With the acceleration of digital technology, humanity is moving towards an increasingly digital and dematerialised world. One of the key factors is the development of 100% digital currencies.
The idea of digital currencies has been around for years, most notably with crypto currencies, including Bitcoin launched in 2009.
A crypto currency is a digital currency that circulates freely on the internet. It is linked to an encryption system and is decentralised, i.e. without any controlling authority.
Crypto-currencies emerged with the creation of the blockchain. A blockchain is a decentralised (not dependent on an authority) blockchain database that protects transactions and encryption. It is theoretically impossible to hack a blockchain, so they allow the circulation of cryptocurrencies.
According to CoinMarketCap, in mid-July 2020, there were more than 5,700 crypto-currencies with a total value of more than €240 billion (with Bitcoin accounting for 63% of this, Ethereum for 10%, Tether for 4% and Ripple for 3%).
New crypto currencies : Facebook Diem
More recently, new and stable crypto currencies have emerged. Facebook is currently testing a new crypto currency: Diem.
Diem is the new name of Facebook’s Libra virtual currency since last December.
This new crypto-currency would be backed by a basket of fiat currency and would allow the exchange of value between Facebook users.
During its test phase, Diem reached more than 50 million transactions. These tests allow the developers to detect and correct any flaws in the network before its official launch. The data shows that Diem’s testnet is capable of reaching an average speed of over 3 transactions per second (TPS). While this seems relatively fast, this transaction speed is lower than Bitcoin (4.6 TPS) and Ethereum (15 TPS). And much slower than networks such as Solana (65,000 TPS).
Limits to Diem’s deployment
However, there are still many restrictions before Diem is officially launched. If Diem were to be popularised and licensed, it would mean that public authorities would give the power to control the currency to a private company. This is still far from being accepted, especially in Europe.
Moreover, a cryptocurrency is not anonymous but pseudonymous, all exchanges are traceable. Facebook would therefore have access to all Diem users’ transactions, and would therefore not respect the principle of privacy. This is not reassuring when we know that Facebook is regularly subject to data leaks. There is also the danger of monetisation of the information collected, especially as Facebook is an American company. The US government therefore has the right to demand access to all data collected by Facebook.
Organisations are reacting to Facebook’s Diem initiative. For some, it is out of the question that the Gafa dictate their law in payment. Below are some examples, such as the reaction of central banks or the creation of alternatives with a case study of Casino.
Central banks wake up
In the face of digital acceleration, central banks are taking an interest in the digitalisation of money. They are increasingly experimenting with basing their currencies on the same model as a stablecoin. A stablecoin is a stable cryptocurrency, backed by a value that is supposed to have low volatility, such as the dollar or the value of gold.
The current environment seems favourable for the initiative and creation of crypto-euro or euro-digital type currencies. This would totally dematerialise the currency, and the payment media would change. They would become smartphones, but also many connected objects such as watches for example. The principle would be similar to the credit card, which is already digitising the euro.
However, central banks have not yet reached this point. To use a digital currency on a daily basis, as will be the case, it is imperative that the currency be stable and not very volatile. Bitcoin, for example, although very popular, is very unstable, and the development of a secure, reliable and well-protected stablecoin will take a long time.
Innovations in digital currencies: Lugh from Casino
At the end of March, the Casino group launched its new creation: a digital currency called Lugh.
The value of this currency is based on the euro: 1 Lugh is worth €1.
Casino’s objective is to prepare the future of payment and loyalty cards for its customers.
The Lugh virtual currency is presented by Casino as the evolution of the digitalisation of payment and loyalty card for its customers. The objective of the Lugh project is turned towards “B to C” consumers. The idea is to create a consensus around a single means of payment and loyalty through a shared, secure and transparent technology between independent companies.
A loyalty and payment application
Loyalty and payment have already been unified for several years. In 2017 Casino launched the Casino Max app, a digitalisation of loyalty programmes. Casino then added a payment option to it, which allows the customer with their smartphone to pay and have their loyalty programme directly at the checkout in all Casino shops. Currently, more than 22% of the turnover is from Casino Max customers who use the payment and loyalty option. Casino has identified a customer need to pay and have their loyalty programme on their smartphone. This application is the first step in the digitalisation of payment and loyalty and their unification.
