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Conférence of the Autorité de contrôle prudentiel et de résolution (ACPR)
Palais Brongniart, 25 November 2021
Central banks and finance in the face of a triple revolution
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Chairman of the ACPR
Press contact: Mark Deen (mark.deen@banque-france.fr) and Deborah Guedj
(deborah.guedj@banque-france.fr)
Ladies and Gentlemen,
I am delighted to be here with you today at the Palais Brongniart. In this historical
venue of the Stock Exchange, I would like to talk to you this morning about the
digital revolution underway in finance and payments. I would nevertheless like
to start with a topical remark on traditional banking regulation: at the end of
October, the European Commission presented its proposal for the transposition
of Basel III. It was the first of the major jurisdictions to do so, and it is to be hoped
that the others will soon follow suit. In substance, it is the delay in the
implementation timetable that has drawn attention. I believe that this delay -
guided by realism - is minor if (and only if) the temporary exemptions proposed
by the Commission remain temporary, particularly for housing loans. This is key
to Europe's credibility and compliance with the international agreement of
December 2017. I would also like to welcome the application of the output floor
at the consolidated level: it has already been contested, but it is in the spirit of
the Banking Union and the 2017 agreement. The digitalisation of the financial
sector has been accelerating ever since the Covid crisis; the words themselves
reflect the questions we are asking ourselves: revolution, disruption,
decentralisation or centrifugation. It is first necessary to understand these
transformations (I), and then to map out the path for collective action (II) to
safeguard the best of financial innovation, while ensuring the provision of secure
financial services and payments for our businesses and citizens.
I. A revolution in finance and payments: players, assets, infrastructure
I won't go into detail about
the obvious: the acceleration of distributed ledger
and blockchain technologies, artificial intelligence, dematerialised payments,
the cloud, big data, etc. In this revolution, my purpose this morning is to try to
shed some light on the disruptions they are bringing about in the banking and
financial sector. I will summarise them through a triangle of disruptions: (i)
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First, the arrival of new There were and still are non-banks, and by
players.
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this I mean the technology companies Fintechs and Bigtechs in the financial
and payment services sector, many of which are, to date, subject to little or no
regulation. (ii) Second, the emergence of new forms of financial or settlement
assets: crypto-assets from the blockchain universe in the form of tokens. Bitcoin
is emblematic of the first generation of highly volatile crypto-assets, whose use
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remains essentially speculative. The second generation, i.e. stablecoins with
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mechanisms to stabilise their value against sovereign currencies aims to
provide a more comprehensive range of services with a global reach. (iii) Lastly,
the emergence of decentralised new technologies tend
market infrastructures:
to reduce the use of financial intermediaries or centralised systems, often
developed by central banks, such as TARGET2, the Real-Time Gross
Settlement (RTGS) system for euro payments, or the TARGET2-Securities
settlement platform, both of which were developed and are operated by the
Eurosystem. Distributed ledger technologies aim to dispense with the need for
a central register, as do smart contracts, computer programs that automatically
execute transactions on the blockchain.
Decentralised finance (DeFi) has emerged from the combination of these three
disruptions. It allows for the provision of traditional financial products and
services without intermediaries: deposits, payments, loans, swaps or settlement
of tokenised securities. Transactions are carried out directly between end-users,
very often anonymously, bypassing banking intermediaries and market
infrastructures: this is an unprecedented movement towards disintermediation.
In practice, the scope of DeFi remains unclear and heterogeneous; there are
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already large platforms such as MakerDAO and small protocols that are
more difficult to identify. DeFi, in the strictest sense of the term, has a limited
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valuation at this stage around USD 115 billion in outstanding assets under
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management but it is inspiring a sharp increase in players. DeFi offers the
potential for increased market efficiency while reducing costs and time. But it
also entails at least three risks: money laundering or financing of criminal
activities, lack of governance (who is responsible?), and fragmentation of
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transactions which would be a step backwards almost to the Dark Ages due
to a fundamental lack of interconnection and convertibility at par with central
bank money.
Financial innovations therefore act as centrifugal forces: they aim to create a
movement of decentralisation that runs counter to the traditional architecture of
the monetary and financial edifice, which is centralised around trusted
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institutions the central bank, credit institutions, market infrastructures.
