Denis Beau: The perils and potential of digital currencies
Introductory remarks (virtual) by Mr Denis Beau, First Deputy Governor of the Bank of
France, for the panel discussion on "The perils and potential of digital currencies", at
the RAID (Regulation, Artificial Intelligence, Internet & Data) Digital 2023 on "Bridging
Parallel Lines", 3 May 2023.
* * *
In order to set the scene, let me:
Put CBDC and stablecoins discussions and developments into the broader
perspective of the transformation underway of financial services and of the
financial sector.
Highlight the regulatory and supervisory issues they raise from a central banker
perspective, from the perspective of an institution in charge of ensuring monetary
and financial stability.
To do this, I would like to make three points:
First, CBDC and stablecoins are the prominent and most publicized output of the 3
major disruptions of finance that digital technologies are bringing about, namely:
The arrival of new players, big techs and fintechs, which to date, have been
subject to little or no regulation.
The emergence of new forms of investment and settlement assets in
tokenized form, usually referred to as crypto-assets. Bitcoin is emblematic of a
first generation of highly volatile cryptos, whose use remains essentially
speculative. The second generation, stablecoins, aims to provide a broader range
of services possibly with a global reach, with the support of mechanisms to
stabilize their value against sovereign currencies.
based on DLT and
The emergence of decentralized market infrastructures,
blockchains in particular.
The combination of those 3 trends is translating into activities and services that first
swept into the payment sector and are now spreading more broadly. Among them,
socalled decentralized finance, DEFI, is emerging as a crypto-based alternative to
traditional finance, where the provision of services is claimed to be disintermediated
and their governance decentralized, and is enabled notably by permissionless
blockchains, smart contracts and decentralized apps. Digital innovation therefore acts
as centrifugal forces: they aim to create a movement of decentralisation that runs
counter to the traditional architecture of the monetary and financial edifice, centralised
around trusted institutions -the central bank, credit institutions and market
infrastructures-.
Second, these decentralisation forces might have a two-sided impact on the functioning
of our financial system, both in terms of efficiency and stability.
they can bring in particular more transparency,
From an efficiency perspective,
costefficiency and availability around the clock. But they bring also a risk of
fragmentation of processes, if the blockchains are not interoperable and cannot also
smoothly interact with legacy, centralised, clearing, settlement and payment systems.
From a stability perspective, it is clear that currently the crypto ecosystem is not large
enough and interconnected enough to threaten the stability of the whole financial
system, as shown by the modest impact on mainstream finance of last year's
turbulences, in the wake of the Terra-Luna and FTX conglomerate collapses. But these
collapses did have significant negative spillover effects within the crypto ecosystem. In
addition, the crypto ecosystem inherits and may amplify the vulnerabilities of the
mainstream financial system, as it grows and tries to replicate the functions of that
system, and it introduces new points of vulnerability like bridges between blockchains or
so called oracles that feed data to blockchains.
the investigations undertaken by many central banks, for the issuance of a retail
Third,
and/or a wholesale CBDC, should be seen in my view as part of a broader response by
central banks, in line with their monetary and financial stability mandate, to help bring
the financial landscape, which will result from those transformations, within a
confidence prone regulatory and operational framework, to help reap their benefits and
master their risks.
At the Banque de France, our response is based on three convictions:
First, the traditional pillars to ensure confidence cannot be replaced by any
"algorithmic" confidence, namely by rules of the game that would be coded once
and for all and for which respect would be entrusted to algorithms.
Second, confidence requires a regulatory framework that is clear, fair ("same
business, same risk, same rule"), balanced and consistent at international level, if
we want to simultaneously encourage innovation, protect adequately customers
and investors, and maintain the stability of our financial system. Europe has led
the way in this field, with the adoption of MiCA. It is important that its
implementation takes place as swiftly as possible, within a broader international
effort, building on the highlevel recommendations developed by the FSB, and that
it is expanded in due time to cover in particular the specificities of the DEFI
ecosystem.
Third, confidence requires maintaining central banks money as the anchor of the
financial system. This implies that central banks revisit the central bank money
services they provide with the objective of adapting them to the digital age.
This is necessary for the services provided in the wholesale sphere, for the settlement
of transactions between financial intermediaries, which are the most important from a
systemic risk perspective. Today, central bank money is the very dominant settlement
asset in that space because it is the safest and most liquid settlement asset on supply.
It is essential that tomorrow it remains so, in particular if tokenized finance takes off.
These attributes of central bank money cannot be matched by stablecoins or
commercial bank money.
Hence our strong and early involvement at the Banque de France in a large-scale
experimentation program on wholesale CBDC with a number of market participants;
and the announcement by the ECB a few days ago that the Eurosystem will explore
potential solutions for central bank money settlement of wholesale financial
transactions recorded on DLT platforms.
Adapting our central bank money services might also be necessary in the retail space.
Hence the in depth investigations led by the ECB with the NCBs of the Eurosystem. A
digital euro would contribute to the anchoring role of central bank money by offering to
the general public CBM in a form that would be complementary to banknotes and
adapted to the growing demand of the public for digital payments. In addition, a digital
euro would contribute to strengthening our strategic autonomy.
To conclude, let me just stress that it is not clear to me what is going to be the destiny
of digital finance and the shape that the financial landscape will eventually take as a
result, in the medium run. Market forces will decide. But what is clear to me is the role
we, as a central bank, should play, which is to make sure that the shape evolves in a
confidence prone regulatory and operational framework, which implies that we play an
active role to help build that framework on both aspects, in line with our mandate.