Banque de France (BdF) has launched a new wave of experimentation in wholesale central bank digital currency (CBDC).
France’s central bank is at the forefront globally of research into wholesale CBDC – the lower-profile sibling of retail CBDC – and its governor, François Villeroy de Galhau, announced its next steps during a speech entitled ‘Central bank digital currency and bank intermediation in the digital age’ last week.
Villeroy described wholesale CBDCs, which are for interbank settlement, as “quasi-consensual, with strong use-cases” but as raising “little public interest”. Retail CBDCs, which are for public use and also known as ‘general purpose’ CBDCs, are – by contrast – “the focus of both public excitement and private questions,” he said.
Speaking at the Paris Europlace International Finance Forum on 12 July, he announced that “second phase” of the BdF’s “experimentations programme” would see “four or five” projects starting “this semester” (meaning the second half of 2022).
“We want to get closer to a viable prototype,” he said, adding that BdF wanted to “test it in practice with more private actors and more foreign central banks in the second half of 2022 and in 2023”.
Momentum has been spurred by the recent agreement of legislation for the European Union (EU)’s pilot regime for financial market infrastructures based on distributed-ledger technology (DLT). Villeroy said the BdF’s aimed to “stand ready to bring central bank money as a settlement asset as early as 2023”, with the pilot regime – which will mostly start applying next March – providing a regulatory framework “to support the financial asset tokenisation trend”.
Wholesale CBDC: ‘two critical use cases’
BdF has to date undertaken nine experiments, including cross-border work, in the wholesale CBDC space. These include an experiment in partnership with IZNES, a European fund record-keeping platform based on blockchain; and Project Jura, a ‘quasi-live’ trial of cross-border transactions working with the Swiss National Bank (SNB), Bank for International Settlements (BIS) and six private companies.
Villeroy described these projects as completing the ‘first phase’ of the BdF’s CBDC experimentation, and that the central bank had identified “two critical use cases for improving the payments ecosystem”: first, the tokenisation of securities; second, that a wholesale CBDC could enhance cross-border and cross-currency settlements.
Its experiments had enabled the BdF to develop “direct technical expertise”, he said, including “two key innovative assets born in the Banque de France”: a proprietary distributed-ledger technology (DLT) called DL3S; and an automated market maker (AMM) platform “inspired from the DeFi [decentralised finance] markets”.
DL3S has, he said, been designed by the BdF to meet the needs and expectations of market participants as a “permissioned blockchain with efficient delivery and settlement services, using CBDC”, he said.
The AMM platform, meanwhile, could “serve as the basis of a multi-CBDC platform where different central banks come together to enable fast, automated and transparent settlement across currencies.”
Villeroy went on to address what he described as the “key outstanding issue of the articulation of a CBDC with existing [financial market] infrastructures”, such as the ‘TARGET’ services operated by the Eurosystem (the European Central Bank and the central banks of the 19 European Union EU member states that use the euro).
“Both must be made interoperable,” he said. “On the one hand, distributed ledger technologies are still not mature enough to handle large volumes of transactions, and therefore will not replace conventional systems from one day to another; they will rather complement them. Centralised and distributed systems will thus have to coexist securely and efficiently. On the other hand, we must make a CBDC available on these infrastructures to match market demand for tokens, so that our settlement asset is not substituted by private assets – which would be riskier.”
Retail CBDC: who does what?
In terms of retail CBDC Villeroy also gave his opinion on how a potential digital euro should operate, saying that “as many functions as possible” related to the operation of a eurozone CBDC should be delegated to intermediaries.
The European Central Bank (ECB) is currently about 10 months in to its two-year digital euro ‘investigation phase’.
“The Eurosystem should entrust banks with the distribution of digital euros to final users, while setting technical, functional and commercial rules like for example the branding, logo and fee structure,” Villeroy told the Paris audience. “We would thus build on their experience as intermediaries to offer means of payment to end users and develop value-added services. The Eurosystem could also outsource parts of the settlement, such as recording or validation, to intermediaries.”
“It is clear that some functions should remain under the sole responsibility of intermediaries,” he added. “In particular, I believe that the Eurosystem should not have the role of managing digital euro holdings: the Banque de France closed its last private customer accounts over 20 years ago, and does not intend to reopen any.”
“Customer relationship management is best handled by financial intermediaries, as they have the experience in this field,” he continued. “They would also ensure compliance with the related regulatory requirements, including KYC [know-your-customer] and AML/CFT [anti-money laundering and combating the financing of terrorism]. Such a design would allow them to preserve the role of financial intermediaries in the retail payment system and would ensure the high level of privacy required by the public.”
Villeroy also mentioned that a CBDC working group had “just” been created within France’s National Cashless Payments Committee (CNPS – Comité national des paiements scripturaux – chaired by the BdF).
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‘CBDCs effective for cross-border wholesale transactions, Franco-Swiss trial concludes’ – our news story (8 December 2021) on the conclusion of the Project Jura ‘quasi-live’ trial undertaken by the BdF and Swiss National Bank (SNB), working alongside BIS and in collaboration with six private companies (the trial took place over three days during November 2021)
‘French and Swiss central banks trial cross-border CBDC’ – our news story (14 June 2021) on Project Jura’s launch
‘Banque de France: CBDC blockchain experiment is ‘significant step forward’” – our news story (26 January 2021) on the BdF’s completion of a pilot using CBDC for interbank settlement (the pilot alongside IZNES)