Conference on opportunities and challenges of the tokenisation of finance -
Paris, 27 September 2022
Anchors and catalysts: central banks' dual role in innovation
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Press contact: Mark Deen (mark.deen@banque-france.fr), Déborah Guedj
(deborah.guedj@banquefrance.fr)
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Ladies and Gentlemen,
It is a great pleasure to welcome you in the Louvre for this conference organised
by the Banque de France. I am honoured by the presence of Commissioner
Mairead McGuinness, of my most distinguished peers at central banks, and of
prominent representatives of the public and private sectors. I trust this unique
blend of skills will offer a comprehensive overview of the topic that will keep us
busy: the tokenisation of finance, and the role of central banks in it.
Let me just recall what I describe as the "triangle of disruptions"i: new players;
new settlement assets based on blockchain; and new decentralised market
infrastructures. These disruptions offer the potential for cheaper and faster
services. However, they could also lead to fragmentation and to systemic risk.
How can we collectively reap the "net benefits" from innovation? That will only
be possible if we come out on top of two false contradictions.
The first apparent oxymoron opposes stability and innovation. Financial stability
implies that the financial system is capable of withstanding shocks, so as to
avoid impacts on the real economy. But it does not mean stagnation or paralysis,
and does not ban innovation in any way. On the contrary, financial stability
creates trust, which is an imperative for innovation to last. Well-tailored,
consistent and evolving regulations are key in this regard.
The second false contradiction opposes public and private players, with the
former supposedly conscribed in their conservative regulators' role and the latter
in their innovators' role. After decades of developing and maintaining state-of-
the-art technologies, central banks may sometimes consider this caricature as
unfair. To private players who know us better - and to others: you can rest
assured that we are willing to continue our fruitful partnership. We will obviously
have to reinvent the terms and conditions of that partnership to some degree,
but let me stress that central banks' action will only succeed together with you,
not against you. And that we central banks need to be on both sides: regulation,
and innovation. I will now elaborate on these two key issues.
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I. The need for well-tailored, consistent and evolving regulations
A number of players in the crypto world have recently stumbled - so-called
"stablecoins", DeFi protocol, lending platforms, hedge funds -, demonstrating in
practice what many regulators and central banks had been claiming for years:
that these new tools of payments and finance had unlocked age-old dangers,
meaning that the industry requires robust regulation. Salvador's decision to
make bitcoin an official "currency" in September 2021, regrettable as it is, is a
noteworthy experience of a forced attempt to label a currency something that is
nothing more than a crypto asset. One year later, actual use is far from taking
off. The value of bitcoin against the dollar has been divided by three; this
certainly stands as an explanation, yet a partial one. People also rightly mistrust
bitcoin because it does not fulfil most of the basic characteristics of a currency -
nor any of its ethical requirements.ii But the so-called "crypto-winter" is no
reason for complacency or inaction. Europe has been a pioneer, designing and
drafting a new regulatory framework known as MiCA (Markets in Crypto-Assets)
that is tailored to new players and assets. I can only hope for its swift formal
adoption, ideally by March next year, as well as the adoption of the very
welcome agreement on the extension of transparency rules to transfers of crypto
assets, which will make money laundering and criminal use more difficult.
Other major jurisdictions are less advanced in a similar process. We should be
extremely mindful to avoid adopting diverging or contradictory regulations, or
regulating too late. To do so would be to create an uneven playing field, risking
arbitrage and cherry picking. An unduly complex legal pattern would run counter
to our objective of protecting clients, and preventing money laundering. Crypto
players operate globally, and even their place of establishment is sometimes
difficult to determine.
We are fortunate to have a common international framework. The G7 as early
as 2019, then the FSB and the G20 have made great progress in this direction:
by the end of the year, the FSB will publish updated high-level
recommendations. This success shows that regulation of crypto players and
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crypto assets and more broadly of payments is one course of action where a
"pragmatic" or "focused" multilateralism can, and must, still deliver. To avoid
further payments fragmentation, there are two imperatives: (i) let us keep
coordinated. I am sometimes impressed by the growing number of international
bodies which play in the "crypto-regulations" orchestra; we need a strong, single
conductor, and that should be the FSB (ii) let us implement in all jurisdictions.
The current moment calls less for further global reflection or ever refining of
taxonomies of financial tokens, and more for decisions and the monitoring of
basic, consistent and robust national regulations.
II. Central banks have their own driver's seat in innovation
Digital technologies are profoundly transforming finance: from artificial
intelligence, API and mobile apps for the development of open banking and of
the "banking-as-a-service", to distributed ledger technology and smart contracts.
