Research

2022



FSBC Working Paper


The Digital Euro From a Geopolitical Perspective: Will Europe Lag Behind?

Co-author: Prof. Dr. Philipp Sandner

The digital euro is not a monolithic project. On the contrary: The fields of application are broad, and possible solutions are diverse. This paper provides an overview of use cases, application domains, and infrastructures for the digital euro that differ significantly. A comparison with solutions for the digital dollar and the digital yuan leads to the conclusion that, in the most extreme case, the euro could become a regional currency for Europe.



The main reason for this argument is the design and prioritization of current approaches within Europe as well as the European Central Bank's digital euro project, and that stablecoin approaches seem to be neglected as solutions for the digital euro.


2021



Journal of Macroeconomics


What is on the ECB’s Mind? Monetary Policy Before and After the Global Financial Crisis

Co-author: Dr. Johannes Zahner

This paper analyzes the monetary policy of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis in 2008. In the literature, researchers typically select one Taylor rule-based model to analyze monetary policy of central banks and to derive determinants for the interest rate setting. However, uncertainty about the choice of this respective model is typically neglected. In contrast, we apply a Bayesian model averaging (BMA) approach to extend the Taylor rule to account for model uncertainty driven by heterogeneity in the ECB’s decision-making body, the Governing Council. 


Our results suggest the following: First, the ECB focuses on the inflation rate when setting interest rates. Second, economic activity indicators were in the focus of the ECB before the financial crisis. Third, over the last decade, the role of economic activity decreased, indicating that inflation is the main driver of monetary policy decisions in the post-crisis period. Fourth, when setting interest rates, central bankers appear to consider more than one model.

2021



Working Paper, SSRN

Designing a Central Bank Digital Currency with Support for Cash-Like Privacy

Co-authors: Johannes Sedlmeir, Matthias Babel, Alexander Bechtel, Benjamin Schellinger


Most central banks in advanced economies consider issuing central bank digital currencies (CBDCs) to address the declining use of cash and to position themselves against increased competition from Big Tech companies, cryptocurrencies, and stablecoins. One crucial design dimension of a CBDC system is the degree of transaction privacy. Existing solutions are either prone to security concerns or do not provide full (cash-like) privacy. Moreover, it is often argued that a fully private payment system and, in particular, anonymous transactions cannot comply with anti-money laundering (AML) and countering the financing of terrorism (CFT) regulation.

In this paper, we follow a design science research approach (DSR) to develop and evaluate a holistic software-based CBDC system that supports fully private transactions and addresses regulatory constraints. To this end, we employ zero-knowledge proofs (ZKP) to impose limits on fully private payments. Thereby, we are able to address regulatory constraints without disclosing any transaction details to third parties. We evaluate our artifact in interviews with leading economic, legal, and technical experts and find that a regulatorily compliant CBDC system that supports full (cash-like) privacy is feasible.





2021



Working Paper, SSRN

How Do Central Banks Set Interest Rates? A Bayesian Model Averaging Analysis

Co-author: Tim Kleinlein


This paper analyzes the monetary policy of the Federal Reserve (Fed) and the Bank of England (BoE) both before and after the global financial crisis. In contrast to extant literature, we use a Bayesian model averaging (BMA) approach that does not rely on one underlying empirical model but accounts for model uncertainty around the selection of the empirical model. Accounting for heterogeneity in the monetary policy bodies of these central banks, we estimate approximately 33,000 different empirical models for the Fed and 4,000 for the BoE and derive, in the end, one aggregated reaction function for each central bank.

Our results suggest the following: First, both central banks appear to consider more than one model when setting interest rates. Second, while the Fed seems to mainly focus on inflation and, most of the time, economic activity, the BoE seems to focus only on economic activity. Third, applying BMA provides valuable additional explanatory power for the interest rate setting of the Fed by accounting for additional models. However, for the BoE, using a BMA approach does not provide substantial benefits compared to conventional empirical techniques.


2021



Working Paper, SSRN

A Model for Central Bank Digital Currencies: Implications for Bank Funding and Monetary Policy

Co-author: Jonathan Schiller


We develop a dynamic stochastic general equilibrium (DSGE) model to study the impact of central bank digital currencies (CBDCs) on the financial sector. We focus on the effects of interest- and non- interest-bearing CBDCs during financial crises and their interactions with the effective lower bound. In addition, we analyze the role of central bank funding and a rule-based variable interest rate on CBDCs. We find that CBDCs crowd out bank deposits. However, this crowding out effect can be mitigated if the central bank chooses to provide additional central bank funds or disincentivize large-scale CBDC accumulation through low CBDC interest rates.


2021



Working Paper, SSRN

The Programmable Euro: Review and Outlook

Co-authors: Philipp Sandner, Jong-Chan Chung



This study analyzes the potential of a programmable euro, a blockchain-based euro that enables programmable payments. The study sets out how DLT-based payment systems and a programmable euro can promote innovative business models for the real economy and the financial sector. To this end, such business models and their fields of application are discussed using practical examples. Furthermore, the document recommends actions to strengthen Germany as a financial centre.

