Prof. Dr. Philipp Sandner, Head of Frankfurt School Blockchain Center, talks about how he sees crypto assets developing going forward, the challenges of regulating and supervising blockchain use in finance, and what is needed to make the digital euro a success.

Which kind of innovation is blockchain bringing to financial services?

Blockchain technology represents a ledger, and ledgers are perfect for representing value – it could be the euro, the dollar, stocks, debt instruments, even real estate records. For this reason, blockchain technology is perfect for financial markets or financial instruments – be it currency, securities, crypto assets etc. It’s a prime technology when it comes to representing value digitally. And that’s also why these financial ‘use cases’ (which define the most basic functional tasks that the users of the application perform) have grown so much whereas other applications of blockchain technology are developing a little bit slower.

You mentioned crypto assets – is that the main usage for the time being? And how will it develop going forward?

Crypto assets are a huge field and I’d specifically like to mention three major innovations. First, having an infrastructure developed in a decentralised way so that there is no central power – like Bitcoin. A second huge innovation is ‘smart contracts’ – the building blocks of Ethereum and similar platforms. With smart contracts you can control and program money flows. Finally, I’d like to mention tokenisation. Here, you have smart contract platforms like Ethereum as a base, and then you have tokens on top of Ethereum that can represent anything – for example the euro on top of Ethereum, the US dollar on top of Ethereum, second layer crypto assets, securities, shares, debt instruments, potentially even car ownership… So you have smart contract platforms like Ethereum and many others as a base platform, with the functions of smart contracts for flow of value and tokenisation to allow other assets to be represented on top of Ethereum. These are the three key innovations. And yes, they rely on crypto assets, but as I said you can also put the dollar/Swiss franc/euro on top of these crypto assets. So we see here that the existing world of assets and money can meet crypto assets: Putting for example the US dollar on top of Ethereum, whereas Ethereum functions like a ‘transporting platform’.  

You frequently mention Ethereum – although generally speaking Bitcoin is probably more famous. What is the difference between the two and why do you focus more on Ethereum?

Ethereum is a much more versatile platform. Bitcoin is the largest and basically the ‘number one’ asset out there and very intensely in the media. But from an innovation perspective you can do much more in the Ethereum ecosystem. And this is also true when it comes to headcount – the Ethereum ecosystem has more than 100,000 people doing IT development every day. You do not have this with Bitcoin. Yet, Bitcoin is the largest platform but simply with another use case.

You said that blockchain will become much more widely used in finance and you highlighted that crypto assets are one of the current major use cases of blockchains in the financial sector.  What lessons do you draw from the current turmoil affecting crypto markets globally in regulatory terms?

Well we now see that regulation makes sense because it provides both legal certainty and customer protection. What is lacking is international regulation because we’ve seen for instance business models coming from South Korea or elsewhere which then affect customer confidence or customer protection over here in Europe. An interesting point is that people have now learned what a decentralised network is. A lot of networks have been marketed as decentralised but if you look carefully you realise that the most decentralised network is Bitcoin and that other networks, like Solana, are much more central. People are now learning to differentiate between those that claim to be decentralised and those that really are. I think young people who have invested their money knew exactly what they were doing and have accepted the risks. This might have been different had it been for instance older people, who were drawn in by the marketing and lost their money. And this is also connected to my last point and that is the fact that crypto markets are still very disintegrated and disconnected to legacy financial markets. Another interesting point – we are hearing that ‘retail’ has invested. But who is retail? Who is investing? It is typically – say 90% - male, tech-savvy, and younger, usually under 45 years old. So older people and women on the whole have not been affected so much.

What are the challenges of regulating and supervising blockchain use in finance?

First it’s very important to understand what exactly you are regulating. Four or five years ago the general opinion was that you should regulate the technology itself. But as I have said it’s decentralised so you cannot regulate the network processing itself, you can only regulate the interactions between people – e.g. private individuals or companies – on the one hand and the network on the other hand. And that’s something we all had to learn over the past couple of years. That’s also how MiCA is designed. Such ‘interfaces’ can also be said to be financial intermediaries. They are issuing assets on blockchain systems or trading assets – wherever there is a person interacting with a blockchain network that’s where the regulator has to ensure that rules are not being broken, money laundering or criminal financing are not taking place… So you are not regulating the bitcoin network as such, but rather accepting the bitcoin or Ethereum network and then regulating the interactions of people with them.

So, do you think that the fundamental driver of blockchain in finance is related to this vision of society – in other words giving the power back to people and not the institutions that have typically run finance?

This is a very interesting question! But we must first specify which society we are talking about. Are we talking for instance about a European or US society, where people have grown up with the desire to have freedom? Or are we talking about a more closed society? In Europe and the US the open source approach of IT is completely in line with the general mentality of crypto assets because you can see clearly what’s happening on the network as an open ledger. If you regulate this, then the underlying technology matches people’s desire for freedom. So crypto assets, the open source approach, smart contact platforms like Ethereum perfectly match this type of freedom-seeking mentality. But you have to regulate them correctly, where people are interacting with the networks. And this is exactly how the MiCA rules have been defined, so I see this all fitting together well and the regulation coming with MiCA will foster this relationship.

What is your take on central bank digital currencies (CBDC), such as a digital euro? What would you say is needed for this to be a success?

First we must define what the digital euro is. There are two elements: what the central banks are doing – so the CBDC aspect – and then there is private money, for example stablecoins. Why is this important? Because I am quite optimistic about stablecoins. We’ve already seen that it works for the US dollar. And we can see that value can be transferred from one point on the planet to another in a couple of seconds. On the other hand, we have the central bank digital currencies, where I am a little bit less optimistic. The reasons: The European Central Bank (ECB) and other central banks are working on this quite slowly and they also are not acknowledging that crypto networks like Ethereum are already delivering part of their promises in terms of moving value around the globe. Furthermore, society puts certain demands on central banks, for instance when it comes to privacy, but central banks are to some extent not fully adhering to this.

There is of course a debate here about whether money should be public or private. If this innovation takes place in the private field do you think that private stablecoins could over time erode the value of public money?

From a technology perspective this will not happen. Stablecoins are here to stay. But the underlying nature with regard to smart contract platforms like Ethereum and stablecoins running on top of them is basically ‘open source’ – so people can ensure that whatever is being developed and programmed on these networks is as it should be. To be honest, I think this puts central banks at a disadvantage because I don’t believe that they are developing IT in an open source way. This means there is always the risk of a lack of trust in what central banks are doing. Most important: While stablecoins are issued from private companies, it is still ‘the euro’, since these companies need to comply with regulations. It is very similar to payment processors like Paypal, Revolut or N26: Yes it is ‘the euro’, but issued and provided by private companies.