The next step for the Casino group is to make loyalty programmes between different retail players interoperable on the basis of a new technology. This is why Casino is embarking on the Lhug project. The Lugh has had a first technical phase, which is the creation of a stablecoin before developing use cases. The idea is to develop a new means of payment and loyalty, which would be based on this stablecoin. To do this, Casino will use the principle of blockchain smart contracts, which allow the loyalty programme and the payment to be interwoven in a single algorithm, a single technical tool.
Lugh technical aspect
The Lugh is a stable digital currency backed by the euro in partnership with Coinhouse, a player in crypto asset investment for individuals and businesses. Initially, the Lugh digital asset (EUR-L) will be offered to customers of the Coinhouse platform, for individual or professional investors. Once this stage is over, Lugh aims to develop new everyday financial services based on blockchain technology.
In order to guarantee the stability of the Lugh (EUR-L), for each digital asset issued, €1 will be kept in a dedicated bank account. For the technological aspects of the project, the Lugh company is working with:
- Société Générale that will be the issuing company’s account holder.
- PwC that will certify each month the number of Lugh (EUR-L) tokens issued as well as the balance of the associated bank account domiciled at Société Générale.
- Sceme, the provider of the Lugh issuance and management infrastructure.
- Nomadic Labs, the French specialist in the Tezos blockchain, on which the Lugh (EUR-L) will be issued.
The future of digital currencies: the Digital Yuan
According to some, Bitcoin and other crypto-currencies have no future in the long run, as governments and central banks will want to keep the monopoly on the creation and distribution of money. The digital yuan, currently called DCEP (Digital Currency Electronic Payment), is expected to be the first virtual currency to be developed on a large scale.
The digitalisation of services in China is extremely advanced. In terms of dematerialised payment, the country is ahead via its WeChat Pay and Alipay applications. The Wechat and Alipay system works like an “electronic wallet” that is fed or debited by transfers between users and potentially linked to their bank account. Payment by phone, via NFC or QR code is already commonplace. It is fair to say that dematerialised payment is ubiquitous in the daily lives of the Chinese. Even roadside fruit and vegetable sellers are equipped with dematerialised payment methods. Dematerialisation of money is common, so much so that the idea of a 100% digital currency has been in the works for a few years (since 2014).
Successful large-scale testing
Trials have been extended to several regions and cities in China (Chengdu, Shenzhen, Suzhou), as well as to certain Chinese and foreign companies (Starbucks and McDonald’s) and public administrations such as the Ministry of Education.
Last October, China began one of the world’s largest live tests of its digital currency. The Shenzhen government held a lottery to distribute a total of 10 million yuan (about $1.5 million) in digital currency. Almost 2 million people applied and 50,000 people actually won. The winners downloaded a digital renminbi application to receive the digital yuan and spend it at more than 3,000 merchants (supermarkets, pharmacies, Walmart, etc.) in a particular area of Shenzhen. A very conclusive result.
The Chinese government’s objective is to gradually extend the circulation of the digital yuan so that it can be used in China and abroad by 2023. The Chinese banking authorities even hope that their “e-money” will eventually replace the dollar in international circuits. A first key milestone will be the 2022 Olympic Games in Beijing.
A controlled digital currency
China is moving towards a cashless society. Indeed, the digital yuan is not a crypto-currency like Bitcoin. The digital yuan is issued and controlled by the People’s Bank of China, the country’s central bank. It does not seek to replace digital wallets like Alipay or WeChat Pay. It is likely to work with these and other banks to expand and facilitate the use of the digital yuan. The digital yuan is a completely different currency from Bitcoin, which is decentralised, not owned or controlled by any authority, and not distributed by a central bank.
Central banks around the world are exploring the idea of issuing digital currencies. The digital Yuan is a perfectly government-controlled currency. It inspires many banks, including central banks. This type of digital currency will not give more freedom as free crypto-currencies would have done. It may even give less freedom to people and more control to authorities.
Ultimately, the acceleration of digital technology has a key role in the evolution of currency as it becomes digital. In all four corners of the globe, various digital currencies are emerging. Although these new currencies are still in their infancy, it is undeniable that they will transform our daily lives and disrupt our payment and banking systems.