Denis Beau: The role of cryptoassets in the payment system
Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Official Monetary
and Financial Institutions Forum (OMFIF) Meeting, London, 15 October 2019.
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Ladies and gentlemen,
The payment landscape is currently dominated by a bank-based ecosystem, an
interchangeable use at par, of commercial bank and central bank money as settlement
assets, and an anchor role for central bank money which is the sole settlement asset
with legal tender status. It is certainly an understatement to say that this landscape may be
significantly altered given technological developments and changes in consumer preferences
underway. As these developments and changes unfold, both the « front-end » arrangements that
ensure the interaction between the payer or payee and the payment service provider, to initiate or
receive payments, and the « back-end » arrangements that transfer information and funds
between the payer and the payee, will change. With the emergence of so called
« crypto assets » like the bitcoin and so called « stablecoins », we may also see new
settlement assets develop which may compete against and possibly, according to their
promoters, replace commercial and central bank money as settlement assets at the
center of our payment systems.
For the time being, in spite of their rapidly growing number and variety, crypto-assets only
account for a marginal share of assets held by economic agents. In October 2019, according to
CoinMarketCap, total outstanding crypto-assets represented EUR 205 billion globally; in
comparison, the euro area's M3 monetary aggregate amounted to EUR 12.5 trillion
in August 2019.
In addition, the diversity of views on the contributions that crypto-assets can make to the
Some see
efficiency and safety of our payment systems mirrors the one in their forms.
crypto-assets as a disruptive innovation poised to radically change the way our monetary and
financial system operates, and changing it for the better. Others believe that for the time being
they do not provide a new and attractive answer to the classical trilemma payments solutions
face between low cost, high execution speed and low risk, and would change the way our
monetary and financial system operates for the worse.
To share with you a few thoughts on this debate, speaking from the perspective of a central
banker and a supervisor mindful of the benefit of innovations but also of the risks they could bring
to financial and monetary stability, I will focus my remarks on:
1- whether and how crypto-assets can contribute to improve our payment systems,
2- the public policy challenges they raise, in particular for central banks, and how to address
them.
I - Crypto-assets and the future of payment systems
1- In the payment instrument landscape, there is currently a twin trend: the share of cash
payments dwindles while cashless payments undergo a transformation driven by
behavioral changes and technological innovation. Shifts in consumption patterns, such as
the growth of e-commerce, are fueling a steady decline in the use of cash in transactions, while
the use of electronic payment instruments and systems is increasing, rooted in the current surge
in global digitalization, along with the development of internet-based technologies and
multifunctional technological devices.
However, the decline of cash payments needs to be put into context because, if the downwards
trend is undisputable - the volume of banknotes returned by the public to cash processing firms
fell by over 10% between 2012 and 2017, -banknotes still dominate face-to-face
transactionsparticularly small-value ones. Banknotes remain the main payment instrument in Europe by
number of transactions, accounting for 79% of the latter in the euro area and 68% in France
(54% and 28% respectively in value).
The increase in the use of electronic payment instruments and systems is developing along
four different pathways.
First, the sophistication of internet technologies and devices for transactions: the number
of channels used to initiate and accept payments has increased significantly. Contactless
payments and mobile payments are some examples.
Second, the availability of payment services at any time: 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. Instant payments in Europe are for example designed to be executed in less than
15 seconds compared to the duration of 24H to 48H for traditional payment orders. This
improvement in the functioning of payment systems represents a huge step for liquidity
circulation.
Third, a broader range of participants: 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 that the increasingly global nature of the market is raising
sovereignty issues, including those relating to the control of data when the providers are located
outside the region or jurisdiction where they offer their services.
Last, the crave for blockchain technology: all around the world, market participants and big
techs have launched or are preparing to launch new projects for tokens designed to serve as
means of payment or settlement using the blockchain technology. We all have in mind
firstgeneration crypto-assets like Bitcoin and Ethereum, but there are now many others coming or
foreseen, like the JP Morgan Coin, the UBS' Utility Settlement Coin or The Facebook' Libra.
2- The development of crypto-assets are part of the innovations fueled by these underlying trends
affecting payment instruments and systems, combining the search for anonymity, management
of non-intermediated peer-to-peer payments and the use of entirely web-based technologies. But
they also have their specificities. Actually, they have unique financial, monetary and
technical features which set them apart from the currencies and payment instruments
issued by financial institutions and central banks. Regarding the first wave of crypto-assets
which have been brought to the market, they are not a claim on any natural or legal entity, they do
not have a guaranteed fixed exchange rate with the currency issued by the central bank and they
rely extensively for their circulation on blockchain, a distributed ledger technology system using
cryptographic techniques. A second wave might develop in the form of « stablecoin » with a
potentially global reach, some of which sponsored by large technology or financial firms, whose
distinctive feature, beyond their potentially large size and reach, is that they seek to stabilize their
value by linking it to an asset or a pool of assets.
