Denis Beau: Where do crypto-assets fit into our payment system?
Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Bank of France
Conference, Rouen IAE, Rouen, 31 October 2018.
* * *
Ladies and gentlemen,
Bitcoin was valued at USD 0.001 less than a year after its launch in October 2009. Today it is
worth USD 6,500, down from a peak of USD 19,500 in December 2017. The explosion and
volatility in Bitcoin's price have done much to fuel the media coverage surrounding the growth of
of which Bitcoin is
the new monetary and financial instruments known as crypto-assets,
merely the best known. In fact, there are now over 2,000 of these types of assets worldwide.
Initially designed as online instruments of exchange, these assets have gradually gained a
foothold in the real economy with the development of services that allow them to be bought and
sold against currency issued by central banks or financial institutions, to be held, to be used as
instruments of exchange against other assets and, with the recent emergence of Initial Coin
Offerings (ICOs), to be employed as investment and financing instruments.
Issued and stored in electronic form, these assets have specific features that US-based
comedian John Oliver jokingly summed up in his Last Week Tonight show on 11 March 2018, as
"everything you don't understand about money combined with everything you don't understand
about computers". His comments reflect the fact that crypto-assets have unique financial,
monetary and technical features that set them apart from the currencies and payment
instruments issued by financial institutions and central banks and which form the foundation of
our monetary system in Europe. They have no issuer for whom the assets act as a guarantee of
value. They do not have a guaranteed fixed exchange rate with the currency issued by the central
bank, which forms the basis of our payment system because it is the only one with legal tender
status, i.e. which must be accepted by everyone. And they rely for their circulation on blockchain,
a decentralised and distributed ledger system using cryptographic techniques.
These unique features largely explain the widely varying views that we hear today about the
outlook for crypto-assets, keeping in mind that, for now, they constitute a marginal share of
holdings of economic agents and within the global economy. At their peak in January 2018, total
outstanding crypto-assets represented EUR 330 billion; in comparison, the euro area's M1
monetary aggregate amounted to EUR 7.5 trillion. Some see crypto-assets as disruptive
innovations poised to radically overhaul the way that our monetary and financing system works,
changing it for the better. Others believe that these are innovations that still need to find their
market. Or, to quote from a special issue on the subject published in September 2018 by The
Economist, a weekly economics magazine: "Cryptocurrencies look like a solution in search of a
problem."
Given all this uncertainty, I would like to speak today from my perspective as a central banker,
supervisor, mindful of innovations that could affect the effectiveness and security of our payment
system, since this is a determining factor in the stability of our monetary and financial system.
Accordingly, I would like to share a few ideas and thoughts about where crypto-assets fit into
and about
the changes taking place in payment methods, the supervisory challenges
posed by these new assets.
I. To begin with, let me set the development of crypto-assets in the broader
Supporting this transformation
context of the changes affecting payment instruments.
is a core activity for us at the Banque de France, in accordance with our statutory tasks of
ensuring the security of cashless payment instruments as well as the quality of banknotes
in circulation. Since banknotes are the only payment instruments with legal tender status,
we have to make sure that they remain a secure and easily accessible payment
instrument for anyone who wants to use them, especially the most vulnerable people in our
society. Given this twofold mission, we base our activities on a principle of neutrality and
freedom of choice, which in turn means that we cannot favour one payment instrument
over another and do not seek to influence people's behaviour or preferences.
1. In the payment instrument landscape, we are currently seeing a twin trend as
cash payments go down, while cashless payments undergo a transformation
driven by behavioural changes and technological innovation.
Shifts in consumption approaches, such as the growth of e-commerce, are fuelling a steady
decline in the use of cash in transactions, while the use of electronic payment
instruments is increasing. Statistically speaking, the volume of banknotes returned by the
public to cash processing firms fell by over 10% between 2012 and 2017. However, this decline
needs to be put into context, because banknotes still dominate face-to-face transactions,
particularly small-value transactions, as shown by recent Eurosystem research, which found that
banknotes continue to be the main payment instrument in Europe and France by number of
transactions, accounting for 79% of transactions in the euro area and 68% in France. In value
terms, they make up 54% and 28% respectively.
