Denis Beau: Moving beyond the first generation of innovation and
regulation for tokenized finance - the case of DeFi
Address by Mr Denis Beau, First Deputy Governor of the Bank of France, at the
occasion of the change of Bank of France Head of the Asia-Pacific Representative
Office, Singapore, 31 March 2023.
* * *
I am glad to be here with you today for this handover reception. It gives me the
opportunity and the pleasure to thank François Haas and to welcome Stéphane
Latouche as our outgoing and incoming chief representative in Asia and head of the
Bank of France Office in Singapour. It also gives me the opportunity to underline our
very good and multifaceted cooperation with the MAS, in particular on financial
innovation. In my remarks today, I would like to illustrate this cooperation, notably with
our work on the development of tokenised finance, and the so-called decentralised
finance, and how we, at the Banque de France and the ACPR, are working to respond
to this change of paradigm, in line with our financial stability mandate.
I. A strengthening of bilateral ties between the ACPR, BdF and MAS, a very
close and sustainable partnership between Singapore and France
Let me start with what the ACPR, BdF, and MAS have achieved together. Cooperation
between the BdF and MAS has
strengthened significantly, particularly since the
opening in 2020 of the Asia-Pacific Representative Office, here in Singapore, which
is one of the most innovative financial centres (with a strong Fintech sector), and a
highly important region in today's world.
MAS, BdF and ACPR have deepened and diversified their linkages across key and
such as (i) cybersecurity, with an international cyber crisis
cutting-edge areas,
management exercise conducted jointly in June 2022, (ii) Fintech, with a MoU between
MAS and ACPR, (iii) post-quantum cryptography, where ongoing work is joining BdF
and MAS, (iv) green finance, with a milestone achieved together with the
FranceSingapore Conference on Sustainable Finance in May 2022, and finally (v) tokenisation
of finance, with Central Bank Digital Currency experiments involving cross-border
payments.
My warmest thanks go to Ravi Menon and MAS staff, and also to the colleagues
of the BdF's office in Singapour, who have helped the strengthening our bilateral
ties. I wish to also express my sincere and special thanks to François Haas for his
proactive engagement for making this MAS-ACPR-BdF cooperation flourish.
François was the right man in the right place to take up the challenge of launching
and leading our rep office here, building notably on his former experience as head
rep for the Americas. Your achievements François are all the more remarkable
when considering that you took office exactly when in person, face to face,
interactions, were hampered for a long while by lockdown measures. I also want
to give a very warm welcome to Stéphane Latouche. Building on his wide raging
experience within and outside the Bank, he will I am sure contribute to develop
further the activities of our rep office with all of you, and notably deepen our
bilateral ties with the MAS, notably for future innovation partnerships.
As a matter of fact, innovation never stops, innovation is above all change.
Financial innovation illustrates this time of rapid change, with a wave of new
players, new digital assets in the form of crypto-assets, as well as new exchange
and settlement infrastructures. Among those digitalisation trends, so-called
"decentralised finance", DeFi, is emerging. DeFi is a set of applications offering
financial services based on crypto-assets, operating on public blockchains and
using smart contracts. We need as supervisors and providers of settlement
services in central bank money to stay alert, explore its opportunities and
address challenges it raises.
II. Impact on BdF activities and stability mandate
To that end we have been developing our actions along two axes that should serve as
an additional basis for the dialogue and cooperation we have been developing from
here in Singapour.
1.The first axis is to move beyond the first generation of crypto-asset
regulation
Indeed, the first generation of crypto-asset regulations does not fully address the
challenges posed by DeFi. For example, in Europe, fully "decentralised" services are
excluded from the scope of the MiCA regulation.
To go beyond this first step, we need to build a regulatory framework adapted to the
specificities of DeFi. In my view, when designing this framework we should not try to
replicate existing financial regulations at all costs. On the contrary, it could be
advantageous to draw inspiration from regulations in other sectors. For example, one
could imagine setting rules on "products" even when their "producer" or "issuer" is not
clearly identified.
In addition, we have to recognise the technical specificities of decentralised finance and
pay a particular attention to the three layers (blockchains, applications and access
that schematically constitute DeFi.
gates)
First, we should evaluate the resilience of the blockchain infrastructuresupporting
DeFi. That leads to an open question: can public blockchains provide the right level of
security, and if so, how?
Second, we need to address the security of the applications, on which DeFi
"services" are provided. A logical avenue for regulation would be to define the perimeter
of protocols that are deemed "secure", i.e. whose computer code has been certified. Of
course, this leads to many subsequent operational issues that deserve careful analysis.
Third, in order to protect users, and in particular
we should regulate access to DeFi,
individual customers. Intermediaries - or "access points", whatever their form - who
provide access to DeFi should comply with rules of good conduct, and be subject to a
duty of care and advice as well as KYC requirements, when necessary.
To contribute to the reflection, we are about to publish a discussion paper on the
possible regulatory options for DeFi. In order to build the most appropriate
framework, taking notably into account the question of proportionality, we need to feed
our thinking with input from all stakeholders: financial services or crypto-assets industry
professionals, IT specialists, academics, other regulators and supervisors- That is why
this document will be open to a wide consultation and I look forward to listening to your
reactions on it.
2. The second axis is to use DeFi innovation to serve the possible
development of tokenised finance and to improve cross-border payments
Our monitoring of DeFi is not just motivated by financial stability risk but also by our
intuition that its innovative potential could serve the development of an ongoing
trend: the tokenisation of finance. To do so, central banks and the traditional
financial players need to understand how DeFi operates and master its innovative
aspects in order to use them in a secure way to do something else than speculate on
crypto-assets.
This is what we are trying do with the project Mariana, our ongoing experiment with
the MAS, the Swiss National Bank and the Eurosystem, Singapore and
Switzerland BIS Innovation Hub Centres. Basically, we are building an automated
market for the exchange of CBDCs based on a concept imported from DeFi. This
project is really at the crossroads of a number of topics: enhancing cross-border
payments, CBDCs interoperability, understanding of DeFi and the development of
tokenised finance.
Technically, this project is a real challenge and it will contribute to the definition of
smartcontract standards for the automation of tokenised financial markets and the
interoperability of CBDCs. These standards are necessary to allow the tokenisation of
finance to take off securely and to reduce fragmentation in this environment. In case of
success, project Mariana could be an important step toward the improvement of
cross-border and cross-currency payments .
Confident in the strength of our cooperation with MAS, we hope that other joint
experiments will follow the Mariana project. There is still a lot to be done , especially
on more complex financial activities around the lifecycle of financial securities in a
cross-border and cross-currency context .
In conclusion, I would like to say that financial innovation is promising and exciting but
can be for an institution like the Bnaque de France, which has among its core mandates
to ensure financial stability, a source of issues if not concerns. It is therefore for us in
any case very stimulating and leads us to reconsider and adapt our role, our policies
and our services. To that end, with the help of our team in Singapore and the new
leadership of Stéphane Latouche, I very much hope that we will be able to continue
working with you here in Singapour, and in particular with the MAS, to better master
innovation and build the future of our financial system.
Thank you all for your attention.