Denis Beau: Stablecoins - a good or a bad solution to improve our
payment systems?
Opening address by Mr Denis Beau, First Deputy Governor of the Bank of France, at the
Stablecoin Conference "Which ambitions for Europe?", organized by Paris Europlace and
ConsenSys, Paris, 15 January 2020.
* * *
I would like to thank Valérie Fasquelle and Christian Pfister for their contributions to this speech.
Ladies and gentlemen,
The growing number and forms of crypto-assets in our payments landscape has triggered a
significant and important debate about their virtues and risks, in case the role of these
cryptoassets in our payment systems were to become less marginal than it currently is. The
emergence of so-called "stablecoins" has brought additional fuel to this debate as they could
bring to the market new settlement assets and payment schemes, which may compete against
and possibly, according to their promoters, replace those in commercial and central bank
money, currently at the centre of the functioning of our payment systems.
In order to share with you a few thoughts on this debate, speaking as a central banker and a
supervisor mindful of the benefits of innovation but also of the risks they could bring to financial
and monetary stability, I will focus my remarks on two topics:
Whether stablecoins can contribute to improving our payment landscape?
How to respond to the public policy challenges they raise?
1 - Are stablecoins a brand new solution or a brand new problem?
From my perspective, they can be both. Let me explain.
Due to their specificities, stablecoins are a novelty in tune with some markets' needs.
In the context of the economy's digitalisation, the past decades have shown how Fintechs as well
as Bigtechs have aimed at taking advantage of the latest advances in web-based technologies,
notably blockchain, to provide new payment credit and investment services. Often, they propose
to achieve this through the creation of various new assets (coins, tokens, stablecoins, with or
without smart contracts). We all have in mind the first generation of crypto-assets such as
Bitcoin and Ethereum, initially designed to be instruments of exchange in the digital world but
suffering from a number of limitations, not least severe price volatility and a lack of guarantee of
their convertibility and security. A second generation is emerging in the form of « stablecoins »,
such as the JP Morgan Coin, UBS's Utility Settlement Coin or Facebook's Libra. They share
many of the features of crypto-assets but seek to stabilise the price of the "coin" by various
means. They might therefore be more capable of contributing to the enhancement of payment
systems, with a potentially global reach, especially those sponsored by large technology or
financial firms.
In the retail market, stablecoin-based solutions seek to address evolving consumer
preferences towards instantaneous, continuous, and standardized payments, as consumers
become ever more mobile. While this demand is largely already met through an increasingly
diversified and digitalised supply by many payment services providers - be they new entrants or
established players-, stablecoins could challenge the latter by offering cheaper, easier and
instant anonymous and peer-to-peer payments. In addition, at the global level, we are far from
having a network (or set of interconnected networks) that could support quick and cheap
transfers of funds. The current supply of cashless means of payment lacks a universal and
ergonomic cross-border solution akin to cash person-to-person payments. Stablecoins could be
seen as a "universal" means of payment facilitating cross-borders payments in a single unit of
account. As we know, this is an argument put forward by some global stablecoins promoters.
Furthermore, stablecoins could help remedy other limits of the existing payment
ecosystem, even if the issues at stake might concretely vary between developed and developing
countries. In particular, their blockchain-based technology could help improve wholesale clearing
and settlement mechanisms and facilitate Delivery-versus-Payment processes as well as cross
currency settlements, while guaranteeing resilience and recovery from operational incidents.
However, stablecoins may also bring material risks to payment systems.
As many central bankers have pointed
out, stablecoins do not satisfactorily offer the
qualities expected from a settlement asset to be used interchangeably with commercial bank
money and central bank money. As intermediaries in exchanges, stablecoins are far less
effective than a settlement asset with legal tender status, insofar as (i) they are not entirely stable
since their price stability depends on the value of a basket of assets, and (ii) they offer no
guarantee of a refund in the event of fraud. The fact that they have no intrinsic value and that they
offer no guarantee that they may be converted at par upon demand with commercial bank money
or central bank money means that they cannot be used to create reliable stores of value.
In addition, as pointed out in the G7 report on stablecoins issued last year,
stablecoin schemes
are significantly exposed to risks of various nature, including legal, financial, operational and
compliance risk concerning money laundering and terrorist financing, competition law, consumer
and investor protection.
The risks identified must be seriously addressed if stablecoins are not to become the «
weak links » undermining the safety of our payment systems. This is all the more important
as some of these risks would be amplified and new risks might arise if stablecoins are adopted
at a global level. Stablecoins of potentially large size and reach - so-called global stablecoins -
may indeed pose additional challenges of system-wide importance both domestically and
internationally, for the transmission of monetary policy, as well as for financial stability. They
could also have implications for the international monetary system more generally, including
currency substitution, and could therefore pose challenges to monetary sovereignty.
2 - What role for regulatory and oversight authorities?