2020



Working Paper, SSRN

The Future of Payments in a DLT-based European Economy: A Roadmap

Co-authors: Alexander Bechtel, Agata Ferreira, Philipp Sandner


Distributed ledger technology (DLT) enables a wide range of innovative industrial use cases and business models, such as through programmable payments and the seamless exchange of assets, goods, and services. To exploit the full potential of a DLT-based European economy, it is crucial to integrate the euro into DLT networks. In this paper, we propose a framework for developing payment solutions for a DLT-based European economy. To this end, we decompose the digital payments value chain into three pillars: (1) contract execution system, (2) digital payment infrastructure, and (3) monetary unit.

Based on this framework, we systematically compare account- and token-based payment solutions, including a bridge solution, e-money tokens, synthetic central bank digital currencies (CBDCs), and a central bank digital currency (CBDC). Taking into account current circumstances, we conclude that no individual payment solution will be sufficient to address all emerging use cases. Instead, a broad array of payment solutions will emerge and co-exist. These solutions will apply to a variety of different use cases and will be launched at different points in time.


2020



Frontiers in Blockchain

Convergence of Blockchain, IoT, and AI

Co-author: Philipp Sandner, Robert Richter


Blockchain, IoT, and AI are key technologies driving the next wave of the digital transformation. We argue that these technologies will converge and will allow for new business models: Autonomous agents (i.e., sensors, cars, machines, trucks, cameras, and other IoT devices) will in the future act as own profit centers that (1) have a digital twin leveraging IoT, (2) send and receive money leveraging blockchain technology on their own, and (3) autonomously make decisions as independent economic agents leveraging AI and data analytics. We further argue that this convergence will drive the development of such autonomous business models and, with it, the digital transformation of industrial corporations.


2020



Working Paper, SSRN

The Digital Programmable Euro, Libra and CBDC: Implications for European Banks

Co-authors: Philipp Sandner, Lena Grale, Philipp Schulden

Existing payment systems get more and more disrupted. As a consequence of the global trend of digitizing payments and generating new business models from the use of blockchain-based digital programmable money, several new payment initiatives have been announced recently. Besides “classical” crypto assets, also stablecoins become increasingly important. The announcement of the Facebook-initiated Libra stablecoin is mainly perceived as a game-changer for the financial sector. Today, also central banks discuss the introduction of their own digital currencies, so-called CBDCs. To date, these payment innovations are not sufficiently discussed and analyzed from the perspective of different sectors and industries, as its implications remain unclear since most initiatives have not yet been introduced. At this point, the literature does not sufficiently discuss the implications of these innovations on the financial sector.

This paper sheds light on the perception of these payment initiatives by interviewing more than 50 senior experts. In this study, we analyze the impact of digital programmable Euro initiatives, such as the Libra stablecoin, and CBDCs, on banks. We find that both Libra and a Euro CBDC might heavily affect European banks. Experts fear that large-scale financial disintermediation of the financial sector could take place, and digital bank runs could be triggered. Besides these risks, our findings suggest that banks also have the opportunity to develop new business models stemming from these initiatives. Therefore, Libra and a CBDC Euro should not only be seen as threats but also as opportunities.



2020



ifo Schnelldienst

Digitaler, programmierbarer Euro, Libra und CBDCs: Auswirkungen digitaler Zahlungsinitiativen auf europäische Banken (in German)

Ko-Autoren: Philipp Sandner, Philipp Schulden, Lena Grale

Die Digitalisierung des Geldsystems schreitet immer weiter voran. Neben »klassischen« Krypto-Assets gewinnen auch sog. Stablecoins zunehmend an Bedeutung. Die Ankündigung des von Facebook initiierten Stablecoin »Libra« 2019 wird teilweise als Wendepunkt für den traditionellen Finanzsektor wahrgenommen. Auch Zentralbanken diskutieren derzeit intensiv die Einführung eigener digitaler Währungen, sog. digitaler Zentralbankwährungen (CBDCs). Zunehmend werden die Konzepte einer Euro-CBDC und Libra auch in der Literatur diskutiert, jedoch ohne die Auswirkungen des daraus resultierenden digitalen, programmierbaren Euro auf Banken zu diskutieren. Dieser Beitrag beleuchtet die Wahrnehmung dieser Zahlungsinitiativen durch Befragung von mehr als 50 hochrangigen Fachexperten.


