A well-functioning payment system requires a stable payment medium: stable money. Safeguarding price stability is a central bank’s core task. It has to be possible to transfer stable money securely and efficiently. For that reason, the Eurosystem also has the statutory mandate for payments.

With digitalisation, the demands on payment systems have changed. The digitally and globally networked individual now expects payments to be settled digitally, ideally in real time, globally and around the clock. At the same time, digitalisation has seen the emergence of technologies which make precisely this possible.

The implications of Bitcoin

Bitcoin and other crypto tokens[1] have shown that, in the digital age, it is possible not only to find new ways of payment, but also to create new, digital payment media. The Bitcoin blockchain is probably the most well-known of the peer-to-peer (P2P) systems that work on the basis of the distributed ledger technology. With the aid of cryptographic techniques and because of the decentralised organisation of the network, units of value can be transferred electronically and globally P2P.[2] Owing to its design, intermediaries that function as centralised operators are not needed in the Bitcoin network.

Interestingly, however, the Bitcoin white paper does not contain any explicit deliberations on value stability or references to monetary policy considerations. It is obvious that the nearly inelastic supply of Bitcoin – which, without any identifiable foundation, is supposed to be around 21 million Bitcoins – is incapable of generating any value stability. Crypto tokens do not have any stabilising value anchor. They have neither intrinsic value nor an issuer vouching for stability. Fluctuations in demand – in which purely speculative motives are evidently the dominant factor in many cases – therefore lead to very volatile prices that frequently make headlines. Added to this is the residual uncertainty about whether the originally promised restriction on supply might not perhaps be set aside by agreement among the users, which could drive down the price of Bitcoin.[3]

The prices of crypto tokens such as Bitcoin are so volatile that they are unsuitable as a stable store of value and therefore can hardly be used as a means of payment. Crypto tokens such as Bitcoin do not fulfil the functions of money. For some investors, they may be interesting as a speculative instrument – precisely because of the strong fluctuations in price. Nevertheless, it is still necessary to be aware of the possibility of a total loss.

Bitcoin leads a niche existence in payments. Besides the lack of stable value, this is also due to the technology used for transfer. Bitcoin transactions account for a vanishingly small percentage of global cashless payments and do so even in comparison with payments in Germany alone; the same is true of the number of places where they are accepted.[4]

New development: stablecoins like Libra

Since Bitcoin was invented, the technologies for transferring digital value have been refined and adapted to the demands of the financial sector. The concept of stablecoins arose to address the fact that crypto tokens lack a stable value.[5] The most promising variant of stablecoins is pegging the value to a stable currency, which is achieved by a complete backing of the issued amount of coins.

A powerful consortium aiming to issue a global stablecoin has now emerged in the shape of the Libra Assocation led by Facebook. Major payment service providers are also part of the consortium. Facebook, through its subsidiary Calibra, is offering access to the network via a wallet that can be integrated into its own messenger services and other platforms. The large user base of participating enterprises, their financial strength and the obvious seriousness with which this is being pursued means that market success is at least a real possibility.

It is intended that Libra is to be stable in value as a result of being backed by a basket of currencies and globally transferable within a matter of seconds. The current high costs in cross-border payments could be reduced as a result. This could benefit many people, especially in the area of remittances, and strengthen financial inclusion. The motives of the Libra Association are likely to be driven by entrepreneurial objectives. A more inclusive global financial system does not have to conflict with that, but the economic expectations of the parties involved have to be fulfilled as well. However, Libra could gain a certain foothold in developed economies, too, if, say, integration into corresponding platform options led to a significant increase in convenience from the users’ point of view.

Many important questions are still undecided, however. To really promote financial inclusion, it would have to be made possible to change cash into Libra without a bank account. The actual fees for a transfer in Libra in the case of a deposit or withdrawal in cash with various intermediaries across international borders might then even be higher in some cases than they are now for a cross-border payment. This would necessitate the construction of a matching distribution network, which would likewise have to be incorporated into the overall considerations of cost. For users there are substantial exchange rate risks, not least in countries with a weak currency not belonging to the currency basket for backing Libra. An additional complication is that there is unlikely to be an entitlement to reimbursement and that users are exposed to credit risk, market risk and liquidity risk.

