A report sharing lessons learned from wholesale central bank digital currency (CBDC) experiments that have involved the use of distributed-ledger technology (DLT) has been published by France’s central bank.
Wholesale CBDC refers to the settlement of interbank transfers and related wholesale transactions in central bank reserves. It is the lower-profile sibling of retail CBDC, which is a CBDC for the general population.
The Paris-headquartered authority’s report covers both waves of its multi-stage wholesale CBDC programme, which has to date spanned 12 experiments in total, and presents eight high-level ‘key takeaways’ – four each relating to policy and technical considerations.
The BdF has been experimenting with DLTs across use cases focused on two principal fields: the tokenisation of finance and improving cross-border transactions. Three models addressing ‘key aspects’ of wholesale CBDC implementation – interoperability (with other financial market infrastructures), integration and distribution – have been used, with each providing different capabilities and functionalities ‘so they can be complementary rather than exclusive’.
The BdF is feeding its findings into a Eurosystem work programme, announced in April, focused on how wholesale financial transactions recorded on DLT platforms could be settled in central bank money. The Eurosystem comprises the European Central Bank (ECB) and the national central banks of the 20 European Union (EU) member states whose currency is the euro (so, including the BdF).
RELATED ARTICLE Banque de France kicks off new wave of wholesale CBDC experiments – an article (21 July 2022) on the BdF’s governor, François Villeroy de Galhau, announcing details of the second phase of the BdF’s ‘experimentations programme’
Eight ‘key takeaways’
In respect of policy-related conclusions, the 48-page ‘Wholesale CBDC experiments with the Banque de France – New insights and key takeaways’ report starts by making an overarching point: that issuing a wholesale CBDC as a complement to a retail CBDC would ‘contribute to the singleness of money’ by ensuring the anchoring value of central bank money for both retail and wholesale payments, and convertibility between the different forms of private money.
Second, it states that international co-operation and public-private partnerships ‘remain a priority to converge towards a more globally inclusive and interoperable wholesale CBDC framework’.
Third, interoperability should be prioritised ‘to ensure seamless data and transaction exchange between DLT-based and conventional infrastructures’; and, fourth, it points out that climate-related concerns ‘highlight the need to develop energy-efficient solutions’ in wholesale CBDCs’ design.
In respect of technical key messages, the BdF again starts with an overarching point, stating that technological advancements related to DLT ‘offer various means for central banks to maintain control over their wholesale CBDC’.
Second, and more specifically, it advises that central banks ‘should remain technologically neutral while actively contributing to the adoption of common standards’.
Third, it points out that DLT ‘could enhance the straight-through processing of trade and post-trade activities and contribute to overall financial stability’; and fourth (and, again, more broadly), it urges that ‘continued experiments at domestic and international level are essential to advance our analysis and our efforts to develop an operational framework through a learning-by-doing approach’.
RELATED ARTICLE ‘CBDCs effective for cross-border wholesale transactions, Franco-Swiss trial concludes’ – our news story (8 December 2021) on the conclusion of ‘Project Jura’, a ‘quasi-live’ trial undertaken by the BdF and Swiss National Bank (SNB), working alongside the Bank for International Settlements (BIS) and in collaboration with six private companies
‘Only the beginning of the journey’
As part of its experimentation the BdF ‘proof-tested’ its proprietary DL3S (‘Distributed Ledger for Securities Settlement System’) DLT to assess its capabilities and adaptability to various use cases.
BdF also tested the use of an automated market maker (AMM) in ‘Project Mariana’, an initiative involving the Bank for International Settlements (BIS) Innovation Hub, Monetary Authority of Singapore and Swiss National Bank (a 19-page ‘Project Mariana – interim report’ was published in June). AMM enables the exchange and settlement of two or more digital assets to be performed automatically with a smart contract.
The BdF’s director-general of financial stability and operations, Emmanuelle Assouan, said the BdF was “happy to provide our DL3S DLT solution in the context of the exploratory work announced by the Eurosystem for settling tokenised transactions using central bank money”. She added that the BdF was “also ready to explore other solutions to facilitate the interaction between TARGET Services and DLT platform.” TARGET Services are a number of services developed and operated by the Eurosystem, including T2 for settling payments and T2S for settling securities.
In respect of cross-border payments, the BdF described its work as ‘complementing’ work conducted by BIS and, separately, the International Monetary Fund (IMF). For example, BIS in June presented details of a new type of financial infrastructure – a unified ledger – that it described as having the potential to ‘radically’ improve the global financial system.
“This is only the beginning of the journey,” Assouan said. “We contemplate that multiple wCBDC [wholesale CBDCs] DLTs could co-exist on a global scale. It is therefore key to explore their interoperability from the outset of their design, to avoid replicating hurdles experienced on interlinking existing Real-Time Gross Settlement Systems (RTGS)”.
Banque de France: CBDC blockchain experiment is ‘significant step forward’ – a news story (26 January 2021) on a BdF experiment undertaken in partnership with IZNES, a European fund record-keeping platform based on blockchain
Eurosystem’s DLT progress
The ECB announced on 28 April that the Eurosystem was to explore how wholesale financial transactions recorded on DLT platforms could be settled in central bank money, specifically looking to ‘consolidate and further develop’ individual Eurosystem central banks’ efforts; and ‘gain insight into how different solutions could facilitate interaction between TARGET Services and DLT platforms’.
A ‘New Technologies for Wholesale Settlement Contact Group’, chaired by the ECB’s market innovation and integration division head Holger Neuhaus, has since been set up to ‘provide expert input and keep the Eurosystem abreast of advances in the use of DLT and other new technologies in wholesale financial markets’. The group – whose membership largely comprises representatives from major banks and financial services trade associations, as well as national central banks – held its first meeting on 21 June.
The Frankfurt-based ECB described the group’s work as ‘part of the Eurosystem’s broader efforts to ensure that developments in central bank money keep pace with and contribute to digital innovation in wholesale and retail payments, and that central bank money remains a monetary anchor that supports the stability, integration and efficiency of the European financial system and payments system’.
In a speech one year ago the BdF’s governor, François Villeroy de Galhau, described wholesale CBDCs as ‘quasi-consensual, with strong use-cases’ but as raising ‘little public interest’ (while retail CBDCs are ‘the focus of both public excitement and private questions’). Momentum in respect of the former has since been given a fillip by the EU’s regulation on a pilot regime for market infrastructures based on DLT, which began applying on 23 March 2023.
France’s central bank also published a ‘Banque de France wholesale CBDC experiments report’ in November 2021.
FURTHER READING
Global Government Fintech’s ‘Blockchain’ and ‘Digital Currencies’ topic sections
CBDC activity grows globally: BIS central banks survey – an article (10 July 2023) on ‘Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto’ (a survey of 86 central banks)