Hierbei werden die Auswirkungen von digitalem, programmierbarem Geld, wie beispielsweise einer Euro-CBDC und Libra, auf europäische Banken untersucht. Die befragten Experten erwarten, dass sowohl Libra als auch eine Euro-CBDC europäische Banken stark beeinflussen werden. Sie befürchten, dass es zu einer Disintermediation des Finanzsektors kommen könnte und digitale Bank Runs ausgelöst werden könnten. Neben Risiken für den Finanzsektor deuten die Ergebnisse allerdings auch Chancen für Banken an, neue Geschäftsmodelle basierend auf programmierbarem Geld zu entwickeln, um sich auch im Libra- und CBDC-System zu positionieren. Daher sollten Libra und eine Euro-CBDC nicht nur als Bedrohung, sondern auch als Chance wahrgenommen werden.


2020



Wirtschaftsdienst

Bitcoin, Libra und digitale Zentralbank-währungen – ein Geldsystem der Zukunft?

Ko-Autoren: Bernhard Herz, Jonathan Schiller

Seit der Einführung von Bitcoin 2008 und vieler anderer Kryptowährungen ist eine neue Welle innovativer Zahlungsprojekte im Gange, darunter Innovationen wie Libra – als supranationaler Stablecoin konzipiert – und digitale Zentralbankwährungen. Diese privaten und öffentlichen Projekte sind durch verschiedene Wechselbeziehungen miteinander verbunden. Bitcoin hat sich bislang nicht zu einem weit verbreiteten Zahlungsmittel entwickelt, unter anderem wegen der erheblichen Preisvolatilität.



Im Gegensatz dazu soll Libra ein eher konventionelles Zahlungsmittel mit engen Beziehungen zum bestehenden Bankensektor werden, was viele Fragen zur Geld- und Finanzstabilität aufwirft. Digitale Zentralbankwährungen könnten als Reaktion des öffentlichen Sektors auf diese privaten Projekte angesehen werden, um die vorherrschende Rolle der Zentralbanken im Währungssystem der Zukunft zu sichern


2020



Working Paper, FSBC Working Paper

The Digital Euro and the Role of DLT
for Central Bank Digital Currencies

Co-authors: Manuel Klein, Philipp Sandner

Digitization has reached the monetary system. The advent of crypto assets, such as Bitcoin and Ether, revealed numerous advantages these digital assets based on distributed ledger technologies (DLTs) can bring: Using DLT can enhance the security of sensitive financial transaction data, increase transaction speed through faster processing and settlement and automate numerous business processes through smart contracts. These advantages ought to be realized in the conventional
monetary system as well not only in the "crypto industry”.

DLT can be used both to digitally represent bank deposits and to tokenize central bank money via central bank digital currencies
(CBDCs). Current DLT-based CBDC projects and prototypes among others by the Chinese and Swedish central banks, but also initiatives by the European Central Bank (ECB), show that DLT
will be an essential pillar of the digitization of the monetary system in particular and the financial system in general in the future.

2019



Working Paper, University of Bayreuth

Libra: Insights into its Expected Stability

Co-author: Leon Landes

Recently, stablecoins have gained high public attention. They provide a value-stable alternative to cryptocurrencies such as Bitcoin or Ethereum, which are volatile and, therefore, not suitable as means of payment. The announcement of the Libra project has further increased the public interest in stablecoins. In this paper, we study whether Libra might fulfill the function of money. We argue that Libra can only act as a proper unit of account and store of value if its value is relatively stable. To analyze the expected stability of Libra, we use the Special Drawing Rights as a proxy. For this purpose, we calculate common risk measures, namely, standard deviation, Value-at-Risk, and Maximum Drawdown.

We show that Libra’s exchange rate against strong currencies in industrialized countries can be expected to be relatively stable in the long-term, however fluctuating in the short-term. In emerging and developing countries, Libra can offer protection against the devaluation of local currencies. However, holding Libra will also entail a higher risk of loss for residents of these countries. Furthermore, we find from current stablecoins, as Tether or TrueUSD, that Libra will not necessarily be traded at par with the underlying reserves any time. Reasons for this divergence can be a perceived risk of default and incentives to carry out hedging transactions.


2020



Wirtschaftsdienst

Libra – Konzept und wirtschaftspolitische Implikationen

Ko-Autoren: Bernhard Herz, Jonathan Schiller

Die Ankündigung der Libra Association, mit Libra eine private globale Währung zu emittieren, hat eine heftige Debatte über die damit verbundenen Chancen und Risiken ausgelöst. Befürworter erwarten, dass Libra das Geldsystem von seinen „staatlichen Fesseln“ befreien und den Zahlungsverkehr weltweit liberalisieren und verbilligen kann. Gegner argumentieren, dass eine private Währung erhebliche Risiken für den einzelnen Nutzer und das gesamte Finanzsystem mit sich bringt.


Darüber hinaus könne Libra die Effizienz der nationalen Geldpolitiken einschränken. Dieser Beitrag erläutert das Konzept von Libra und leitet aus deren Vor- und Nachteilen das Marktpotenzial von Libra ab. Zudem werden Implikationen für die Geldpolitik und die Finanzmarktregulierung beleuchtet.