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2022 Paris Europlace International Finance Forum Paris, 12 July 2022
Central bank digital currency (CBDC) and bank intermediation in the digital age
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Ladies and Gentlemen,
It is a great pleasure to be with you today, thanks to Paris Europlace. In light of
the current geopolitical context, the theme of this session appears particularly
relevant: European strategic autonomy is not absent from our sight as central
banks. We notably ensure that our banking system remains robust in times of
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great uncertainty namely the war in Ukraine, and its economic consequences:
the spur in inflation, the deterioration of the macroeconomic outlook, and the
normalisation of interest rates. In this context, let me pay tribute to the solidity
French bank's CET1
and performance of the French banking system: amounts
to 14.9 % in Q1 2022; while their RoE increased over a rolling 12-month period
at 7.6 % in Q1 2022, and corporate risk remains manageable for sure. However,
this collective strength should not mean any complacency, especially in the face
of the triple digital revolution unfolding before our eyes in the financial sector;i
new
new tokenised assets, new players, and "decentralised" market
infrastructures aim to remodel the financial system from the ground up.
Against this background, central banks are increasingly considering the creation
of a digital form of their currencies. And let's face it: the idea sometimes raises
doubts, and even fears, among commercial banks. The part of the project which
is quasi-consensual, with strong use-cases, is the one which raises little public
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interest which does not mean that it is not key: wholesale CBDC. I will come
back to this later. But let me start with the other face of the CBDC mountain:
retail CBDC; this one, by contrast, is the focus of both public excitement and
private questions.
I. A 'retail' CBDC for a renewed intermediation in the digital age
Let me suggest three hopefully shared principles to climb together this face of
the mountain.
1. Our means of payment are and must remain a partnership between
central bank money and commercial bank money
Until now, the coexistence and partnership of central bank and commercial bank
money has structured the retail payment landscape and preserved the stability
of the monetary system. Their respective roles are clearly assigned: central
bank money anchors the stability of the financial system while the multiplicity of
issuers of commercial bank money preserves competition and innovation. Their
interplay and their interchangeability at par value ensures the safety and
efficiency of the monetary and financial system. Neither one is better than the
other, but in a joint venture each partner needs the other: a digital euro should
never mean disappearance of commercial bank money; conversely,
digitalisation cannot mean the disappearance of central bank money.
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Indeed these foundations and especially the role of central bank money are
increasingly threatened by the digital revolution of the financial sector. First, it
results in the decline in the use of cash in transactions, which calls into question
the availability of central bank money for the public. Increased reliance on digital
payment solutions also shows how our European ecosystem has become
critically dependant on non-European players (eg international card schemes
and Bigtechs). Meanwhile, the emergence of crypto-assets and so-called
stablecoins may compete against both commercial and central bank money,
even though they do not offer the same guarantees in terms of credit risk and
safety: the recent collapse of the Terra-Luna ecosystems or the sudden liquidity
shortage of Celsius Network are necessary wake-up calls. I strongly welcome
here, on the last days of a fruitful French Presidency of the EU, the successful
trilogues on Transfer Fund Regulation (Travel Rule) and Markets in Crypto-
Assets (MiCA).
2. Even if the precise use cases are not yet definitively fixed, there are
several material reasons to consider the issuance of a digital euro
The main rationale for a digital euro is therefore to preserve the role of public
money in a digital economy. Such means of payment, adapted to the demand
of users in the digital age, would (i) preserve the accessibility and usability of
central bank money, (ii) support our monetary sovereignty, and limit the risk
"external" - -
that digital assets be they cryptos or non-European CBDC would
be used as settlement assets in the euro area, (iii) support the strategic
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autonomy of the European continent and hopefully contribute to the
emergence of a pan-European payment solution e.g. the European Payments
Initiative, which could be used as a vehicle for the distribution of a digital euro.
In the light of these challenges, and under the leadership of my Board colleague
Fabio Panetta, the Eurosystem wisely decided on a two-year investigation
phase on the issuance of a digital euro, before taking a decision about whether
to go further by the end of 2023 / early 2024.
I don't say it's done yet; but it's our strategic - -
and yes, sovereign responsibility
and then to decide. I would hence suggest we don't
to study the issue seriously,
focus too much our discussion on this "why" question, but on the
"how", together.
And here I come to my third principle.
3. Our possible future digital euro must be designed and developed
altogether, and be as decentralised as possible
I stressed it here last year: a CBDC will be created with banks, not against them
I don't have any word to change to this commitment.
nor in spite of them.ii
Accordingly, I strongly encourage all financial intermediaries to actively
participate in the dialogue the Eurosystem has established, both at the
European level through the Euro Retail Payments Board and at the national
level. We just decided to set up a CBDC working group within our French
payments committee (the CNPS). Concerns have emerged that the issuance of
a CBDC would threaten the role of banking intermediaries in client relationships,
while draining banks' deposits through a massive conversion into risk-free
CBDC accounts, especially in times of stress. These outcomes are not foregone
conclusions, to say the least.
The Eurosystem is currently looking at the possible scope and design of a digital
euro. Let me just share my personal thoughts about the general framework that
should see light: in my opinion, similarly to the current intermediation model, as
many functions as possible should be delegated to intermediaries.

