Of course these scenarios are just science fiction, but the funny thing about science is that any scientific breakthrough was at some point only science fiction before it became science and then reality. Who knows what the future will bring..

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