Denis Beau: Central bank digital currency (CBDC) and crypto
Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Bank of
France branch, Montpellier, 24 April 2024.
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Slides accompanying the speech
Slide 2
Ladies and gentlemen, faculty members and doctoral researchers,
I am very pleased to be with you today to talk about the changes taking place in our
payment system and the wider financial system, driven by the advancing digitalisation
of financial services.
Digitalisation has already profoundly altered practices in the payments sector :
we are using cash less and less in day-to-day transactions as we turn to
electronic solutions, such as cards. The rise of e-commerce and the aftermath of
the Covid-19 crisis caused this trend to accelerate still further, spurred particularly
by the surging increase in contactless and mobile payments.
In the financial sectormore broadly, digitalisation has led to the emergence of
crypto-assets and decentralised finance (DeFI), both of which rely on distributed
ledger technology (DLT). This in turn has paved the way for the tokenisation of
finance, which consists in issuing, recording and exchanging financial assets,
such as shares and bonds, or real assets, including gold or property, in the form
of digital tokens on DLT such as blockchain. Tokenisation has the potential to
drive deep changes in the way our financial system works.
These transformations present opportunities for market participants and the
general public, as they could bring greater simplicity, effectiveness and speed
while also lowering transaction costs.
But they also raise challenges, especially for an institution such as the Banque
de France, whose mandate includes preserving financial stability:
First, if an appropriate framework is not in place, innovation could potentially
reduce security and efficiency and affect our sovereignty over the payment
ecosystem and our financial system;
Second, these trends could challenge the role of central bank money (CeBM) in
anchoring the stability of our payment system and financial system.
At the Banque de France, we are taking action in two areas to respond to these
challenges: (i) we are setting rules and supervising their implementation so that
innovation can thrive within a trusted framework, and ii) we are adapting the provision
of CeBM services to preserve the role of central bank money.
I will now outline the Banque de France's actions in these two areas, which are aimed
at supporting the continued tokenisation of finance and digitalisation of payment
services.
I. Supporting the tokenisation of finance
The emergence of tokenised finance presents opportunities and risks
Slide 3
Digital technologies could significantly transform the financial system by supporting the
emergence of:
that bridge the gap between IT and finance.
A wave of new participants
A new form of tokenised investment and settlement assets, commonly called
crypto-assets.
New decentralised market infrastructures based on DLT, particularly
blockchain.
The combination of these three trends has spawned new activities and services, which
first appeared in the payments sector before spreading to the wider financial sphere.
They include DeFi, which is presented as an alternative to conventional finance. DeFi
consists in providing crypto-asset-based financial services, such as lending, borrowing
and investing, and theoretically bypasses traditional financial intermediaries, with the
immutability and transparency of its computer code replacing the traditional role played
by trust between participants, via public blockchains and IT programs known as smart
contracts.
These changes could have a dual impact with mixed effects on the efficiency and
stability of our financial system:
From an efficiency standpoint, they could deliver improved transparency, better
cost effectiveness and 24/7 availability. But processes could also become
fragmented if blockchains are non-interoperable and unable to interact smoothly
with existing central clearing, settlement and payment systems.
From a stability perspective, notwithstanding its distributed architecture, which
could be a source of resilience benefits, the crypto ecosystem has inherited the
vulnerabilities of the conventional financial system, notably in terms of credit,
liquidity and market risk. This was illustrated by the failure in November 2022 of
FTX, one of the largest crypto-asset exchanges. What is more, crypto-assets
have specific features that could amplify traditional vulnerabilities. For example,
the crypto ecosystem's exposure to cyber risk could be exacerbated by the
introduction of new vulnerabilities, such as bridges between blockchains.
Meanwhile, unregulated stablecoin-type crypto-assets present their own particular
risks, not least the false and misleading sense of security conveyed by their
name. As the collapse of the Terra USD stablecoin showed, these instruments are
not as stable as they sound. This instability stems from a lack of transparency
about the nature and appropriateness of their reserves and the limits of their
stabilisation mechanisms, exposing holders to restrictions and risks in relation to
their redemption rights.
At the Banque de France and the ACPR, we are working to mitigate these risks while
ensuring that the full benefits of tokenisation are harnessed. We are guided by two
convictions:
Confidence requires a regulatory framework that is suitable, clear, sufficiently
demanding and fair;
Central bank money must remain at the heart of settlements between financial
intermediaries, which are the most sensitive from a systemic perspective.
The European regulatory framework created by the MiCA Regulation
Slide 4
France blazed a trail in crypto-assets with the adoption in 2019 of the PACTE Act,
which created the classification of digital asset services provider, or DASP. DASPs
must be registered with the AMF. This registration, to which the ACPR must give its
assent, covers anti-money laundering and terrorist financing obligations along with fit
and proper procedures for senior executives. DASPs may also be covered by an
optional authorisation that entails additional requirements and AMF supervision.