Obviously, some functions should remain the exclusive privilege of the
Eurosystem because they are at the core of its mandate and cannot, by
definition, be outsourced. This is the case specifically for the of a
issuance
potential digital euro.

The Eurosystem should entrust banks with the distribution of digital
euros to final users, while setting technical, functional and commercial rules like
for example the branding, logo, and fee structure. We would thus build on their
experience as intermediaries to offer means of payment to end users and
develop value-added services. The Eurosystem could also outsource parts of
the settlement, such as recording or validation, to intermediaries.

Moreover, it is clear that some functions should remain under the sole
responsibility of intermediaries. In particular, I believe that the Eurosystem
should not have the role of managing digital euro holdings: the Banque de
France closed its last private customer accounts over 20 years ago, and does
not intend to reopen any. Customer relationship management is best handled
by financial intermediaries, as they have the experience in this field. They would
also ensure compliance with the related regulatory requirements, including KYC
and AML/CFT. Such a design would allow them to preserve the role of financial
intermediaries in the retail payment system, and would ensure the high level of
privacy required by the public.
 deposit
Finally, regarding the possible risks of banks' conversions, we
must and will ensure that a digital euro remains a means of payment rather than
a saving/investment asset. This could be achieved by capping the maximum
amount of digital euro in circulation, at a low enough level. In a completely other
field, regulated savings, ceilings for the Livret A have proven an efficient tool,
without requiring the intervention of a Big Brother to check on them.
Building on our experiments with the private sector on a 'wholesale'
II.
CBDC to be ready for the future
By comparison, the topic of a wholesale CBDC is less contentious and of less
concerns to stakeholders; but it should not be perceived as less important. We
central banks have been very proactive here, as demonstrated by the
"wholesale CBDC focus"
of the BIS Innovation Hubs. The Banque de France is
at the forefront here, and we have especially identified two critical use cases for
improving the payments ecosystem.
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First, the tokenisation of securities. A wholesale CBDC could be used for
the settlement of such securities issued on DLT, which is essential to
prevent market and liquidity fragmentation. This technology also
streamlines the information flows in financial markets, from trading to
exchange procedures and settlement.

Second, a wholesale CBDC could enhance cross-border and cross-
currency settlements.
Over the past year, we have successfully completed the first phase of our
experimentation programme, comprising 9 experiments, hand in hand with the
private sector and with other public actors.
Thanks to these experiments, we have developed a direct technical expertise
including two key innovative assets born in the Banque de France:
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A proprietary DLT technology, called DL3S. This blockchain has been
entirely designed by the Banque de France in order to meet the needs
and expectations of market participants as a permissioned blockchain
with efficient delivery and settlement services, using CBDC.

An automated market maker (AMM) platform inspired from the DeFi
markets, which could serve as the basis of a multi-CBDC platform where
different central banks come together to enable fast, automated and
transparent settlement across currencies.
I announce today that we engage the second phase of our experimentations
program with 4 or 5 additional ones starting this semester. We want to get closer
to a viable prototype, testing it in practice with more private actors and more
foreign central banks in the second half of 2022 and in 2023. This work ensures
that we stand ready to bring central bank money as a settlement asset as early
as 2023, with the implementation of the European pilot regime. This pilot regime
will offer a regulatory framework to support the financial asset tokenisation trend.
Finally, these experiments conducted by the Banque de France contribute
and future Governing council's
directly to the Eurosystem's existing task force,
decision, on improving our services to the wholesale market.
This leads to the key outstanding issue of the articulation of a CBDC with
existing infrastructures, such as Target Services in the EU. Both must be made
interoperable: on the one hand, distributed ledger technologies are still not
mature enough to handle large volumes of transactions, and therefore will not
replace conventional systems from one day to another; they will rather
complement them. Centralised and distributed systems will thus have to coexist
securely and efficiently. On the other hand, we must make a CBDC available on
these infrastructures to match market demand for tokens, so that our settlement
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asset is not substituted by private assets which would be riskier.
***
The two projects of a wholesale and retail CBDC are two faces of the same
"mountain",
which is the ambition to offer a digital form of central bank money to
combine innovation and trust in the payment system. I spoke at the start about
the 'existential' monetary partnership between central banks and commercial
banks. The trust/innovation nexus is just as existential. It does not entirely
coincide with the former: commercial banks can rightfully inspire confidence;
central banks are capable of innovation, the CBDC is proof of that. But one thing
is for sure: it is together that we can succeed in strengthening Europe's strategic
autonomy. Thank you for your attention.
References
i
François Villeroy de Galhau, Central banks and finance in the face of a triple revolution, speech, November
2021.
ii
François Villeroy de Galhau, Roads for the future: central bank digital currency (CBDC) and innovative
payments, speech, June 2021.