Besides the question of whether Libra will constitute a relatively stable settlement medium, it remains to be seen whether the technology proves to be sufficiently scalable and efficient enough to generate added value in payment settlement. As the transaction fees are supposed to be low, it is unclear whether this can be achieved by efficient technology alone. Cross-subsidy with other services or users implicitly paying with their data are other possibilities.

Regulatory treatment

New models in payments inevitably raise questions concerning regulation. Bitcoin’s decentralised structure makes direct regulation of the network extremely difficult. In some instances, innovative business models have been made possible as a result. In many cases, this has simultaneously opened the floodgates for manipulation and fraud in a largely unregulated ecosystem. Regulation therefore takes as its starting point the interface with the traditional financial system. Players such as wallet providers and trading platforms have positioned themselves around the Bitcoin network; following the implementation of the latest EU anti-money laundering directive, they are subject to general regulation. Furthermore, BaFin in Germany was quick to respond by classifying Bitcoin as a financial instrument for regulatory purposes.

Although the Libra project will not start before 2020 at the earliest, central banks and regulatory authorities are already looking into the potential implications. A “move fast and break things” approach cannot be tolerated when it comes to a project with a potentially wide scope in the financial sector. Compliance with regulations to prevent money laundering and terrorist financing as well as for protecting the users is to be ensured to the fullest extent from the outset. The players outside the blockchain network, such as wallet providers and trading platforms for Libra, likewise have be included in the remit of regulatory oversight.

For regulators it is key that there exists a level playing field for payment service providers. Business transactions of a similar nature which harbour the same risks have to be subject to the same regulatory requirements. Moreover, the circulation of another unit of value in one and the same currency area may represent a challenge. The regulatory classification of these payment media is not always clear-cut. Internationally, Bitcoin has been classified differently in some instances; how Libra is classified will depend on its concrete design. A separate cash cycle might be formed if Bitcoin or Libra were actually to come into widespread use.

Parallel currencies and private payment media in the digital age

Ultimately, it is actual use in an economy that determines whether something has the defining properties of money. Money is defined by its functions. Irrespective of its defining property as a claim on an issuer or as a good, its physical or digital form and the way it is designed and organised, money is that which is used as a store of value, a means of payment and a unit of account. A currency, on the other hand, denotes, in a broad sense, the constitution and organisation of the monetary system in a given country and, in a narrower sense, the legally recognised monetary unit in a currency area.

We understand a genuine parallel currency to be money that is issued by governments in addition to an existing currency or is officially recognised domestically as an additional currency. Parallel currencies may also be foreign currencies that may even be a complete substitute for a national currency (euroisation and dollarisation).[6] Thought experiments concerning a parallel currency may also be found in Europe, especially in the context of the crises in Greece and, recently, Italy.[7] Even long before the launch of the euro, thought was being given to parallel currencies as an alternative to an overnight changeover to the euro. The All Saints’ Day Manifesto for European Monetary Union of 1975 contained a proposal by a number of economists envisaging a parallel, indexed basket currency consisting of weighted national currencies.[8] The idea behind the basket currency “Europa” was that, by its use, the decision on economic integration and the speed at which it would take place would be left to private economic agents (the demand side).

The use of private payment media stands in contrast to genuine parallel currencies and has a different underlying motivation. Money is created privately in the financial sector nowadays by commercial banks (book money).[9] Private money takes various forms. In Skagway, a village in the US state of Alaska, spruce tips are accepted as a means of payment in some circumstances and, at the same time, used to a limited extent as a store of value and a unit of account.[10] In this instance, “regional money” or “regional payment medium” would be more accurate terms than “parallel currency”. This term is also used for concepts such as the Chiemgauer, which have a very limited reach and are used on a negligibly small scale in Germany and Europe.[11]

Given the new possibilities of creating digital units of value and transferring them in P2P networks, this debate is now attracting more attention. Stablecoins used in this way are often pegged 1:1 to an existing currency. Such payment media are generally flexible in design and can be used globally via the internet. They therefore could potentially achieve a wide range of coverage in payments.

