Today the Banque de France published its second paper on wholesale CBDC, following a dozen central bank digital currency (CBDC) experiments. The two primary use cases for an interbank CBDC are for securities settlement on DLT systems and cross border payments. Based on its experience, the bank outlined three potential models.
While other European central banks suggest DLT systems could be linked to existing payment systems for settlement, the French central bank acknowledges that a wholesale CBDC would enable atomic settlement or delivery versus payment in which the cash and the security exchange simultaneously. This removes the reconciliation process – a key friction that DLT addresses.
The central bank makes a number of of policy and technical recommendations. A need for interoperability and standardisation stand out as essential requirements, both for cross border CBDCs and for adopting DLT in the securities markets.
In the last couple of months, the BIS has proposed its Unified Ledger concept in which banks and central banks transact on the same network. And the IMF has its similar XC concept focused on cross border payments. Both require interoperability and standardization as highlighted by the Banque de France.
“This is only the beginning of the journey; we contemplate that multiple wCBDC DLTs could coexist 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)” said Emmanuelle Assouan, Banque de France Director General of Financial Stability and Operations.
Three wholesale CBDC models
One of the conundrums for a central bank is how a wholesale CBDC system should work. The simplest option is an Interoperability Model, which functions similar to how DLTs interact today. This means the tokenized assets do not leave their ledgers, and the ownership changes within the ledger.
If a DLT securities network needs to settle using a wholesale CBDC, it would have an interoperabilty mechanism in which the wholesale CBDC transfers from one bank to another on the central bank ledger. This would be synchronized to happen simultaneously with the ownership change of the financial assets on the securities ledger.
A second model is the integration model in which there is a single shared network operated by the Eurosystem (the ECB and the EU central banks). In this case, the tokenized securities and the wholesale CBDC both exist on the same ledger for settlement purposes. The cash and securities change hands simultaneously on the same ledger. In reality, the tokenized securities might originally have been issued on a separate infrastructure. Hence, some interoperability will be required.
Thirdly is the distribution model, a hybrid of the first two. There is a shared network, independently operated. And each individual network integrates with the shared network. So the Eurosystem CBDC network, a foreign CBDC network or multiple financial market infrastructure DLTs would integrate with the shared network.
The Banque de France doesn’t see the models as mutually exclusive and acknowledges the interoperability solution is the simplest. But it also envisages the integration model being useful.
Meanwhile, the Eurosystem has formally launched work on the topic, with the Banque de France continuing its wholesale CBDC work, including for the EU’s DLT Pilot Regime. The central banks of Germany and Italy will focus on linking DLT networks to the existing payment systems.