At the same time, we are seeing a rise in electronic payments, which are not merely
growing but also developing along four different pathways:
advances in internet technologies and devices have paved the way
Spreading technology:
to increase the number of channels used to initiate and accept payments. The ways in
which these technologies are used are becoming more diversified and increasingly digital.
They are no longer confined to cards, as we are seeing with the rise of mobile payments.
A broader range of participants: I am thinking here about how the payments market has
expanded to include competition from big techs and major retailers, which are following a
wide range of strategies in this respect. The flipside of this trend is the increasingly global
nature of the market, which is raising sovereignty and independence issues, including the
question of control of data with respect to the American and Chinese tech giants.
Payment is becoming less prominent: nowadays the actual act of paying is becoming
less visible, as it is combined seamlessly within the overall transaction process to minimise
the impact on the payer. We are seeing this shift in online payments, for example, which are
designed to be increasingly fluid through solutions such as one-click buying.
Availability of payment services: payment services are becoming more available, ignoring
physical borders and time constraints to satisfy customer demand for instant, continuous
and uniform payment services, as economic agents become ever more mobile.
2. The development of crypto-assets naturally forms part of these underlying
affecting payment instruments, combining the search for anonymity, management
trends
of non-intermediated peer-to-peer payments and the use of entirely web-based
technologies.
But crypto-assets are also different because of their financial, monetary and
technological features that I mentioned in my introduction. These clearly create
opportunities to improve payment services in at least three ways, by:
Harnessing the underlying blockchain technology to improve or supplement existing
processes: the Banque de France is already employing blockchain technology to improve
industry processes. For example, we are using a blockchain project called MADRE to
assign SEPA Creditor Identifiers, which are needed for creditors to issue direct debits.
this could be done in the area of international
Helping to remedy market inefficiencies:
multi-currency payments, for example, with a view to improving the conditions under which
individuals transfer funds abroad.
Diversifying project financing methods: a prime example would be ICOs, which have
enabled swift and large-scale fundraising in the network technologies sector in the past two
years.
3. Yet for all that, can crypto-assets become true currencies that will revolutionise
our payment system, providing the decisive innovation that will lead us to the cashless
society that some people are predicting and even hoping for?
For the time being, this seems unlikely because existing crypto-assets are far from perfect.
As many central bankers have pointed out, today's crypto-assets do not satisfactorily offer the
qualities expected of a currency and cannot be considered as such:
First, their value fluctuates enormously, preventing them from being used as units of
account. As a result, very few prices are denominated in crypto-assets and not many large
brick-and-mortar or online retailers accept bitcoin for example, although there are some
exceptions [i.e. showroomprivé.com, France's second largest flash sale web retailer, which
has accepted bitcoins since 2014].
Second, as intermediaries in exchanges, crypto-assets are far less effective than a
currency with legal tender status, insofar as (i) their price volatility makes it hard to use
them as a means of payment, (ii) they generate transaction fees that are far too high for
simple retail transactions, and (iii) they offer no guarantee of a refund in the event of fraud.
Third,
the fact that they have no intrinsic value means that they cannot be used to
create trustworthy stores of value.
In addition, crypto-assets may be conduits for financial risk, security risk and especially
risks of cyber-attacks, money laundering and terrorist financing. These would represent
major risks for users and hence for the orderly functioning of our payment system if
crypto-assets were ever to play a major role in that system.
II- In this complicated context, with crypto-assets undergoing technical and
economic trials that offer opportunities but also present material risks for our
payment system, should we consider establishing a regulatory framework and
supervisory approach and, if so, how should we go about this?
1) Various courses of action are available to the public authorities. The first would be
to ignore crypto-assets. But even if the volumes in play remain small and do not represent
a threat to financial stability, the risks that I mentioned earlier must be addressed. The
second course of action would be to ban crypto-assets outright because of these same
risks. Several countries have already gone down this route, including China in 2013 and
Russia in 2017. A third option, and the one that has so far been the preferred
response in Europe and France to innovations with the potential to change the
payment services market, is to establish appropriate regulations that make it
possible to reconcile two key imperatives:
First, address the risks that I mentioned, notably with a view to ensuring an adequate level of
protection for participants, whether they be investors or consumers.