However, they could subsequently lead, conversely, to significant concentration
effects among a few dominant private networks: these would in practice "re-
intermediate"
but without the regulation of current intermediaries. This triple
revolution, which is still far from over, could be very unsettling for both
commercial banks and central banks. These two categories of player have for
decades provided a secure, generally efficient, albeit improvable, payment and
financial system, anchored to the stability of central bank money, and operated
by reasonably innovative private players. Today, there are three avenues for
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recomposition two of which, in my opinion, are dead-ends. The first would
consist of a conservative reaction, trying to keep the traditional functioning of
institutions and finance unchanged, and seeking to ban this fountain of
innovation. I do not believe in Maginot lines, even financial ones. The second,
opposite avenue, would be to pursue the underlying logic of decentralisation to
its logical conclusion, a "laissez-faire, laissez-passer" ideology nicely disguised
as technophilia. Let me be clear, this is not an option: money is a public good
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and the institutional and even democratic trust that underpins it cannot be
replaced by "algorithmic trust", which has already shown its limits with crypto-
asset piracy. I would like to advocate for a third avenue, an "upwards
convergence": we must encourage innovation and the progress it brings, while
preserving stability and rules. There is no contradiction, at least in the long term,
between these two buttresses. There is a convergence towards an essential
keystone in the long term: confidence in the monetary and financial system. The
role of central banks is to defend this confidence, not their own power, as well
as all their existing instruments and infrastructures. Before turning to concrete
avenues for action, I think it would be useful to recall a number of guiding
principles: first, we must not focus on the technology - which will continue to
evolve - but rather on its new use cases for economic players. And for this very
reason, we need to establish the principles before attempting to set the rules.
These principles are basically quite simple: for all assets that are intended to be
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means of payment in the future, we must guarantee (1) equal security this
concerns the stability of their value, as well as cyber protection; (2) equal
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compliance both with regard to anti-money laundering and data protection; (3)
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equal responsibility there can be no asset without an identified and regulated
player/issuer; and lastly (4) equal accessibility, in order to avoid a regression
towards fragmentation or new financial exclusions. Moreover, these four
guarantees also apply to the most traditional means of payment, banknotes and
cash, which we will preserve in the name of freedom of choice of means of
payment: this freedom is a prerequisite for confidence in money.
II. Four pillars of action with the public interest as the keystone
How can we translate these principles into collective action? I shall separate my
answer into two obvious imperatives, then two more open avenues:
1. Accelerate the projects that are currently underway. By this I mean, first of
all, the European Payments Initiative (EPI) launched by some 30 European
banks, which is designed to guarantee European payments sovereignty and for
We encourage the banks to take a "go"
which we are renewing our full support.
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decision, which we hope will come in the next few days. Speed at least as
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much as substance is of the essence here: the European banking system has
two years at most in which to win or lose against the Bigtechs. The second
project I have in mind is the work to improve cross-border payments, on which
the FSB adopted a roadmap in October under the aegis of the G20. I welcome
this initiative, which is perhaps a little too under the radar but worthy of note,
especially as it involves a broad range of public and private sector players: six
years from now, cross-border payments will have become significantly faster
and cheaper, and much more accessible to all, including to migrant workers in
advanced economies.
2. Globalise our approach to these digital issues, through cross-border and
cross-field cooperation. A global challenge requires a global response. There
and stablecoins in 2019 ("the
was a good report by the G7 on crypto-assets
Coeuré report"), under the French presidency, followed by another good report
by the G20 last year. These now need to be updated and, above all, brought
into force, and quickly: responsibility for this unified piloting should fall to the
FSB. There is also a need for dialogue between authorities in different fields, on
issues beyond the merely financial: cyber, anti-money laundering, data
protection, competition authorities. There is currently no international forum for
this, but the OECD would be a good place to start.
Regarding the two other pillars of action, the principles or modalities are still
under discussion:
3. Innovate ourselves as a participant in the financial sector and in payment
systems. We are the guarantors of the public good that is central bank money,
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the cornerstone of the financial industry and of a potential digital form of that
money, a central bank digital currency (CBDC). Let me just point out the obvious
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here: not all assets even those that might be used in settlement are money.
Ever since Aristotle, money has needed to have a number of fundamental
properties: universality as a means of exchange, stability as a unit of account
and reliability as a store of value. So is still an inappropriate term
"crypto-money"
for crypto-assets. The only money there is is that which is anchored in the central
bank's balance sheet, with a sovereign and democratic guarantee: either directly
(banknotes, and tomorrow potentially a CBDC), or indirectly (in exchange for
being able to issue money, commercial banks are strictly regulated by the
central bank). The forms in which this central bank money is made available
can, and indeed should evolve. But it still plays an anchoring role, and shall
continue to do so.
The Banque de France is closely involved in the investigation phase, launched
in July thanks to Fabio Panetta and Christine Lagarde, for the Eurosystem
project to develop a retail digital euro, designed for end-users. This project
cannot be conducted to the detriment of banks, or without their participation: it
can only succeed if they are involved. They would play a key role in distributing
the digital currency, if it were actually launched. It would be capped in volume
terms, and its rate of remuneration would be as neutral as possible: the role of
commercial bank money would thus be preserved.