In this context, it is first and foremost the responsibility of the private sector to design
stablecoin schemes that do not bring undue risks to our payment systems. For that
purpose, regulatory and oversight authorities have an important role to play in order to
ensure that the risk management requirements to be met are clear, comprehensive and
complied with, while preserving the potential for technological innovation offered by
crypto-assets. To that end, they should in my view focus on three main tasks:
- Firstly, working on a regulatory response that preserves the positive potential impact
stablecoins might have on the efficiency of our payment systems. Given the rapid pace of
innovation, which is also characteristic of stablecoin initiatives, this pleads for developing an
agile, pragmatic and proportionate regulatory response rather than setting up an ad-hoc,
unique and comprehensive framework. This would be simpler, faster to implement and to adjust,
and be more likely to achieve level-playing field conditions. In the European context, this is an
encouragement for building on and adapting the functional coverage of existing regulatory
frameworks and, in some cases extending their geographical coverage. What comes to mind in
particular is the framework for crypto-assets service providers created in France with the
Pacte bill, and the European framework for e-money issuers, investment funds and
financial market infrastructures. This also calls for ensuring a consistent regulatory treatment
of similar risks, irrespective of the framework or combination of frameworks under which
stablecoins schemes might be operated.
- Secondly, coordinating the adjustment of regulatory and supervisory frameworks at the
international level
Whatever the final choice made for the European Union in terms of regulation strategy, such an
adjustment of the regulatory framework should be part of broader adjustment at the
global level, given the possible development of global stable coins. Indeed, there is a need for
overall consistency to prevent regulatory arbitrage under the "same activities, same risks,
same rules" principle. This is also necessary to address risks that fall outside existing
frameworks, including risks to fair competition and monetary policy transmission. Indeed,
in July 2019, G7 Finance Ministers and Central Bank Governors agreed that possible stablecoins
initiatives must meet the highest regulatory standards, be subject to prudent supervision and
oversight and that possible regulatory gaps should, as a matter of priority, be assessed and
addressed. Accordingly, the Financial Stability Board is working on a global regulatory and
supervisory approach towards stablecoins. Developing shared public policy, regulatory and
supervisory goals and principles should help capture activities that fall outside traditional
regulatory boundaries. It should also help prevent any discrepancies at domestic levels that may
give rise to fragmentation and regulatory arbitrage which would be counterproductive for the
development of these new instruments themselves. These goals and principles should include
common requirements vis-à-vis GSC operators before they start their operations, such as clear
and proper risk management policies and means, regarding their stabilisation mechanisms, legal
certainty of users' redemption rights and potential claims on underlying reserve assets, and
regarding linkages and exposure between their core components and the other entities of the
financial system. In addition, there is a need to agree on adequate cross-border oversight
principles and schemes between authorities in charge of jurisdictions impacted by the potential
circulation of stablecoins. To that end, we could take inspiration and review existing standards
and principles for cross-border cooperation in the field of market infrastructures or AML-CFT.
- Thirdly, making concrete efforts - including live experimentations - to address
weaknesses of the current payment and settlement landscape
Adjusting the regulatory and oversight frameworks might not be enough as we have to make sure
stablecoins do not become a bad solution to a real problem. Our current financial system
order rests on multiple issuers of settlement assets linked to the anchor settlement
asset provided by central banks. In order to preserve the incentives and benefits for
innovation, efficiency and stability, central banks as issuers of the reference settlement
asset need to revisit and possibly adapt the conditions under which they make that
settlement asset available. In that perspective, central banks could, for instance, issue their
money in digital form, the so-called concept of Central Bank Digital Currency (CBDC). This might
be particularly appropriate for meeting settlement needs in central bank money between financial
intermediairies. Indeed, asset tokenization initiatives have proliferated among financial players,
with the the risk that such developments may lead to disorderly approaches and heterogeneous
adjustments of settlement processes, which are currently mainly handled through market
infrastructures. The Eurosystem, as a major provider of critical wholesale clearing and
settlement services in euro, should therefore be open to experimenting the conditions under
which it makes central bank money available as a settlement asset. To that end, we, at the
Banque de France, have started gaining experience with innovative solutions, including in
particular recourse to DLT. Experimentation is key in this area and this is why, as already
announced by Governor Villeroy de Galhau, the Banque de France will launch a call for projects
before the end of the first quarter of 2020. Indeed, we wish to work with industry innovators and
start running experiments rapidly to possibly integrate a "wholesale" CBDC into innovative
procedures for exchanging and settling tokenised financial assets.
Another contribution from central banks could be to help address one of the major failings of
the current payment systems which is cross-border retail payments. This is one of the
drivers of the development of crypto-assets such as stablecoins, and we believe we could help
identify and support other concrete, useful and possibly complementary solutions.
In conclusion, let me stress 4 points:
It is hard to anticipate the role that stablecoins and more generally crypto-assets might play
in the payment system of the future, especially since the features of these assets look set
to change considerably.
While it is clear that they offer opportunities to improve our payment systems, they can also
bring quite material risks which must be addressed. In that context, it is first and foremost
the responsibility of private sector entities to design arrangements which do not bring undue
risks to our payment systems.
Regulatory and oversight authorities also have an important role to play in order to ensure
that risk management requirements to be met are clear, comprehensive, coherent
acrossborders and complied with, while preserving the potential for technological innovation offered
by stablecoins.
Beyond contributing to the adjustment of the regulatory and oversight frameworks to address
these risks, central banks may make further contributions, notably by revisiting and possibly
adjusting the conditions under which they make central bank money available for settlement
purposes. To that end, we should keep an open-minded approach and develop an in-depth
understanding of innovations currently spreading across the financial sector, including
through experimentations. This is critical for our capacity to help deliver a sound, proper and
updated regulatory framework supporting innovation, and adequately mitigate their inherent
risks. This is also critical for our capacity to adapt the performance of the different roles we
play to fulfil our financial stability mandate and conduct efficient monetary policies.
Thank you for your attention.