Public and private allocation of roles in the monetary system

As a result of their market power, enterprises, especially platform providers, might be in a position to induce users to adopt their own payment medium. Unlike central bank and commercial bank money, the payment medium of internationally active providers such as Libra is no longer pegged to one currency alone, but to a basket of currencies. Structures in payments and, beyond that, in the financial system might change. A change in the monetary transmission process cannot be ruled out.

Governments can nevertheless steer the use of money to a certain extent. Not only can a government determine what constitutes legal tender and impose compulsory acceptance,[12] it can also impose restrictions so that only the domestic currency may be used for public services and payments, when paying taxes and as a settlement medium for private contracts.[13] The role of the state is only effective inasmuch as people accept these restrictions and the government can exercise control over economic transactions. The best means of safeguarding the use of a currency is ensuring that it has a stable value and can be used efficiently in settlement.

The case of Libra is significant because – somewhat like the above-mentioned idea of the “Europa” basket currency – it is supposed to be based on a globally oriented currency basket. Generally speaking, conflicts between macroeconomic welfare and the private profit motive may arise among private actors and create false incentives. Money is not an ordinary good; rather, money may be seen as a natural monopoly and public good. It is from this that the central banks’ sovereign task of providing money is derived.

Role of central banks

The central bank must keep track of the money cycle and has an effective steering function in order to fulfil its statutory mandate. Linked to this is ensuring non-discriminatory access to payments. Furthermore, central banks have to respond to current developments. This includes providing own efficient infrastructures or closely monitoring private infrastructures.

Public and private infrastructures often exist as complements, which means that comparative advantages can be used. While central banks are able to provide, say, infrastructures for large-value payments with default-proof central bank money, the private sector has an advantage at the customer interface, say, in relation to user convenience and customer service. Public and private systems are sometimes also in competition with each other, however. Against the backdrop of digitalisation, the onus is on central banks – like other financial market players and infrastructure operators – to refine existing systems and make them increasingly global in reach.

In order to enhance settlement systems and ensure their efficient use, payment media could be issued by central banks not only as cash and on bank accounts, but also to a restricted group of users (wholesale) in the form of tokens. This would allow the use of currencies, such as the euro, in digital networks or infrastructures.[14] Fundamentally, many applications in payments could probably be implemented using tokenised commercial bank money, which would be likely to strongly curtail the applications for other units of value.

At present, regional money is used as a payment medium on a very limited scale for a limited purpose – as are, say, tokens in theme parks. For everyday transactions for different purposes, however, using only one currency is advantageous. The reason for this lies in the network effects of use. In other words, the more people use a currency, the more it benefits (much like using a common language or particular software, for example).[15] By contrast, the use of two or more currencies or currency baskets causes considerable additional transaction costs. As a result, the predominant use of a dominant currency is efficient and, in most currency areas, the usual case.

The question to be answered is this: Will the new technological possibilities in payments change the roles in a stable financial system? James Tobin noted in 1987 at the Jackson Hole conference that the structure of the financial system was undergoing a transformation as a result of technological and institutional innovation. He said that this transformation was taking place gradually and, in some cases, outside the framework of the law.[16]

This statement is perhaps even more relevant today than it was at the time. Regulators and central banks have a duty to address this change by means of appropriate regulation and active contribution. The stabilising role of financial supervision, which sets a regulatory framework, and of central banks, which ensure a stable currency and stable payments, must not be impaired by this, however.

References

Basevi, G., M. Fratianni, H. Giersch, P. Korteweg, D. O'Mahony, M. Parkin, T. Peeters, P. Salin and N. Thygesen (1975), The All Saints’ Day Manifesto for European Monetary Union, The Economist, 1 November 1975, pp 33-41.

