Denis Beau: The future of money - regulatory and policy issues
related to the introduction of CBDCs
Opening remarks by Mr Denis Beau, First Deputy Governor of the Bank of France, at
the European Law Institute Webinar, 3 June 2024.
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Ladies and Gentlemen, good evening,
First of all, I thank the European Law Institute for inviting me to this panel discussion on
the Future of Money. I am very pleased to share with you a few thoughts on the
challenges which have emerged in the field of money and the associated payments
systems, as I see them from my central bank and supervisor standpoint, and on the
policies we develop given our monetary and financial stability mandates, to help
address them. On those topics, within the 5 minutes I have, I would like to make 4 quick
points:
The first one is on the changes which are taking place in our payment system and the
wider financial system, driven by the advancing digitalisation of financial services. At
this stage, a lot of attention is focused on the use of distributed ledger technologies
(DLT), in relation to the speculative crypto market and Decentralised finance (DeFi).
However, behind the hype, there is a more discrete and more transformative trend
underway: the tokenisation of finance.
However tokenisation is not a single innovation per se but rather a new ecosystem that
is building up, which has spawned new activities and services, which first appeared in
the payments sector before spreading to the wider financial sphere. The development
of this ecosystem is still in an early stage. Nevertheless, it could lead to far-reaching
changes in the way our financial system operates, by fostering the emergence of new
players, that bridge the gap between IT and Finance, new investment and settlement
assets in tokenized form, and new type of financial infrastructures, decentralized, based
on DLT, particularly blockchains.
My second point is about the opportunities and risks created by those transformations,
for market participants and the payment system as a whole. Here I would like to stress
first that this impact is likely to be two sided. To illustrate this for the functioning of the
payment system, it is important to recognize that the positive impact those
transformations may have in terms of improved transparency, better cost effectiveness
and (24/7) availability could come at the price of more fragmented processes. This is
particularly relevant if blockchains are non interoperable and unable to interact
smoothly with existing central clearing, settlement and payment systems. It could also
come at the cost of an excessive reliance on non-European entities, which raises
competition, strategic autonomy and data protection concerns. Second, this two sided
impact creates specific challenges for an institution like the Banque de France, given its
mandate, a major one being the preservation of the critical role played by CeBM in
anchoring the stability of our payment and of our financial system more broadly.
In that context, we see our task as being to help mitigate the risks brought by the
transformations underway, while ensuring that benefits of those transformations are
harnessed.
To deliver on that task, we intend to use and we have actually started to use two policy
instruments as levers, on the basis of two convictions. The two levers are our influence
in the development of regulations for payment services and systems and the adaptation
of our central bank money services. The two convictions are:
First, innovation can bring sustainable benefits for the payment system only if it
benefits from the confidence of its users, which requires a regulatory framework
that does not stifle innovation but that is sufficiently demanding to ensure the
protection of the stakeholders and the stability of the system.
Second, there is a public interest in keeping central bank money at the heart of
the settlement processes between financial intermediaries as it is the safest
settlement asset and hence the most appropriate to ensure financial stability.
My third point is about the use of our first policy lever, the contribution to the
development of regulations. In this field we have in the recent past contributed to the
trail blazed in France in crypto assets with the adoption in May 2019 of the PACTE Law,
which introduced the legal status of digital asset services provider, or DASP.
Europe's lawmakers have drawn heavily on the French framework, with the adoption of
MiCA Regulation, a specific regulatory framework covering the issuance of
cryptoassets and stablecoins and the provision of related services.
Looking forward, while MiCA represents a vital regulatory step forward, it will need to be
built on in the coming years. For example, it only partially tackles the concentration of
crypto-asset service activities within crypto-conglomerates. The challenge here is to
ensure that investors are protected, through rules covering notably the segregation of
customer funds, rules of conduct and management of intermediary risks, for example by
requiring activities to be separated. By virtue of its decentralised nature, the DeFi
ecosystem likewise raises regulatory challenges that will need to be addressed.
With this in mind, the ACPR has begun identifying potential avenues of regulation.
These were set out in a paper published in October 2023. They include three
measures: (1) first preserving the resilience of public and private DLT infrastructure via
security standards; (2) second, certifying smart contracts, even if this raises operational
questions; and (3) third, regulating DeFi entry points to protect investors against the
risks of abuse.
Work is continuing in 2024 with stakeholders on one of the ACPR's key proposals,
namely the mandatory certification of smart contracts prior to their use.
My fourth and last point is about the use of our second lever, the adaptation of the
services we provide in CeBM. It has taken the form so far of two major endeavours to
prepare for such adaptation.
First, the Banque de France was the first central bank to launch an ambitious
experimental programme on wholesale central bank digital currency (CBDC) for
largevalue payments, in 2020, to support DVP and PVP settlement processes of tokenised
financial assets, both domestically and cross-border. The experiments are now pursued
under the aegis of the ECB. The Banque de France's wholesale CBDC technical
solution, based on our own DLT (DL3S), is one of the solutions currently trialed by the
Eurosystem.
The Banque de France is also taking part in several important international initiatives,
notably those spearheaded by the Bank for International Settlements' Innovation Hubs,
to explore the future of market infrastructures and interoperability between traditional
systems and different types of DLT. In the latest Project, Agorá, the Banque de France
will represent the Eurosystem, and will explore with six other central banks worldwide
the tokenisation of cross-border payments using both tokenised central bank money
and tokenised commercial bank deposits in an ecosystem that preserves the two-tiered
architecture of the financial system based on the concept of unified ledger.
The second major endeavour is our participation as a central bank of the Eurosystem to
the preparation of the digital euro, but I do not develop this aspect as my colleague of
the ECB will tell you more on this.
If and when we will deploy these CBDCs, wholesale and retail, remains uncertain as we
speak. The only certainty we have and market participants should have, is that we will
be ready to deploy them if and when we deem it necessary to meet our policy
objectives, in line with our mandate. Let me stop there.