This example illustrates the limitations of our current payment system: relatively long waiting times, complicated authorisation procedures and a lack of delivery-versus-payment functionalities. While this may have been acceptable in the past, it poses serious problems for the future. Because the future belongs – among other things – to the Internet of Things (IoT). By 2025, an estimated 75 billion devices will be linked via networks. The potential for new business models is huge, from automatic customs clearance without human intervention, or rental charges for agricultural machinery billed according to the actual payload, to the self-ordering refrigerator.
However, many of these business models will be hard to realise if the current limits of payment systems remain. Digital currencies can lay the foundation for automation and overcome these limitations. The European Central Bank (ECB) is considering the introduction of a public digital euro – a digital form of central bank money that is to promote financial inclusion and be available to the citizens as a digital and secure means of payment. Still, even if this were to be decided in 2021, according to the assessment by the ECB's director Fabio Panetta as well such a currency would hardly be a reality until 2026 , especially since it is not yet known whether the digital euro will have the characteristics necessary for IoT business models. Given the growth of the IoT, this will be too late and too uncertain.
The solution to this dilemma lies with private initiatives. It is already possible to connect the SEPA system with an application based on distributed ledger technology (DLT) via a technical bridge solution. This method can be used, for example, to implement pay-per-use solutions: payments are triggered via the SEPA system and programmable payments can be mapped on a DLT. However, this so-called trigger solution does not eliminate the limitations of SEPA because a human authorisation is still needed. The machine or IoT device cannot bill itself. The system break in payment processing can be avoided if a digital means of payment is issued and processed directly on a DLT, instead of using conventional payments.
A DLT-based digital currency does not necessarily have to be issued by a central bank. Banks or financial institutions can also create solutions for so-called programmable payments. One example are euro-based stablecoins – digital tokens backed by a specific monetary value. At present, there is still no regulatory basis for euro stablecoins and they have a high counterparty risk. However, with the planned EU directive "Markets in Crypto-assets" (MiCA) this is likely to change and stablecoins will become tokenized e-money. An alternative is tokenized scriptural money that financial institutions could issue. Unlike the stablecoin, it would have the advantage of not having to be 100 percent covered. Nevertheless, according to the current rules, such a currency would not be multi-bank capable and would thus entail very significant restrictions.
In whichever form this happens, the digital currency will become reality. This is the only way for the German industry to fully benefit from the potential of the IoT. Even more far-reaching automation in goods logistics or increasingly popular asset-as-a-service models are hardly conceivable in the long term without fully autonomous payments in real time. Details on the use cases and further details on the design of digital currencies can be found in the joint white paper "The future of payments: programmable payments in the IoT sector", which was written by PPI together with the partners Cash on Ledger, Digital Euro Association and Frankfurt School Blockchain Center. For a free download click here.
Authors: Anja Kamping, Philipp Schröder
