France’s central banker wants to test a central bank-issued digital currency by 2020. Along the way, he’s making a play for French leadership of the European economy and the creation of an e-euro.
Blockchain technology is likely to play a role in that scheme, Banque de France Governor François Villeroy de Galhau said in a Dec. 4 speech on payment innovation. To that end, he plans to create a new department, the Infrastructure, Innovation and Payments Directorate (DIIP).
The DIIP’s goal is to “start running experiments rapidly and [to] launch a call for projects before the end of the first quarter of 2020,” said Villeroy de Galhau.
However, that cryptocurrency will probably not be a “retail” digital currency the general public will see or even know about, he said.
Eventually, two different CBDCs “could exist side by side,” he suggested.
One would be a “a so-called ‘wholesale’ currency for payments between financial sector players,” the banker said. That would use “blockchain technology and all its possibilities, notably smart contracts.”
The general public’s digital currency might not use blockchain technology, added Villeroy de Galhau added. It would be “simpler and better suited to retail transactions,” he said.
Vive la France
Calling CBDCs “the future of the international monetary and financial system,” Villeroy de Galhau staked a claim to French fiscal leadership of the E.U.
The Banque de France, its governor said, “fully intends to guide these developments, as it has done for more than 200 years, and will adapt the way it operates to this change” in the nature of payments.
He also announced the Banque de France executive who will spearhead the speedy creation of that CBDC.
Nathalie Aufauvre, 59, is director general of financial stability and operations. She is a 25-year veteran of the Banque de France and the European Central Bank.
According to the English-language copy of Villeroy de Galhau’s speech provided by the Banque de France, Aufauvre will lead the DIIP in working “with industry innovators from the private sector” on the new central bank digital currency (CBDC).
E-euro is next
The French CBDC is also intended to lead the European Union towards a broader digital currency—an “e-euro”—Villeroy de Galhau said.
He’s not the only French official with that goal. On Sept. 12, French Finance Minister Bruno Le Maire and European Central Bank (ECB) board member Benoît Coeure called for an EU digital currency. And within the last few days, French ECB President Christine Lagarde brought up the idea of an e-euro in the European Parliament, said Villeroy de Galhau.
“I think there would be some advantage in moving rapidly to issue at least a wholesale CBDC, as we would be the first such issuer in the world and would thus reap the benefits of having a benchmark CBDC,” Villeroy de Galhau added.
Of course, he’d have to beat China, which has said it is close to launching its own CBDC.
American tech giants threaten Europe
There are two major benefits a CBDC could bring both France and Europe, said Villeroy de Galhau. One is cutting the time, costs, and middlemen needed for those back-end, “wholesale” financial transactions like payment settlement.
Another is dealing with the declining use of cash in favor of private digital payment platforms like Apple Pay and Google Pay in the U.S., and Tencent’s WeChat Pay and Alibaba’s Alipay in China. In both Sweden and China hard cash is rapidly disappearing, he noted. Others will follow, he predicted.
“There is no denying that, today, the ‘center of gravity’ for payments is shifting towards these new players, especially the big tech [firms],” Villeroy de Galhau said.
This is a threat to traditional bank’s business model, but it could also be a “threat to European sovereignty,” said Villeroy de Galhau. “[T]he infrastructures, knowledge and technologies underlying it are largely owned by non-European corporations.”
He pointed to Facebook’s Libra stablecoin proposal. The fear that the social media giant’s 2.7 billion global customers could quickly make Libra a global digital currency outside of the control of governments pushed cryptocurrencies to the top of the world’s financial and political agenda in the first place.
“[A] CBDC would give us a powerful lever with which to assert our sovereignty in the face of private-sector initiatives such as Libra,” the central banker asserted.
Big tech firms like Google, Amazon, Apple, and Facebook are not Villeroy de Galhau’s only concern. Smaller, blockchain-based fintechs are creating “a new generation of crypto-assets … amplifying this disruption,” he warned.
While he dismissed early cryptocurrencies like bitcoin (BTC) as having “no real underlying economic basis and perhaps no real future,” that is changing said Villeroy de Galhau.
They have “been succeeded by a second generation of assets—stablecoins—based on the same promising blockchain technology, but now backed by mechanisms designed to stabilize their value,” he said.
Those stablecoins also bring risks like making it harder to fight money laundering and the financing of terrorism. At a Libra scale, central bankers also fear global stablecoins would blunt the impact of financial tools they use to stabilize economies during downturns, Villeroy de Galhau acknowledged.
“[A]s central bankers and supervisors, there is no question of us standing by and letting this change happen unchecked,” he said. At the same time, “we … must and want to take up this call for innovation at a time when private initiatives—especially payments between financial players—and technologies are accelerating, and public and political demand is increasing.”
That is why institutions like the Banque de France and European Central Bank should “consider the possibility of a CBDC,” he added.
“Today, probably more than at any other time in our history, innovation has the potential to profoundly alter banking activities,” Villeroy de Galhau said. “It is no longer just about transforming our payment systems, it is our very currency that is at stake.”