What are the specific benefits of such blockchain-based initiatives?
First,
the blockchain technology and more broadly the DLT could help answer market's
needs and demands. There is in particular a strong demand for quick and safe cross-border
payment solutions, available 24h/24, enabling smooth exchanges. There are a number of local
instant payment solutions already in place in a number of countries in particular in Europe,
available 24/7, settling retail payment orders up to 15 000 euros in less than 15 seconds. A
certain number of initiatives follow the European Payment Council SCT scheme. The
Eurosystem has even launched its own service, under the name of TIPS to help ensure a
panEuropean reach.
However, these solutions are costly for end users and, at the global level, we are far from having
a network (or set of interconnected networks) that would support quick and cheap transfers of
funds.
Second, and in close relation to the previous point, the DLT could help remedy the current
limits of the existing wholesale market infrastructures. Those wholesale infrastructures also
have various shortcomings. Since RTGS are not interoperable, correspondent banking is often
the only solution to transfer fiat money across borders. However, correspondent banking is
costly, and the perimeter of the AML/CTF and KYC checks is in some cases uncertain for the
counterparties of a payment order. Furthermore, for security reasons, the access to payment
systems is limited to a certain type of entities (mainly credit institutions, investment firms,
ancillary systems, etc.). Finally, cross-border payments lack traceability. The DLT could also
help improve current aspects of wholesale clearing and settlement mechanisms and facilitate in
particular gross and simultaneous Delivery-versus-Payment processes, cross currency
settlements and resilience and recovery from operational incidents.
If the issues at stake are not the same in developed as in developing countries, the objectives of
crypto-assets, and in particular stablecoins, are the same everywhere. They seek to shortcut
central authorities and more generally financial intermediaries. However, they bring their own
problems.
3- Indeed, it is quite clear that
crypto-assets undergoing technical and economic trials bring
about not only opportunities to improve our payment systems but also material risks
both from an efficiency
which on the contrary might weaken them if unaddressed,
perspective and a safety perspective through the introduction of new sources of
fragmentation, instability and fraud.
As many central bankers have pointed out,
today's crypto-assets do not satisfactorily offer
the qualities expected from a settlement asset to be used interchangeably with
commercial bank money and central bank money, let alone to displace central bank
money as the central reference of value, as the privileged settlement asset for
wholesale transactions and as the last recourse settlement asset given its legal tender
status. The reasons for this assessment are well known and documented and boil down to
stressing that there are misnamed as « currencies » for three reasons:
First, their value fluctuates enormously, preventing them from being used as units of account.
For instance, the value of Bitcoin (not however representative of all crypto-assets) went up to
more than 19 300 euros in December 2017 and has since fallen down to 7400 euros in
September this year. And stablecoins represent an imperfect improvement in this field: their
value aims to be relatively stable based on backed assets, but in fact fluctuates, in particular if
they are not backed on safe assets. As a result, very few prices are denominated in
cryptoassets and not many large brick-and-mortar or online retailers accept bitcoin for example,
although there are some exceptions [i.e. France's second largest flash
showroomprivé.com,
sale web retailer, which has accepted bitcoins since 2014].
Second, as intermediaries in exchanges, crypto-assets are far less effective than a
settlement asset 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 (for instance, the redemption fee on Tether is 3%), and (iii) they offer no
guarantee of a refund in the event of fraud.
Third, the fact that they have no intrinsic value and that they offer no guarantee that they can be
converted at par upon demand with commercial bank money or central bank money means that
they cannot be used to create trustworthy stores of value.
In addition, crypto-assets « front end » and « back-end » payment arrangements are
significantly exposed to risks of various nature, including legal, financial, operational and
compliance risk with money laundering and terrorist financing, consumer and investor
protection, which need to be seriously addressed if they are not to become the « weak links » in
our payment systems, with the risk that they undermine the safety of the whole payment chain.
From that perspective, stablecoins of potential large size and reach may pose additional
challenges of system-wide importance, to competition policy, financial and monetary
stability.
II- Public policy challenges, in particular for central banks, and how to address them.
1- In that context, 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. This is all the more true for stablecoins which raise the most serious issues and
deserve attention and responses before they possibly meet a significant market demand.
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.
and the one that has so far been the preferred response in Europe and France to
A third option,
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
- Second, preserve the potential for technological innovation offered by
cryptoassets
To that end, should we reconsider or reaffirm the two current core features of our payment
systems (see: the role of central bank money in payment systems-CPSS 2003)? Namely:
- the coexistence and competition of central bank money and private money (mainly so far
commercial bank money) as settlement assets
- the anchor role of central bank money
My answer to this question would be to reaffirm and therefore preserve those core features
which have served well the public interest of financial and monetary stability. But this
does not mean that we should aim for the status quo both in terms of regulatory and
oversight frameworks and in terms of services that central banks should offer in providing
central bank money as a settlement asset in payment systems.
