INTRODUCTION :
The Banque de France has recently published a progress report on its experimentation with the creation of a "digital central bank money" (DCBM).
Before going into further details about its results, it is appropriate to come back to the reasons for such an experimentation, as well as the modalities of its implementation.
Indeed, the announcement of the launch of this experimentation has had a large media impact in France and in the cryptographic sector.
This will make it possible to better define the Banque de France's political will and to understand why this experimentation is a relative but important success when it is part of the European Union's general reflection on its digital transformation.
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WHY A BANK OF FRANCE EXPERIMENTATION ?
The origin of this experimentation is to be found in the Banque de France press release published on 4 December 2019, which includes the speech by François VILLEROY DE GALHEU during a day organised by the ACPR on the theme "Digital central bank money and innovative payments".
This speech essentially shows a consensus on one observation: the proliferation of private initiatives in the field of payments is generating significant progress but also a number of challenges for public institutions.
Faced with these initiatives, French financial institutions wish to both "speed up payment solutions and consider an MDBC".
At this stage, the objective of conducting an experiment on a "digital central bank money" (DCBM) has already been set.
This action is intended to contribute to the Eurosystem's action, of which the study of a possible "e-euro" should be one of the next subjects.
To allow for experimentation, the organisation of the Banque de France is modified (the DSPM (Payment Supervision and Market Infrastructures Directorate) becomes the Directorate for Infrastructures, Innovation and Payments (DIIP), which is extended to all innovations in payments, infrastructures and central bank digital money. It is also planned that the Banque de France's expertise will be strengthened by the contribution of private actors.
From this stage, three different but non-exclusive objectives are being pursued:
To preserve confidence in the monetary system of states whose cash use is in sharp decline (such as Sweden) ;
Efficiency gains and reduction of costs linked to the tokenisation of central currencies (an objective also pursued by JP Morgan's JPM Corner project);
To have a powerful lever for asserting the monetary sovereignty of the European Union states in the face of private initiatives (a goal shared by China with its Digital Currency Electronic Payment (DCEP) project.
HOW THE EXPERIMENTATION WORK ?
DCBM Form
This is an important issue since the expectations of the general public differ significantly from those of financial institutions (this difference would lie in a difference in the digital maturity of individuals with respect to financial institutions).
It is therefore proposed to split the experiment into two phases :
- one intended for payments between actors in the financial sector (so-called "wholesale" money) using the blockchain and all its possibilities, in particular the availability of "smart contracts" ;
- the other for the public (retail money), which is simpler and better able to process mass transactions.
Experimental study of the positive and negative externalities of the use of a CBDM.
The issuance of a CBDM can generate significant positive externalities by increasing productivity in the financial sector and beyond the economy, and by supporting confidence in the currency and the financial system. At the same time, however, we need to consider the potentially negative externalities that a CBM could have on bank liquidity, profitability, and intermediation. The risks associated with large and/or sudden conversions of bank deposits to the central bank money will, as such, need to be strictly studied.
Contribution of private actors
The Banque de France issued a call for applications, which closed on 7 May 2020. This call for applications, initially closed on 20 April 2020, was extended due to the large number of candidates and questions relating to the experiment.
WHAT IS THE STATUS OF THE EXPERIMENTATION ?
In a press release dated 20 May 2020, the Banque de France reports on the "Progress of the central bank digital money experimentation initiative launched by the Banque de France".
It announces that it "has just successfully tested the use of a blockchain developed by its teams to experiment with the use of digital central bank money to settle an issue of digital financial securities by Societe Generale on 14 May".
AND THEN ?
In the coming weeks, the Banque de France will conduct further experiments in cooperation with other actors, based on the applications received in response to the call for applications opened on 27 March 2020 to test the use of a digital euro central bank euro in interbank settlements. The high number of applications reflects the interest of the banking and financial industry in these experiments and the dynamism of the Paris financial centre in terms of technological innovation in the financial sector.
It is also likely that an experiment on a retail currency will also be launched.
CONCLUSION
The Banque de France's experimentation was necessary in view of the European Union's monetary sovereignty, which was being challenged by the competition from other state currencies, the classic crypto-currencies (Bitcoin, Ethereum, Libra project) and the emergence of stablecoins indexed on the former (Thether, Dai, etc.).
The results of the experimentation conducted by the Banque de France will compete with those of other studies conducted by the states of the European Union, which will serve as a basis for the creation of a public euro-cryptocurrency at the European level.
By relying on the sectors concerned by a broad call for applications, the experiment seems to be on the way to becoming an important part of the European debate.
However, these results are to be put into perspective in that it is on a small scale: only Société Générale has been able to issue these securities, reserved for the wholesale trade and not for everyday payments.
The fact remains that this is an important step in the evolution of the still nascent cryptographic sector in view of its potential.
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This is very thorough and informative article. Kudos and cheers for the progress of the bank legislation.