Denis Beau: New technologies and monetary policy frameworks
Opening remarks by Mr Denis Beau, First Deputy Governor of the Bank of France, at the
International Monetary Fund (IMF) / Reinventing Bretton Woods Committee (RBWC) Seminar on
"New Technologies, Financial Inclusion and Monetary Policy in CCA Countries", Session 3: New
technologies and monetary policy frameworks, 12 July 2021.
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From its monetary and financial stability mandate perspective, the Banque de France pays a lot
of attention to innovations that may alter the functioning of the real economy and the financial
system, in particular digital technologies. This is exemplified by multiple experiments involving
public and private institutions we launched since 2020. Through these experiments, the Banque
de France is notably showing its commitment to reconsider, if necessary, the way it makes
available central bank money for settlement and payment processes, to support with the
provision of central bank money in digital form, the spread of new technologies and to help
address the challenges those technologies raise for the fulfillment of our monetary and financial
stability mandate.
But the issuance of a CBDC is only an aspect of the policy responses that are to be considered
given the risks and opportunities brought by digital technologies. So I would like to start my
remarks with a quick overview of those risks and opportunities, from my central banker
perspective, then turn to the public policies that can help maximize those opportunities and limit
those risks and the contribution that a CBDC can make, and end up with a few thought on the
impact the issuance of a CBDC may have on the implementation of monetary policy.
A. Risks and opportunities of new technologies: a central banker perspective
1. Let me start with the opportunities and risks from a macro financial perspective. The
digitalization of finance holds many promises for society. It can reduce the cost of
payments, especially cross-border ones. Digitalization, thanks to the use of Big Data and AI can
also improve the allocation of savings, for instance by improving the information set used in
credit decisions. The tokenization of financial assets can make financial exchanges safer and
faster. Digitalization can also enlarge access to finance to more people, for instance, new
insurance contracts may emerge through smart contracts. More generally, the hope is to make
finance more user-centric and stimulate financial inclusion. From a purely monetary point of
view, the digitalization of the financial system is also an opportunity. The entry of new players can
reduce rents in the financial sector, allowing for a faster and smoother transmission of monetary
policy to the economy.
But digitalization also raises new risks. A major one is to jeopardize the central role, as
anchor and stabilizer, of the national central bank currency of a country's financial and
monetary system. This risk stems from the possible development of alternative systems whose
settlement asset is not solidly linked to the national central bank money. For instance, tokenized
financial assets are booming with the risk that transactions involving them settle with other
settlement assets than central bank money, including crypto-assets. In the retail payment space,
new players such as BigTechs with huge financial resources and benefitting from worldwide
network effects, are making inroads into the payments industry and may provide dominant
payment solutions with settlement coins with loose links, if any to central bank money.
2. Let me now turn to the consequences from a more macroeconomic perspective that
are relevant for the conduct of monetary policy
Digitalization affects the measurement of the price index. It exacerbates measurement
issues well-known to price indices, such as dealing with frequent product replacements and
adjusting for product quality, or dealing with changes in the structure of the economy and hence
the weight of new technologies in the economy.
Digitalization also influences inflation dynamics via firms' pricing behavior, market power and
concentration, as well as firms' productivity and marginal costs. On the one hand, it reduces
search costs and increases price transparency -think of how e-commerce renders price
comparison easy- thereby reducing mark-ups. On the other hand, it increases the degree of
market power and mark-ups by increasing entry costs for competitors of "superstar" firms
especially due to a strong network and platform effect. The overall impact is therefore
ambiguous.
Hence, digitalization should not only influence price level, but also its dynamics and its
relation to real activities.
B. Policy responses and the role of a CBDC
The macro financial and macroeconomic possible positive and negative impacts of the spread of
digital technologies create challenges to central banks' roles and missions. Three of them are of
particular relevance in the case of Europe: i) a risk to European sovereignty in payments with the
emergence of digital solutions offered by non-European-players, being private or public; ii) a
threat to monetary and financial stability, notably through the risk of a disanchoring of the role of
central bank money both in the retail and wholesale space; and iii) a threat to monetary
sovereignty with the rise of significant new private actors and settlement assets. Three policy
responses are currently under consideration to address them.
1. Drawing up an adequate regulatory framework
The regulatory framework and the supervision methods have
The first response is regulatory.
to evolve, to address in particular the threat to financial stability and monetary sovereignty that
digitalisation of finance and the real economy may create.
In this matter, the enforcement of national regulations will not be enough. One of the main
challenge is indeed to make sure that all countries adopt strict enough regulations, especially
regarding crypto-assets. All kinds of regulatory arbitrage, which would enable firms to relocate to
other jurisdictions to bypass national regulations, should be avoided.
In this regard, the European Union is currently building a harmonized regulation. Last
September, the European Commission launched its proposal for a "Markets in Crypto-Assets
regulation" (also known as MiCA). If this proposition is adopted by the EU, companies that issue
crypto-assets or provide additional services will be subject to the same requirements, under the
watch of supervisory authorities. For example, the crypto-assets intended as a means of
payment will have to provide a predictable redemption right in sovereign currency for asset
holders, which is deemed necessary for the protection of consumers.
At the international level, a cooperative framework is gradually setting up in order to
deal with the challenges raised by stablecoins.