Europe's lawmakers have drawn heavily on the French framework. In 2023, the
European Union adopted its Markets in Crypto-Assets (MiCA) Regulation, a specific
regulatory framework covering the issuance of crypto-assets and stablecoins and the
provision of related services. MiCA's goal is to address the major risks and provide
greater protection to users.
While MiCA represents a vital regulatory step forward, it will need to be built on in the
coming years. For example, it only partially tackles the concentration of crypto-asset
service activities within crypto-conglomerates. The challenge is to ensure that investors
are protected, through rules covering the segregation of customer funds, rules of
conduct and management of intermediary risks, for example by requiring activities to be
separated. By virtue of its decentralised nature, the DeFi ecosystem likewise raises
regulatory challenges that will need to be addressed.
With this in mind, the ACPR has begun identifying potential avenues of regulation.
These were set out in a paper that was put out to consultation in April 2023 and whose
feedback was published in October 2023. They include: (1) preserving the resilience of
public and private DLT infrastructure via security standards; (2) certifying smart
contracts, even if this raises operational questions; and (3) regulating DeFi entry points
to protect investors against the risks of abuse.
Work is continuing in 2024 with stakeholders on one of the ACPR's key proposals,
namely the mandatory certification of smart contracts prior to use.
European regulatory developments are underway in other areas and will also be
needed to facilitate innovation while preserving financial stability. They include
measures in support of digital entities, access to financial data and artificial intelligence.
Why explore a wholesale CBDC?
Slide 5
Our second conviction is that, in order to have a framework that inspires trust in the
development of the tokenisation of finance, CeBM needs to be maintained as the
primary settlement asset for financial intermediaries, which are the most sensitive in
terms of systemic consequences in the event of problems.
To achieve this goal, central banks need to adapt the form and provision of CeBM to
reflect the characteristics of transactions in tokenised assets, that is, tokenised
securities such as shares, bonds or fund units, to ensure that CeBM can be issued,
recorded and used for settlement on DLT.
This conviction spurred the Banque de France to become the first central bank to
launch an ambitious experimental programme on wholesale central bank digital
currency (CBDC) for large-value payments in 2020.
Exploratory work by the Eurosystem on a wholesale CBDC
Slide 6
This conviction is shared by the Eurosystem, which launched its own exploratory work
in April 2023 to trial three solutions for the settlement of tokenised assets in CeBM. The
Banque de France's wholesale CBDC solution, based on our own DLT (DL3S), is one
of the solutions that will be tried out in 2024. The Eurosystem recently published the list
of participants in the first wave of exploratory work, and we are delighted to test our
DLT solution with them.
This work supplements the European pilot regime, which is covered by special
regulatory exemptions and which is being used to test the issuance, trading and
settlement of tokenised assets under real-life conditions. It came into effect in March
2023 and will help us to assess the existence of use cases and determine whether
there is genuine demand for tokenisation. It will also enable us to identify the regulatory
adjustments needed for market infrastructures to operate on DLT over the long run,
using a broad panel of tokenised settlement assets, including CeBM.
The Banque de France is also taking part in several international initiatives, particularly
those being spearheaded by the Bank for International Settlements' Innovation Hub,
which is coordinating projects to explore the future of market infrastructures and ensure
interoperability with traditional systems and between different types of DLT.
II. Supporting the digitalisation of retail payments with a digital euro
Retail payments are also being affected as our economy goes digital. To provide
support so that digitalisation helps to make payments safer and more efficient - as per
our statutory responsibilities in relation to payments - we plan once more to act on the
regulatory front and adapt our CeBM payment services solutions. On the regulatory
side, besides providing input to the recently adopted Instant Payments Regulation and
contributing to the ongoing talks on the third Payment Services Directive (PSD3), we
also play an important role in fraud prevention as part of our oversight activities, which
are guided by the statutory task entrusted to us in the early 2000s of monitoring the
security of payment instruments and chairing France's Observatory for the Security of
Payment Means (OSMP).
It is, however, the work being done on proposals to deploy a digital euro that has drawn
the most attention in this area. I will begin by explaining why we are taking part in this
project, before explaining how and when it could potentially come into being.
Maintaining characteristics of cash in the digital space
Slide 7
As economies switch to digital, cash is being used less and less frequently for
payment purposes. Cash made up 59% of transactions in the Euro area in 2022,
compared with 79% in 2016. The emergence of cashless payment instruments such as
cards has obviously brought many benefits, by promoting simpler, faster, more
convenient and safer payments. But cash has unique qualities that are not available in
the digital space. These characteristics are useful to everyone and actually essential to
some groups.
For this reason, we envision the digital euro first and foremost as a " digital banknote "
that will make it possible to maintain the characteristics of cash in the digital space. The
digital euro will be a new form of CeBM that is accessible to the general public that may
be used throughout the euro area by virtue of its legal tender status, in all settings,
including e-commerce, and with enhanced confidentiality. Its core functionalities will be
free for individuals and will promote financial inclusion in the digital era, including for
people who do not have smartphones.
