Main Takeaways
- The Digital Euro Association and Lipis Advisors have recently put out a paper, sponsored by Binance, examining the prospects of machine-to-machine (M2M) payments in Europe.
- The authors argue that EUR-based stablecoins can play an important role in developing the IoT economy in the region.
- The report maintains that Europe is well-positioned for a breakthrough in M2M payments while outlining some potential technological and policy hurdles that will have to be cleared first.
Learn about M2M payments and how EUR-based stablecoins can shape the future of machine-initiated transactions in our summary of a recently published piece of research.
Binance has recently supported the publication of a paper examining the role of EUR-based stablecoins in advancing the Internet of Things (IoT) and machine-to-machine (M2M) economy in Europe. Experts from the Digital Euro Association (DEA), a Germany-based think tank focused on digital money, and Lipis Advisors, a consultancy firm specializing in the payment sector, have contributed to the report.
The paper assesses the benefits and drawbacks of M2M payments and explores how a EUR-based stablecoin could push Europe to leadership in payment innovation. Lipis Advisors and DEA’s analysts also proposed several policy recommendations to drive healthier growth in stablecoin usage in Europe.
What Are M2M Payments
The concept of M2M payments is becoming increasingly relevant in the context of the Internet of Things (IoT) – a network of physical objects equipped with software that transmit data and communicate with other devices over the internet. Transmitting value is one of the fundamental functionalities that these connected devices will be required to perform as the IoT matures and becomes more embedded into people’s lives.
Currently, the most widely-used IoT payment systems require some form of human intervention or at least confirmation – for example, in the form of granting your smartphone access to your bank account or confirming an online credit card payment.
M2M payments, however, are completely autonomous. Imagine a car that could pay for itself — with no human participation — at the gas station, the parking lot, or the highway toll.
According to the studies referenced in the paper, many European countries lead the world on some M2M payments’ penetration indicators, such as the number of M2M mobile SIM cards per 100 inhabitants. Western Europe also ranks high on production automatization with 225 robotic units per 10,000 employees.
The data, thus, suggest that Europe is ready for a breakthrough in IoT, in particular M2M, payments. Stablecoins, the authors maintain, can be the difference maker in setting Europe apart from the competition in this area, particularly the US and China.
How Stablecoins Can Drive M2M Growth in Europe
The report notes that The European Central Bank (ECB) is not expected to decide whether to issue a digital euro until 2026 at the earliest. It has also clarified that machine-initiated payments will not be a priority use case for a potential CBDC. The authors believe that EUR-based stablecoins can fill the gap.
The paper articulates three key advantages of M2M payments: the inherently contactless nature; being instant and fully automatic; cost-effectiveness that improves value chains by automating menial tasks.
The authors also list several current and future use cases for stablecoin-enabled M2M payments, including:
- The automotive industry: vehicles pay for their own gas, parking, or highway fees.
- Logistics: each time a truck needs to make a payment, the process is automated. Commerzbank, a major German bank, already has a joint project with Daimler Truck AG to develop a blockchain-based M2M system that automates payment between trucks and electric charging stations.
- Smart homes: household appliances automatically pay for the electricity they consume.
- Industrial machines: 3D printers can order their own parts or ink when needed.
The paper also discusses the drawbacks of M2M payment systems, such as potentially higher exposure to security breaches and hurdles to scalability. The authors note that relying on blockchain technology could improve the security of M2M systems, while smart contracts present a better solution to enable the programmability of payments compared to using an API as is the case with many existing payment systems. According to the report, APIs, while more familiar to developers, have a higher potential for system failure if layered on top of each other than solutions based on distributed ledger technology (DLT).
Policy Recommendations
The analysts note the importance of regulation in fostering growth for stablecoin-based M2M payments. Particularly, they emphasize four considerations:
- M2M payments would require some form of machine identification system to ensure a safe environment – in essence, a know-your-customer (KYC) system but for machines instead of humans.
- Regulators must figure out the extent to which they should apply Strong Customer Authentication (SCA) and General Data Privacy Regulation (GDPR) laws to M2M payments, which require zero human interaction, unlike traditional machine payments that have humans provide consent.
- Stablecoin-based M2M payments require the usage of unhosted wallets, also known as self-custody or cold storage wallets. Additional regulatory clarity will be needed.
- Regulators have yet to establish clear standards and best practices for EUR-based stablecoins, which will likely be issued on blockchain networks that function independently from each other.
Conclusion
In sum, the report expresses a belief that EUR-based stablecoins could potentially push Europe ahead of other markets also driving innovation in the payments industry. With proper guardrails in place, EUR-based stablecoins can play an essential role in developing M2M payments, still a relatively niche, but crucial sector that could massively impact a wide range of industries and drive sustainable economic growth.
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