France successfully tests digital euro

A digital euro has been successfully tested for the first time by France’s central bank.

In Banque de France’s experiment on May 14, a blockchain developed by its team was used to settle an issue of digital securities by Société Générale.

Covered bonds worth $44 million were issued as security tokens directly registered on a public blockchain. They were fully subscribed by the bank, which simultaneously paid the issuer in digital euros issued by Banque de France.

The milestone is expected to result in more rigorous testing to take place in the coming weeks—with Société Générale saying it “demonstrates the feasibility of financial securities being digitally settled and delivered in central bank digital currency for interbank settlements.”

In an announcement on May 20, Société Générale said the technology could lead to the “smooth financing” of the economy, adding: “It paves the way for the automation and shortening of payment processes, with simplified market infrastructures and strengthened security.”

A CBDC is a government-issued digital version of its fiat currency—essentially a cryptocurrency—that is issued and regulated by the country’s central bank.

France take the lead in Europe

Banque de France’s successful experiment is quite a coup for Governor François Villeroy de Galhau. In December 2019, he spoke of his determination to test a CBDC at some point in 2020—making a play for French leadership of the European economy in the process.

At the time, Villeroy de Galhau had suggested that two different CBDCs could eventually exist side by side. “A so-called ‘wholesale’ currency for payments between financial sector players” would use blockchain technology and smart contracts. This would complement a consumer-focused digital currency that would be “simpler and better-suited to retail transactions,” with the governor hinting this particular asset might not be built on blockchain technology.

Then a month and a half ago, Banque de France began accepting applications from financial institutions that wished to contribute technology to the trial.

Société Générale said it has been involved in numerous blockchain-based initiatives for several years, describing innovation as central to its digital transformation.

Gunning for the dollar

Countries around the world are clamoring to be the first to roll out a central bank digital currency—a notable exception being the United States. Treasury Secretary Steven Mnuchin said on Dec. 6 that the U.S. has no plans to pursue a digital dollar before 2025 at earliest.

Last month, China finally confirmed it had begun testing its digital yuan in four cities—silencing a rumor mill that had become increasingly frenzied. The People’s Bank of China says it began research on the CBDC back in 2014, and completed a basic design back in January. 

Beijing has been especially keen to get a head start on launching a CBDC so it can gain an early advantage in the marketplace. A successful digital currency issued by a major central bank could be used as an international currency—potentially weakening or even replacing the U.S. dollar’s role as the world’s reserve currency. 

Last August, the Bank of England’s governor, Mark Carney, suggested just that. Such a digital asset would “dampen the domineering influence of the US dollar on global trade,” he said at the 2019 Economic Policy Symposium.

Then in January, the Bank of England announced that it had formed a working group with other central banks to look into whether they should issue their own CBDCs. Institutions in Sweden, Switzerland, Japan and Canada—along with the European Central Bank, which oversees the euro—were involved.