But a CBDC could also bring benefits in the field of interbank payments
("wholesale" CBDC), which was the focus of nine experiments conducted by the
Banque de France. We have just published a report on our findings.i The main
lessons learnt are, first, that a wholesale CBDC would be a means of
accompanying and ensuring the safe development of tokenised financial
markets. It would allow market participants to harness the benefits of distributed
ledger technology, in terms of simplification and hence increased speed for
certain transaction types, while also providing them with a safe settlement asset,
central bank money. It would also help to prevent these markets from becoming
fragmented by fostering greater interoperability. A second major lesson learnt is
that efficient CBDC arrangements could help to make cross-border payments
faster and cheaper.ii There are still open questions as to how to concretely
implement a CBDC, starting with which technology to use and to whom it should
be made available. On this latter point, our position in principle is that access to
a CBDC on our infrastructures should be conditional on complying with
regulatory requirements.
4. In parallel, we need to regulate, to maintain public trust in innovation.
Regulate new players, to whom it is difficult to apply traditional banking
regulations. This means working towards a regulatory framework that is more
nature of players' activities, in line with the "same activity, same
focused on the
risk, same rule" principle. A minimum, and indeed sensible measure would be,
for example, for groups carrying out mixed activities, financial and non-financial
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especially the Bigtechs to group all their financial activities into a single
entity, an intermediate holding. This would give the supervisor an overall view
of the group's financial activities, and allow it to introduce a measure of their
systemic risk and prudential requirements. The recent PWGiii in the United
States took a tougher stance by proposing a complete separation between
Bigtechs' "commercial" activities and their "financial" activities, especially their
issuance of stablecoins. The latter should be subject to exactly the same
regulations as deposit-holding institutions. A subsidiary or a complete
separation: this debate needs to be concluded quickly, in cooperation with our
transatlantic partners and within the FSB.
Regarding the new players, Binance, the leading global crypto-asset platform,
recently said it was interested, in principle, in setting up in Paris. This is
testament to the innovative dynamism of the Paris financial market, but of
course there needs to be a guarantee of trust and credibility. This is what will
inspire the ACPR if it is required to exercise its powers, alongside the AMF which
issues authorisations, notably on the key requirement for an anti-money
laundering system.
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Second, regulate the new assets crypto-assets. Again, to point out the
obvious: the riskier an asset, the more strictly it should be regulated. This is the
line taken by the Basel Committee on the prudential treatment of banks'
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exposures to crypto-assetsiv the riskiest forms are given a weighting of 1250%
in the calculation of capital requirements. In Europe, the proposed Markets in
Crypto-Assets (MiCA) regulation that was presented in September 2020 is a first
step towards regulating crypto-assets and should be adopted under the French
presidency. But DeFI, which has since expanded, is one of the blind spots in
this regulation, as it is hard to identify crypto-asset issuers or service providers
in this landscape; it is important, therefore to reinforce the content of MiCA. A
first stage would be to regulate players who exercise control over DeFI
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applications for example certain developers and providers of smart contracts.
If no dominant player can be identified, the regulator should consider taking a
approach, and introduce disincentives to limit financial players'
risk-based
exposures.
***
Accelerate, Globalise, Innovate, Regulate: in French that spells "AGIR", or act,
which is a forceful imperative. We will not do it alone, nor turn a blind eye to the
revolutions that are underway. But I would like to conclude by coming back to
the last two pillars of action: Innovate and Regulate. For some, the conjunction
between the two should be an making them mutually exclusive: innovation
"or",
in the form of a CBDC would be an alternative, indeed the only alternative, to
of DeFI. For us, the conjunction is the pillars
the unchecked development "and":
clearly work together to create a framework that can foster sustainable
innovation. But the worst conjunction, and the one that needs to be ruled out
completely, is "neither, nor": revolutions
always happen quickly, and we are at
risk of neither innovating nor regulating in time. In that case we will have failed
in our historical mission and jeopardised centuries of work building up
confidence in our money. You all know that lovely quote by Winston Churchill.
"We must take change by the hand or rest assuredly, change will take us by
throat". The time is now, and we need to do it together.
the BIS Innovation Hub, together with the Monetary Authority of Singapore and the central banks of Malaysia,
Australia and South Africa.
iii
President's Working Group on Financial Markets Releases Report and Recommendations on Stablecoins,
November 2021
iv
Basel Committee on Banking Supervision, Consultative Document, Prudential treatment of cryptoasset
exposures, June 2021