Digital Money – The Future of Money

Digital money is creating new opportunities in the financial industry.

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Digitalisation has heralded the next stage in the evolution of money. In addition to the familiar forms of money such as cash or bank money, a new form is now emerging: digital money. An ecosystem of different (regulated) forms of money will emerge, for which the technical and regulatory foundations are now being created. This development opens up new opportunities for banks, regulated institutions and fintechs, but it also brings with it numerous challenges that need to be identified, analysed and addressed.

The Digital Euro

The European Central Bank (ECB) is working with the national central banks of the eurozone to examine the possible issue of a digital euro. This digital European currency would be an electronic equivalent to cash. The ECB's project has been in the preparatory phase since November 2023, with the aim of laying the foundations for the digital euro. This includes finalising the rules and regulations for the new form of money and selecting providers that could develop a digital euro platform and infrastructure. Tests and experiments will also be carried out to develop a digital euro that meets both the requirements of the Eurosystem - i.e. the ECB and the national central banks of the countries that have adopted the euro as their currency - and the needs of users.

At the same time, the European Commission initiated the legislative process in June 2023 and published the proposal for a Regulation of the European Parliament and of the Council on the introduction of the digital euro. This will lay the technical and regulatory foundations for the new form of money, which - depending on its design - could have a massive impact on the business of financial market players.

The stablecoin and the Markets in Crypto-Assets Regulation (MiCAR)

Stablecoins are crypto assets that are linked to assets such as gold, official currencies or multiple assets. The use of stablecoins is regulated by the Markets in Crypto-assets Regulation (MiCAR). MICAR also covers various tokens based on a blockchain, i.e. assets - other than tokenised securities - that can be traded on a blockchain-based market. The MiCAR also regulates the issuers themselves as well as crypto asset service providers (CASP), which are intended to ensure the trading of tokens for euros or custody, for example. MiCAR thus creates a secure legal framework for all types of transactions with crypto assets for almost 450 million EU citizens.

Discover the specific MiCAR requirements for your business model.

New uses for stablecoins

The main use case of stablecoins so far has been in the area of crypto trading and DeFi protocols, where they provide traders with a stable asset to mitigate market volatility. Decentralised finance (DeFi) describes autonomous, code-based protocols that provide financial services without a legally tangible entity, i.e. a company, being able to take responsibility or exercise control.

MiCAR and the legal certainty it creates for the use of stablecoins open up new opportunities for numerous players in the market. The industry in particular is looking for options to further automate and simplify its digital processes with customised payment instruments. Stablecoins could be used for micropayments, programmable payments, seamless transactions between machines (M2M payments) and numerous other new business models, such as pay per use. In the end, it is not only companies that will benefit from this. Public administration could also utilise the programmability function for targeted payments, for example for social benefits.

In future, banks and other players in the financial sector will have the opportunity to offer existing stablecoins or issue their own stablecoins within a trustworthy framework.

Wholesale settlements based on distributed ledger technology (DLT)

The Eurosystem is planning to experiment with research into new technologies for the settlement of central bank money in so-called wholesale settlements and has invited financial market players to express their interest in this development. Wholesale settlements are the process of settling large transactions between banks or other financial institutions. Central banks usually provide the infrastructure and systems required for the processing of wholesale settlements and monitor the process to ensure that all transactions are processed correctly.

The trials for central bank money settlement are experiments with mock settlements. They will be conducted with three Eurosystem solutions that can be used to settle wholesale financial transactions in the T2 real-time gross settlement programme. Prerequisite: They must be recorded on platforms with distributed ledger technology.

Interested parties can apply to take part in the trials until May 2024. The test phase will run until November 2024.

Commercial bank tokens: the answer from the private sector

Money in circulation is also taking the step into the digital world. With the help of blockchain technology, the tokenised form of scriptural money should be useful for bank customers. The use cases are similar to those of regulated stablecoins - from pay-per-use models to programmable payments using smart contracts.

Our Services

We advise you on business models and regulatory frameworks in the digital money ecosystem and support you in developing a strategic market position that is aligned with your goals. Our experts provide practical solutions from the introduction to the topic to the elaboration of the specific need for action and implementation. This enables you to exploit the full potential of digital money while minimising the risks.

Whether you are a traditional financial institution looking to explore new opportunities for digital currencies or a new player looking to enter this rapidly evolving market, our team will provide you with advice tailored to your needs.

Feel free to get in touch with us.