Second, preserve the potential for technological innovation offered by crypto-assets.
These two imperatives are mutually beneficial. Adopting a framework that protects
participants in the real economy will help to increase their confidence in the mechanisms
associated with crypto-assets, thereby promoting growth in the new assets.
1. If we opt for creating a regulatory framework, what should go into it? That is
precisely the topic of a number of debates currently being conducted around
France's new PACTE Bill. The proposed legislation includes an approach to crypto-assets
based on two pillars. The first specifically addresses the question of ICOs, proposing an
optional labelling system. Under this system, a company planning an ICO would be able to
ask the AMF to label the offering. This optional label would give the offering greater
credibility and reassure potential token buyers about the serious nature of the project and
the associated financing arrangements.
The second pillar concerns providers of crypto-asset services. These essentially include venues
used to exchange digital assets against legal currency, and providers of custody solutions for
digital assets. To satisfy anti-laundering obligations, these platforms must be registered. But to
address risks relating to security, market integrity and price manipulation, an optional label could
be granted at the service provider's request by the AMF after a more in-depth investigation, in
order to provide security for the service offered to users. The regulation of venues used to
exchange digital assets for legal currency, in France and elsewhere, is a key issue for obvious
reasons, as these platforms are the interface between the virtual and real worlds and hence
where risk can spread from the former to the latter.
As you are doubtless aware, the authorisation and labelling schemes mentioned in the PACTE
Bill are optional. But there is an exception when it comes to anti-money laundering and terrorist
financing (AML/TF) mechanisms. European regulators have been firm in their resolve not to
compromise in any way on this matter. Accordingly, the Fifth European Anti-Money Laundering
Directive makes all participants handling digital assets subject to applicable AML/TF provisions.
This is consistent with the system in place since 2014 in France, which states that an exchange
of crypto-assets in euro requires a payment services provider authorisation, and, accordingly,
compliance with AML/TF rules.
To take account of the experimental phase that crypto-assets are presently in and to
satisfy the key requirements of ensuring payment security while encouraging innovation
in the area, a possible alternative to the optional approach currently favoured by the
PACTE Bill would be to maintain a proportional approach. This has been the basis for the
European regulation of payment services up to now and consists in setting a mandatory
framework whose requirements are adjusted according to the nature, development stage and
risk of the associated services. This approach was employed under the Second Payment
Services Directive (PSD2) to regulate the market development of account aggregators and
payment initiators.
In conclusion, it is hard to anticipate the role that crypto-assets might play in the payment
system of the future, especially since the characteristics and features of these assets look set to
change considerably. Right now, there are major limitations to their everyday use in retail
payments, and crypto-assets still have to prove their attractiveness in this regard,
particularly since an extensive range of payment solutions is available, and these
to address the need for instant exchanges, with, for example,
solutions continue to modernise
the introduction of mobile payment solutions and instant transfers. That said, the underlying
technologies that I mentioned, and especially blockchain, open up interesting
development prospects for major payment and market infrastructures.
Uncertainty over the future of crypto-assets in the world of payments does not relieve us of the
need to regulate their development, given the attendant risks. Adopting a framework that
protects participants in the real economy will help to increase their confidence in the
mechanisms associated with crypto-assets, thereby promoting growth in the new assets.
The intrinsically digital and global nature of crypto-assets means however that a
coordinated international approach must be taken to avoid creating an opportunity
because experience tells us that participants can easily relocate to another territory
effect,
offering more flexible laws. Several international organisations have set up working groups to
explore this question, under the leadership of the G20. While some of the discussions are still in
their infancy, the aim in the medium term is to come up with a framework and an international
code of conduct to preserve security for everyone and promote financial stability, which is a
common good that we all share.
Thank you for your attention.