We are certain to see a significant development of tokenised and decentralised
finance. In such a context, our stance at the Banque de France is both to support
regulatory reforms and to play an active innovative role. The Banque de France
has been using blockchain for several years now. In 2017, we were the very first
central bank worldwide to implement a blockchain solution to manage, together
with commercial banks, a repository of creditors. Our CBDC experiments, on
which I will elaborate in a few minutes, also led us to develop our own
permissioned blockchain (called DL3S- Distributed Ledger for Securities
Settlement System) in collaboration with an IT provider. We have also drawn on
artificial intelligence for various uses, such as a new forex trading tool and
supervisory tools. The question that now attracts public attention is whether
central banks' investigation phases will lead to the development of CBDCs.
Almost all of that attention is focused on retail CBDCs. At the same time, we can
sometimes hear, and not only from commercial banks, that they are "a solution
iii
in search of a problem". In my view, this phrase simply misses the point. What
we are currently doing is keeping our eyes and minds open on this new way of
making "public money" available. In Europe, we are halfway through our
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investigation phase: the Eurosystem will make its decision by the end of 2023,
before a potential launch in 2026 or 2027. I am sure President Christine Lagarde
will be able to shed some light on the project.
Beyond purely technical considerations, a retail CBDC could play an anchor role
in the digital world, similar to the role played by banknotes in the physical world,iv
and hence preserve the accessibility and usability of central bank money.
Regarding the euro area, a digital euro would also contribute to supporting
monetary sovereignty and strategic autonomy, by preventing the use of
external digital assets - such as private crypto assets and non-euro CBDCs -
as settlement assets, and by facilitating the emergence of a pan-European
payment solution at the point of sale, which could serve as a vehicle for the use
of a digital euro. But such a digital euro could and should be decentralised in its
implementation, in the spirit of public / private partnerships mentioned earlier.
On the other side of a mountain, you will obviously always find a side that is less
exposed to the sun; here, this northern face is wholesale CBDC. It currently
attracts little public interest, although it poses relatively less complex legal
issues, and has two strong business cases. First, a wholesale CBDC could
significantly contribute to improving cross-border and cross-currency payments,
a topic on which we have made progress over the past year. Following a first
report delivered to the G20 in July 2021, the Future of Payments Working Group
of the BIS has recently finalised a new report outlining options for access and
interoperability of CBDCs for cross-border payments. Second, a wholesale
CBDC could accompany the tokenisation of securities as a safe and liquid
settlement asset for them on a blockchain technology. Failing to offer market
participants a wholesale CBDC could open the door to an extensive use of so-
called stablecoins, which would pose a systemic risk.
Over the past two years, the Banque de France has therefore been looking into
a wholesale CBDC with a view to contribute to Eurosystem's efforts in designing
and developing it when the time comes. And this time could come sooner than
expected, with the upcoming entry into application of the European Pilot Regime
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in early 2023 - only six months from now. This new regulation provides a
framework for market players to experiment the use of blockchain in real-life
conditions to issue and trade tokenised securities. It also offers a unique
opportunity for the Eurosystem to conduct its own "pilot regime", in close
cooperation with private players. Without overpromising on that pilot wholesale
CBDC, we have to seize the opportunity to try out various solutions from 2023
onwards. Learning by doing is the best way to acquire knowledge.
In that spirit, since 2020, the Banque de France has been conducting
experiments with a wide range of partners to develop its expertise, with the aim
of providing that expertise to the Eurosystem. Our first nine experiments have
already delivered key insights, shared in a report published in November last
year. Considering these promising results, we have decided to launch a new
series of three experiments. You will learn more on them in the coming weeks,
but let me already give a few insights today.
Two of them focus on improving cross-border payments by working on
interoperability between CBDCs with innovative solutions, such as a liquidity
management tool based on decentralised finance technology (AMM, automated
market maker), which we upgraded in the first half of 2022. The third experiment
aims at deepening previous ones on the use of central bank money as a safe
settlement asset for tokenised securities, together with other European partners.
It involves issuing and distributing tokenised bonds on a blockchain.
* * *
Let me conclude by recalling that in the 1980s it was decided to design and build
a large glass pyramid in its courtyard of the Louvre. This disruptive architecture
by I.M. Peï was first met with outrage, as critics considered it incompatible with
classical style. It was nonetheless built, and has since then become a cherished
symbol of the Louvre. I hope that we central bankers will find our way to make
tokenisation fit in the existing architecture, while regulating it to the extent
necessary. Thank you for your attention. And I would now like to hand the floor
over to Ms Mairead McGuinness.
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i
Villeroy de Galhau, F., Central banks and finance in the face of a triple revolution, speech, 25 November 2021
ii
Villeroy de Galhau, F., Ethics of currency: a possible guide for central bankers?, Michel Camdessus Central
Banking Lecture, 14 September 2022
iii
See for instance Waller, C.J., CBDC - A Solution in Search of a Problem? and House of Lords, Central bank
digital currencies: a solution in search of a problem?
iv
Lagarde, C. and Panetta, F. (2022), Key objectives of the digital euro