Growing Towards a ‘Cashless’ Economy

7

October

2020

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As the whole world is starting to recognize the opportunities that arise from digitization more and more one of the European Union (EU) its institutions, the European Central Bank (ECB), seems to join in on the tendency to become more digital. Pieter Cranenbroek noted that the ECB is exploring various options for a ‘digital euro’. The ECB itself elaborates on a comprehensive report about the possible issuance of a digital euro, which became public on the 2nd of October this year, in a recent press release. The 55-page long report, prepared by a special EU task force – whose members will probably astonish anybody asking them what their job is since they are coined as ‘the Eurosystem High-Level Task Force on central bank digital currency’ – gives an extensive description on several aspects with regards to a digital currency. I will summarize the most important parts of the report in this blog.

What are the EU’s motives to look into possibilities for a digital euro? The short answer is: to hedge against the risks of future uncertainty. Multiple scenarios are described in the report that might unfold anytime in the upcoming years. By preparing a digital currency for Europe, the EU aims to be prepared for any of those scenarios – or multiple. Seven different scenarios are identified, of which the first five are related to core ECB functions and the last two pertain to broader EU objectives:

  • The digitalization and independence of the European economy can benefit from a digital form of central bank money available to citizens;
  • The role of cash as a means of payment declines significantly;
  • A form of money other than euro-denominated (i) central bank money, (ii) commercial bank deposits or (iii) electronic money becomes a credible alternative as a medium of exchange and, potentially, as a store of value in the euro area;
  • If the Eurosystem were to conclude in the future that the issuance of a digital euro is necessary or beneficial from a monetary policy perspective;
  • There is a need to mitigate the probability that a cyber incident, natural disaster, pandemic, or other extreme events could hinder the provision of payment services;
  • The international role of the euro gains relevance as a Eurosystem objective;
  • The Eurosystem decides to proactively support improvements in the overall costs and ecological footprint of the monetary and payment systems.

What would the benefits be of such a digital currency? Most benefits actually originate from the beforementioned scenarios. A digital euro has all benefits that the euro currently provides. Additionally, the new valuta adds a lot of value in situations where people no longer prefer cash payments. Another advantage is that a digital euro cushions the impact of extreme events like natural disasters or pandemics – coincidence?

What would a digital euro’s characteristics be? The incredibly long-named task force sums up five core principles of a digital euro: (1) Convertibility at par: Not a parallel currency, (2) Liability of the Eurosystem: A digital euro is central bank money and its issuance is controlled by the Eurosystem, (3) European solution: Widely accessible on equal terms in all euro area countries through supervised service providers, (4) Market neutrality: Not to crowd out private solutions, and (5) Trusted by end-users: Trusted solution from the start and over time.

When can we expect a digital euro and what will happen to the euro we know? The development of a digital currency is still in the preparation phase. Actually, the ECB will start experimenting very soon and they host a public consultation on October 12th (see source ‘A digital euro’)! However, a decision on whether to pursue this digitalization will not be made until mid-2021. Besides, the digital currency is said to complement the current euro, rather than to replace it completely. So cash lovers do not have to worry anytime soon.

Is it a smart move of the ECB to investigate these digital possibilities? And which of the seven scenarios do you think is most likely to become reality? I am curious to see what you think.

Hope you enjoyed the read!

 

Sources:

  • LinkedIn article – https://www.linkedin.com/feed/news/ecb-considers-issuing-digital-euro-5305506/
  • ECB report – https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_euro~4d7268b458.en.pdf
  • ECB press release – https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr201002~f90bfc94a8.en.html
  • ECB: A digital euro – https://www.ecb.europa.eu/euro/html/digitaleuro.en.html

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Does a “hub firm” need to be a firm?

27

September

2020

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Tesla-Solar-Panel-Roof-Lowest-Cost-Solar-Panels-CleanTechnica

 

Back in the first week of this course, we talked about the hub economy. A recent article about one of Tesla’s embranchments, namely in solar energy, got me re-thinking about this topic. If you want to know why, feel free to read along 🙂

A quick refresher: Iansiti and Lakhani (2017) talked about digital superpowers that capture a disproportionate and growing share of the value being created in the global economy. They refer to these superpowers as “hub firms”. Examples are Alibaba, Alphabet/Google, Amazon, Apple, Baidu, Facebook, Microsoft, and Tencent. These firms occupy central positions within industries that allow them to create and control focal points in the networks of our economies. Once a firm becomes a “hub”, there is (almost) no going back – it is essentially a vicious circle. The bigger such firms get (in terms of revenue, workforce, connections, you name it), the more established their position in the hub economy becomes. This vicious circle is also the one of three roots for the emergence of economic hubs. Note that Iansiti and Lakhani use the word “positive feedback loops” to describe the same phenomenon, which is originally posited by the physicist Albert-László Barabási. The other two roots are Moore’s Law (check Dennis’s post if you are interested in a different perspective here on, I’ll put the link at the end of the article) and connectivity (i.e. network effects).

So far, so clear. Then I stumbled on a recent article discussing Tesla solar power (up until then I didn’t even know they were in the solar power business as well but I guess I shouldn’t be shocked). In the article, Elon Musk explains how Tesla can afford to offer its solar power way below average market prices. With “way below” I’m not exaggerating; Tesla charges $1.49/watt for their solar energy across the USA, whereas competitors’ offer is $2.19 on average. Meaning that Tesla’s price is not even 70% of that of their adversaries. How can Tesla do this? Quite simple actually. They don’t have to invest heavily in marketing/promotions, or hardly any at all. And the reason behind this is Musk himself. With casually mentioning Tesla’s solar program in a tweet every now and then, sales are more or less secured. It may sound absurd but it’s the reality.

When I read this, I immediately thought: Hmm okay.. so basically Elon Musk is a ‘human hub’? Of course, Moore’s Law doesn’t hold for Musk as nobody is constantly trying to put more transistors in every cell of his body to improve performance (as least not that we know of). However, the sole fact that he is active on social media lets him reap the fruits of network effects. Moreover, every follower Musk gets strengthens his already powerful position and that of the companies he owns. This causes Musk to indirectly capture a humongous market share in different sectors since he owns various businesses not only in electric power (SpaceX for example).

Maybe not entirely fitting the original definition of Iansiti and Lakhani, I would say that Elon Musk is a hub, in human form at least – one that can’t easily be stopped if that’s possible at all. Do you agree that Musk is a sort of human hub? If so, is there a need to restate the original definition, and are there more differences between a hub firm and a human hub that I didn’t discuss? If not, let me know why not and how you view Musk’s influential position. Bonus: If you agree, who would you consider a human hub besides Musk?

Let me know in the comments below!

Links/sources:

  • Dennis’s post on Moore’s Law – https://digitalstrategy.rsm.nl//2020/09/13/moores-law-from-a-different-perspective/;
  • Iansiti and Lakhani (2017) – https://hbr.org/2017/09/managing-our-hub-economy (use your browser in incognito mode or clear your cache to avoid the ‘you have zero articles left’ issue on the HBR website);
  • Tesla solar power article (2020) – https://cleantechnica.com/2020/09/12/elon-musk-explains-why-tesla-solar-power-is-so-cheap-cleantechnica-exclusive/

Hope you enjoyed the read 🙂

Youri

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