2-
A number of risks to which crypto-assets payment arrangements are exposed are
familiar and in this respect, existing regulatory and oversight frameworks only require to
To that end, three key issues to be considered are the legal
be adapted to address them.
qualification of crypto- assets, venues used to exchange them and the conditions under which a
crypto-asset can be exchanged into another one, in commercial bank money or in central bank
money. France has already moved into that direction with the adoption of a regulatory regime for
blockchains, tokens and ICOs. After a Blockchain Ordinance authorizing some specific security
tokens to be seen as securities when they are not registered in a central security depository,
France adopted in May this year a legislation on crypto-assets, referred to as the PACTE bill. The
bill includes henceforth provisions on blockchains, tokens, ICOs and providers of crypto-asset
services.
However,
adaptation of local national regimes should fit into a larger regulatory
framework to be adopted at global level. There is indeed a need for overall consistency to
prevent regulatory arbitrage under the "same activities, same risks, same rules" principle, and
also to address risks that fall outside existing frameworks, including risks for fair competition and
for transmission of monetary policy. 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, at global level, several
groups are working on a global regulatory and supervisory approach towards crypto-assets and
a G7 working group is finalizing a report investigating specifically the impact of global stable
coins, which should be published shortly.
3- But adapting the regulatory framework might not be enough. To preserve the advantages of
multiple issuers of settlement assets in providing innovative, efficient and safe means of
payment, central banks as issuers of the reference settlement asset may contribute
further in revisiting and improving the conditions under which they make available that
settlement asset.
In that perspective, a possibility regularly mentioned is that central banks issue their money in
digital form, the so-called concept of Central Bank Digital Currency (CBDC). It is important here
to draw a distinction between a retail CBDC, accessible to the general public, and a wholesale
CBDC, accessible only to financial intermediaries.
As regards retail CBDC, different motivations to introduce it can be considered.
One motivation could be for instance the need to cope with a significant demand for digital
payment solutions and avoid that the supply be ensured only by private payment structures (e.g.
Libra) or a non-euro area CBDC, which may achieve significant market power, thus posing risks
to security and financial stability. Another motivation could be the political will to ensure the
accessibility of central bank money for the general public, in particular in countries where the use
of cash in payments is declining. There may be other reasons.
But my feeling is that, at this stage,
the "business case" for pushing a retail CBDC at the
scale of the Euro area is somehow weak. I don't believe anyhow that such an initiative should
be conceived as a mean to counterbalance private initiatives such as Libra, keeping also in mind
that the weaknesses the latter intends to address in cross-border payments may not be more
easily handled by such CBDC. Furthermore, the macroeconomic implications of the issuance of
a CBDC must be sufficiently well understood and anticipated before the introduction of CBDC for
retail purposes can be considered.
Motivations for a wholesale CBDC are of a different nature. We already begin to observe a
tokenization of financial assets (securities or means of settlement) exchanged between financial
actors. The risk there is that such a trend leads to disorderly approaches and heterogeneous
adaptations of market infrastructures, in particular when it comes to the modalities of settlement.
Several initiatives or projects are in effect considered by the industry in the post-trade area,
pointing to the role central banks could play in this regard, as they have done in the past. Against
this background, the potential role of a wholesale CBDC is in my view worth considering if
not desirable.
But all in all, I would say that, whatever the final orientations taken, we shouldn't refrain from
experimenting the different forms of CBDC.
Another contribution for central banks could be to help address one the major failings of the
current payment systems which is cross-border retail payments, which is one of the drivers
of the development of crypto-assets.
One solution to the weaknesses of private initiatives in the field of cross-border payments could
be to interconnect these systems. It is technically and legally feasible for a given area, for
example, in the euro zone. However, at the global scale, between systems of different areas, it is
more complex, in particular when several currencies are involved.
Another domain where progress can be made is promoting the adoption of common international
industry standards facilitating the interoperability of payment systems at global scale. In
particular, it would be necessary to foster the harmonization of domestic and international
regulations with respect to AML/CTF, KYC. Developing support programs for countries with
underdeveloped payment infrastructures could also enhance financial inclusion by strengthening
the development of local domestic and cross-border payment systems.
We need to work further on these important issues - and will do so.
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. While it is clear that crypto-assets undergoing technical and economic
trials bring about opportunities to improve our payment systems, they can also bring material
risks to our payment systems which, if unaddressed, might introduce new sources of
fragmentation, instability and fraud. In that context, beyond contributing to the adaptation of the
regulatory framework to address those risks, central banks may contribute further in revisiting
and possibly improving the conditions under which they make available central bank money for
settlement purposes. The intrinsically digital and global nature of crypto-assets means however
that a coordinated international approach is necessary to be effective in addressing the issues
raised by crypto-assets. The work currently underway by the G7 and also the FSB, under this
aegis of the G20, should therefore be seen as important and promising.
Thank you for your attention.