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The Future of Pay­ments in a DLT-Based Euro­pean Economy

There is no more doubt, that Dis­trib­uted Ledger Tech­nol­o­gy (DLT) will be at the core of the finan­cial mar­kets of the future. There­fore, both the Euro­pean Union and Euro­pean com­pa­nies have to pre­pare them­selves – both in terms of the tech­ni­cal appli­ca­tions and the respec­tive legal frame­work. DLT based solu­tions have an unlim­it­ed num­ber of appli­ca­tions in indus­try, the pro­cess­ing of trans­ac­tions and the storage/trading of assets. To ensure that Euro­pean com­pa­nies con­tin­ue to play a lead­ing role in the glob­al econ­o­my, it is nec­es­sary to devel­op DLT-based pay­ment meth­ods. As the Euro­pean Com­mis­sion’s Dig­i­tal Finance Pack­age 2020 and the Euro­pean Cen­tral Bank’s Report on a dig­i­tal Euro show, more and more insti­tu­tions are address­ing this question.


Blockchain for Europe’s analy­sis shows that there won’t be a sin­gle pay­ment solu­tion for a DLT-based Euro­pean econ­o­my. In their state­ment “The Future of Pay­ments in a DLT-based Euro­pean Econ­o­my: A Roadmap”, they assume that there will be a wide range of pay­ment sys­tems for dif­fer­ent use cas­es at dif­fer­ent points in time. By com­par­ing account- and token-based solu­tions for the (dig­i­tal) euro Alexan­der Bech­tel and his col­leagues bring exam­ples of how our under­stand­ing of trans­ac­tions and mon­ey will fun­da­men­tal­ly change.


In any bank trans­fer, the bank is the inter­me­di­ary par­ty that ver­i­fies the iden­ti­ties and liq­uid­i­ty of the par­ties and then releas­es the trans­ac­tion. In com­par­i­son, token-based mon­ey does not require a third par­ty to ver­i­fy the iden­ti­ty of the par­ties. The token itself con­tains all the infor­ma­tion nec­es­sary for the recip­i­ent of the pay­ment to ver­i­fy its legitimacy.


As a rev­o­lu­tion­ary con­cept, DLT dig­i­tal­ly solves, for the first time, the dou­ble-spend­ing prob­lem and enables decen­tral­ized dig­i­tal token-based forms of mon­ey. For a more seam­less exchange of assets, goods and ser­vices, it is inevitable to inte­grate DLT-based, decen­tral­ized busi­ness log­ics with pay­ment sys­tems. Smart con­tracts offer flex­i­bil­i­ty and facil­i­tate the inte­gra­tion of com­plex busi­ness process­es with pay­ments. A pay­ment sys­tem that enables pro­gram­ma­ble mon­ey flows, is a pre­req­ui­site for Indus­try 4.0, includ­ing the Inter­net of Things and tok­enized assets.


Token-based Solu­tions

Euro-denom­i­nat­ed e‑money tokens (EMTs) are a token-based form of the dig­i­tal euro issued by the pri­vate sec­tor. Tok­enized e‑money is issued at par val­ue to the euro, and the hold­ers are pro­vid­ed with a claim on the issuer as well as the right to redeem the e‑money at par at all times. EMTS con­sti­tute cryp­to assets, they are trans­fer­able on a glob­al scale and can be seam­less­ly inte­grat­ed into DLT-based envi­ron­ments to serve as means of pay­ment, for exam­ple, for the machine econ­o­my or tok­enized assets and rights. The EMT cat­e­go­ry has not yet been imple­ment­ed because MiCA will only be applic­a­ble 18 months after the date of entry into force, which is unlike­ly before the end of 2022.


A token-based CBDC also con­sti­tutes a dig­i­tal form of cen­tral bank mon­ey avail­able to the gen­er­al pub­lic. It rep­re­sents a new form of cen­tral bank money—a cen­tral bank lia­bil­i­ty incor­po­rat­ed in a dig­i­tal token (Bossu et al., 2020). A token-based CBDC could poten­tial­ly also be avail­able for cross-bor­der pay­ments. Token based CBDC are unlike­ly to be launched before 2026, but first tests could be car­ried out in 2022 sim­i­lar to the CBDC project in China.


Blockchain for Europe‘s opin­ion is, that it would be desir­able to have the pub­lic sec­tor (the ECB) launch­ing an one-size-fits-all solu­tion as soon as pos­si­ble. This opti­mal solu­tion would be a token-based CBDC. Giv­en cur­rent cir­cum­stances, it is not like­ly that an indi­vid­ual pay­ment solu­tion will be suf­fi­cient to address all emerg­ing use cas­es. Instead, a broad array of pay­ment solu­tions will emerge and coexist.