Amid the growing media buzz around this initiative, the digital euro project does raise
legitimate questions, but it is also the subject of some unfounded fear s, which I would
like to dispel:
First, our goal is not to create a European "Big Brother." In fact, the digital euro
will offer . The central bank will never be
unrivalled privacy in the digital space
able to identify individuals on the basis of their transactions. The offline
mechanism available for face-to-face payments below a certain threshold will offer
cash-like privacy. And we are continuing to work on the design with the aim of
maximising privacy in other use scenarios.
Second, the digital euro will not be programmable money. The Eurosystem issues
currency, not purchase vouchers. The digital euro will always be convertible 1:1
including cash and bank account deposits. The
with other forms of money,
Eurosystem will not restrict the use of the digital euro by, for example, setting a
period by which it needs to be used or specifying goods and services that may be
purchased.
Third, the digital euro will not earn interest , positive or negative. It will be a
means of payment, not an investment asset.
Fourth, the digital euro will not replace cash . We will continue working to
preserve freedom of choice by ensuring that cash remains widely available and
accepted.
The European Commission has published a proposal for a regulation on the
legal tender of cash in the euro area.
The Banque de France has announced the construction of a new banknote
printworks in the Puy-de-Dôme region. The EUR 250 million facility will be
Europe's most up-to-date, efficient and environmentally friendly banknote
manufacturing centre, with commissioning due to take place in stages in
2026.
The Eurosystem is considering designing a new series of banknotes and
recently held a public consultation on how the new notes might look.
In other words, our commitment is crystal-clear: cash will continue to be widely
available and accepted throughout the euro area.
Supporting European sovereignty and integration in payments
Slide 8
I now come to the second issue that prompted us to consider issuing a digital euro.
Digitalisation of the economy raises two major challenges for payments in Europe:
First, our day-to-day payments are increasingly reliant on non-European
participants, such as international card schemes or, more recently, Big Tech
companies. These players benefit from significant network effects that are
unconducive to competition and that promote the formation of oligopolies.
European payment solutions remain fragmented despite harmonisation effort s:
some solutions work in only one country, or in certain settings, such as
peer-topeer. While the widespread introduction of the single euro payments area (SEPA)
initiative in 2014 helped to standardise operating rules for credit transfers and
direct debits, card payments continue to be highly fragmented. Just a handful of
euro area countries have a domestic card payment solution, such as France's CB
scheme, and even then, using the card in another euro area country is dependent
on foreign participants.
The digital euro is thus intended to support European sovereignty and integration in
payments. Distribution of the digital euro will be entrusted to private intermediaries,
such as commercial banks and fintechs that are licensed for payment services. These
intermediaries will therefore retain their central role in relation to users, managing
accounts, providing payment instruments, executing transactions and handling
customer relations more generally. Like cash, the digital euro will be issued by the
central bank and distributed by private participants. The digital euro will also preserve
the complementarity between central bank money and commercial bank money.
We want the digital euro to act as a platform for innovation for private participants. In
addition to supporting sovereignty and integration in the field of payments, it could also
encourage competition in the sector and thus help to reduce the fees charged to
merchants.
How and when might a digital euro be issued?
Slide 9
To guarantee that the digital euro can be easily adopted by stakeholders, we want to
ensure its smooth integration with the existing payment ecosystem.
To do this, as part of our technical work, we are having close dialoguewith
consumer associations, merchant associations, commercial banks and other
private intermediaries, both at European level and domestically.
These discussions are valuable in identifying existing solutions that could be
reused in their current state as much as possible, including some types of
infrastructure, such as payment terminals, but also standards that are already
used by industry and that would be compatible with our sovereignty objective.
We also want to encourage private participants to design attractive and innovative
digital euro payment solutions. The proposals put forward by the Eurosystem and
Commission seek to define a viable business model for all participants in the
ecosystem.
Last but not least, we will make sure that the digital euro does not present any
financial stability risks. A holding limit will be set to ensure that the digital euro is
used as a means of payment, not an investment asset. The Eurosystem has
published its initial research on this question and will go deeper in the coming
months. The limit will be calibrated in the future, closer to the issuance date of a
digital euro, to reflect prevailing economic conditions.
While this initiative is advancing quickly, a long road still lies ahead before people
contemplate paying with digital euro.
In October 2023, the Governing Council of the
European Central Bank launched a digital euro preparation phase, which we will
use to (i) finalise our design and analyses, (ii) continue testing functionalities, including
by presenting them to potential users, and (iii) select providers to help develop the
architecture. We will also continue to dialogue with market participants, merchants and
consumers as we strive to build a digital euro that matches their expectations.
Let me stress that the decision to issue a digital euro has not yet been taken . Such
a decision must be taken collectively, following a democratic debate involving the
European Parliament and Member States. That debate began last summer with the
presentation of a proposal for a regulation by the Commission and will continue
alongside the work being done by the Eurosystem.
Conclusion
As you can see, central banks are firmly resolved to support innovation, not only by
helping to establish an appropriate regulatory framework, but also by innovating in their
own right. Thank you for your attention. I would be delighted to answer any questions.