Yesterday the Banque de France announced plans for an experiment to help with clearing and settlement of tokenized digital assets. To that end, it is calling for participants in a wholesale central bank digital currency (CBDC) test for interbank settlement.
The announcement doesn’t come as a surprise because the Bank’s Governor Villeroy de Galhau previously expressed a desire for the European Central Bank (ECB) to be the first to issue a wholesale CBDC.
“I see a certain interest to move quickly on the issue of at least a wholesale MDBC (French for CBDC) to be the first issuer at the international level and thus derive the benefits reserved for a reference MDBC,” the Governor told Le Echos last year.
The Bank says the experiments will not explore replacing cash or central bank deposits held by commercial banks. Instead, it wants to see how payment systems could be more efficient in a world of digital assets, including security tokens.
Goals include to see how traditional settlement could be enhanced using CBDC and to explore how CBDC could encourage innovation. But most importantly, it wants to look at the potential effects on financial stability, monetary policy and the regulatory environment.
Only ten applications will be selected to participate, although potentially, these could be a consortium and each group can offer multiple use cases. The deadline for applications is 15 May.
While the most recent announcement is agnostic about technology, a paper released by the Bank last year entitled “Central Bank Digital Currency: One, Two or None?” acknowledged that a wholesale CBDC is likely to leverage blockchain or distributed ledger technology (DLT).
The paper outlined the rationale for putting a CBDC on a blockchain: “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.”
An alternative to CBDC is for banks to club together to create an institutional stablecoin backed by deposits at central bank money. That’s what Fnality is doing with the Utility Settlement Coin.
A couple of years ago, most CBDC discussions were focused on wholesale CBDC. But since the unveiling of Facebook’s Libra last year, the focus has switched to retail or consumer CBDC. The European Central Bank acknowledged it is exploring both.
Some of the wholesale experiments include Canada’s Project Jasper, the Swiss National Bank’s tests with the SIX Digital Exchange, and Project Stella, a collaboration between the ECB and Bank of Japan.
Six central banks have recently clubbed together for CBDC research, including ECB and the Bank of Japan, as well as the central banks of Canada, England, Sweden, Switzerland and the Bank for International Settlements (BIS).