Next year France intends to start testing a Central Bank Digital Currency (CBDC) targeted at institutions. Yesterday Les Echos reported that the Governor of the Banque de France, François Villeroy de Galhau, announced the timescale as the first quarter of 2020. However, these are just tests at this stage.
In another speech on November 21st, Denis Beau, the First Deputy Governor was more specific. “One possibility often mentioned would be for us to issue a central bank digital currency to support wholesale clearing and settlement services on a decentralised basis using DLT,” said Beau referring to institutional payments for securities and the like.
“We, at the Banque de France, are therefore quite open for experiments in that direction, together with the ECB [European Central Bank] and other central banks of the Eurosystem, in particular with regard to a wholesale Central Bank Digital Currency.”
The ECB has also been experimenting, including with the Bank of Japan.
Governor Villeroy de Galhau said: “I see a certain interest to move quickly on the issue of at least a wholesale MDBC to be the first issuer at the international level and thus derive the benefits reserved for a reference MDBC”. This echos comments by the head of China’s CBDC project who referred to a race.
Governor Villeroy de Galhau acknowledged that Facebook’s Libra announcement was a trigger for the activity. And another impetus will be the Utility Settlement Coin from Fnality, which also targets institutional payments using money deposited at central banks.
Six weeks ago, the Banque de France published a working paper entitled “Central Bank Digital Currency:One, Two or None?”
In the document, the author Christian Pfister, states that the views are his own. He observes that a wholesale CBDC is likely to leverage blockchain or distributed ledger technology (DLT) and lead to the development of an intraday market. This, in turn, would require real-time monetary policy.
Ledger Insights already sees activity in the intraday treasury market for banks. Just this week HQLAX and the Deutsche Börse went into production with a platform for managing collateral and securities lending with one of the aims being to enable intraday trading. The solution services the world’s biggest banks such as Commerzbank, Credit Suisse and UBS which are live and CIBC, Citi, Goldman Sachs and ING which are being onboarded. Another example is Finteum which is exploring intraday FX swaps.
Meanwhile, the French working paper notes that banks such as JP Morgan are exploring their own stable coins such as a JPM Coin. No matter how big the bank, any private coin carries risks. The paper states: “Issuing a CBDC would be the only way to allow the circulation of central bank money on a blockchain and would make a perfectly safe and liquid payment instrument available on it.”
It continues (in brackets): “The alternative which would consist in conducting all transactions in the blockchain and then unwinding them on the accounts of the institutions at the central bank for final settlement, would also be possible, but more cumbersome, and would let a credit risk remain in the blockchain.” Fnality may argue that the Utility Settlement Coin offers a middle ground.
Turning to a retail CBDC, Pfister believes the technology options for a retail currency are not limited to blockchain, and it’s more likely to include intermediaries. The paper explores some of the risks involved with a retail CBDC and how these can be addressed.
The article has been updated adding details from the CBDC Working Paper.