2. Supporting initiatives to strengthen Europe's sovereignty in payments such as EPI
The second response is to support private initiatives that can have a constructive
impact on market functioning, payment systems efficiency and help address European
sovereignty in payments. The best example of this is the European Payments Initiative (EPI), a
project led by a set of major European banks and processors aiming at creating a unified,
innovative and autonomous European payment solution.
The Eurosystem, as well as the European Commission, has been in support of this work right
from the start.
3. Exploring the issuance of CBDC in order to be ready to launch a CBDC, if necessary
The third response is to be ready to launch a Central Bank Digital Currency (CBDC),
which means a digital form of central bank money, possibly for both the public and the financial
sector. This response would help reassert the anchoring role of central bank money in both the
retail and wholesale settlement and payment space, if needed in complement to what can be
achieved with the regulatory and market response. This might prove useful for instance to
address challenges coming from the introduction of CBDC by other countries. Central banks are
actively exploring its potential. This is notably the case of the Banque de France. We have
successfully carried out since 2020 seven experimentations on wholesale CBDC - and we will
carry out two more by the end of this year, with private and public actors alike, covering a wide
range of use cases (DvP and PvP), including cross-border transactions.
Let me point out that a CBDC should be designed in our view in a way it is distributed by
intermediaries, to allow the banking sector to keep a key role in the monetary policy
transmission.
C. Possible impacts of a CBDC on monetary policy implementation: preliminary
thoughts
When decided and depending of course on the specifics of the project launched in the
concerned jurisdictions, a CBDC could have several consequences on monetary policy
implementation. I will highlight today three dimensions to consider, among many others, in case
the introduction of CBDC is decided: liquidity configuration, policy rates and access to central
bank balance sheet.
1. First potential impact: the launch of CBDCs could affect monetary implementation
through a change in the liquidity situation of the banking system.
- While the design of the CBDC should ensure that any risk of sudden large shifts from bank
deposits to CBDC would be avoided, it could still substitute a limited part of retail deposits,
through an increase of what we call in central banking jargon "autonomous factors", i.e. an item
not linked to monetary policy but affecting the liquidity situation of the banking system.
- This could in turn imply that the central bank - depending on its preferred liquidity position -
provides additional liquidity through refinancing operations and/or asset purchases. In case of
collateralized refinancing operations, collateral availability would also need to be checked to
accommodate the operations.
- While it is very much a speculative thought at this stage, liquidity-providing or
liquidityabsorbing operations would need to remain available at any time to ensure that central banks can
choose to operate in the monetary policy implementation framework they choose, even in the
case of the launch of a CBDC.
2. Second: the chosen remuneration scheme, as well as possible limits, are key
parameters for the usage of CBDC that also need to be assessed for the monetary policy
framework.
- A successful CBDC should be attractive enough to be used by households and firms in their
everyday payments. However, it should avoid the above-mentioned risk of excessive shifts from
bank deposits to CBDC accounts, which would involve unwanted bank disintermediation and a
possible destabilization of the financial system. A balance must be found to meet both goals.
- This could imply for example both a zero remuneration of CBDC (i.e. similar to cash) and a
limit to CBDC accounts holdings. Under such a scheme, the CBDC is likely to be used for daily
payments, while households and firms would not be able to hoard large amounts of CBDC for
investment or risk-aversion motives. A second model would involve no limit on CBDC holdings
amount, but a differentiated remuneration rate beyond a certain threshold (a so-called "tiered
CBDC remuneration"), which would disincentivize large CBDC holdings.
- Whatever the model chosen, with its own benefits and drawbacks, it may have impacts on
monetary policy implementation. I already mentioned the potential effect on the liquidity position of
the banking system. Another question relates to how a new remuneration rate should be
articulated with the current key policy interest rates and whether there could be a case for
changing some CBDC parameters together with central bank key policy rates. In any case,
CBDCs should be designed so as to not constrain nor influence in any way central bank
monetary policy decisions and desired stance.
3. Third potential impact: the launch of a CBDC could also raise questions related to
modalities of access to central bank balance sheet.
- Depending on its attractiveness and detailed specifications, a CBDC could trigger a demand
from financial actors which usually do not have access to central bank money (money market
funds, investment funds, insurance companies ...) to be able to settle in CBDC. It would in
particular be the case in a broader wholesale CBDC access scenario. The remuneration of the
CBDC held by these financial actors - in case access were to be granted - would also matter
for monetary policy implementation, as it would play the role of a ceiling for these institutions on
the money market.
- Beyond these settlement and detention aspects, expanding the counterparty framework (i.e.
for central bank refinancing or asset purchases operations) as a response to the implementation
of CBDC does not strike me at this stage as being particularly useful nor necessary. In any case
the usual requirements related to counterparty eligibility criteria, including financial soundness
assessment and supervision, would need to be taken into account.
To conclude these introductory remarks, let me stress three points:
- Digitalization is a major supply/technology shock, whose implications are multifaceted, and
which have been intensified and accelerated by the Covid crisis
- As central banks, in the context of our monetary and financial stability mandate, we have a
role to play to make sure that digitalization becomes a blessing and not a curse. The readiness
to issue a CBDC can prove an important lever to that end.
- In such a context, even if the jury is still out whether we will have to use it, it is essential that
we show openness to change and to investigate ant test practical solutions, among central
banks and with the private sector.