Deutsche Bundesbank (2017), The role of banks, non-banks and the central bank in the money creation process, Monthly Report, April 2017, pp. 13-33.

Deutsche Bundesbank (2019), Crypto tokens in payments and securities settlement, Monthly Report, July 2019, pp. 39–57.

Nakamoto, S. (2008), Bitcoin: A peer-to-peer electronic cash system, at https://bitcoin.org/bitcoin.pdf.

Piller, T. (2019), Italien diskutiert über „Mini-Bots“ als Parallelwährung, Frankfurter Allgemeine Zeitung, 10 June 2019, at https://www.faz.net/aktuell/finanzen/euro-austritt-italien-diskutiert-ueber-ersatzwaehrung-mini-bots-16230200.html

Rösl, G. (2006), Regionalwährungen in Deutschland – Lokale Konkurrenz für den Euro? Deutsche Bundesbank Discussion Paper Series 1: Economic Studies No 43/2006

Thiele, C. and M. Diehl (2017), Kryptowährung Bitcoin: Währungswettbewerb oder Spekulationsobjekt: Welche Konsequenzen sind für das aktuelle Geldsystem zu erwarten?, ifo Schnelldienst 22/2017, Volume 70, pp. 3–6. 

Tobin J. (1987). "The case for preserving regulatory distinctions", Proceedings of the Economic Policy Symposium, Jackson Hole, Federal Reserve Bank of Kansas City, pp. 167–183.

Urken, R.K. (2019), The Alaska town where money grows on trees, BBC, 31 May 2019, at http://www.bbc.com/travel/story/20190530-the-alaska-town-where-money-grows-on-trees.

Vaubel, R. (1990), Currency competition and European monetary integration, The Economic Journal 100, pp. 936–946.

Fußnoten:

1. In this context, the Bundesbank uses the general term “crypto token”, since – as explained below – these are not currencies. See also Thiele & Diehl (2017) and Deutsche Bundesbank (2019).
2. See Nakamoto (2008).
3. Specifically, this could be done via a fork splitting into two strands, resulting in two crypto tokens with differing features. In the past, one strand has mostly proved to be dominant, but other so-called altcoins continue to exist.
4. Around 300,000 transactions are settled daily in the Bitcoin network (blockchain.info). This compares with around 63 million cashless transactions per calendar day that are settled by German payment service providers, i.e. more than 200 times as many (Bundesbank payment statistics 2018). According to the coinmap.org website, Bitcoin is accepted at 15,000 places worldwide. In comparison, there were more than one million payment terminals (POS) in Germany alone in 2018.
5. For differing concepts of stablecoins and an assessment, see Deutsche Bundesbank (2019). For the design of Libra and the members of the Libra Association, see the white paper and the additional documentation at
6. A further distinction is made between parallel currencies and double currencies, with a double currency having a fixed exchange rate between the two currencies.
7. See various media reports, e.g. Piller (2019).
8. See Basevi et al. (1975). The manifesto’s title refers to the date of its publication. Purchasing power was to be maintained by factoring the national inflation rates into the exchange rates vis-à-vis the national currencies.
9. For an in-depth discussion, see Deutsche Bundesbank (2017).
10. See Urken (2019).
11. Regional money is mostly pegged to national currency and is designed to stimulate the regional economy. In the vast majority of cases, it is intended to be “scrip money”, i.e. its value declines over time. Regional demand is supposed to be boosted by a more rapid velocity of circulation. The example of Wörgl is often cited in this context as proof of regional money being used successfully. Rösl (2006) provides an overview and critical analysis of regional money in Germany.
12. The contracting parties may agree on other arrangements, however.
13. See Vaubel (1990). National regulations are also subject to continual change. According to media reports, in New Zealand it has recently become possible to pay salaries in crypto tokens, for example.
14. Besides this, connections via technological interfaces would also be conceivable (trigger solution). This would depend crucially on interoperability between systems.
15. See Thiele and Diehl (2017)
16. See Tobin (1987).