Wholesale CBDC: a means of safeguarding the anchoring role of central bank money
One of the lessons learned from the 2008 financial crisis was the power of central bank money to secure financial markets. Since the crisis, the member countries of the Bank for International Settlements (BIS) have committed to using central bank money on financial markets to safeguard the settlement of financial assets, and thus mitigate liquidity and counterparty risks. This power to provide security is an integral part of central banks’ monetary sovereignty function, regardless of technological developments.
Nevertheless, the emerging trend of tokenisation of finance once again raises questions about the assets used to settle transactions in tokenised assets. Tokenisation involves issuing financial securities in the form of digital tokens using distributed ledger technology (DLT), including blockchain. If central bank money is not available on DLT, private assets (particularly crypto-assets and stablecoins) could be used to settle such transactions.
Safeguarding the anchoring role of central bank money on financial markets is therefore crucial for financial stability. The absence of a public response to the new use cases for tokenised finance could lead to a proliferation of uncoordinated settlement solutions, causing market fragmentation.
“Taking a partnership approach to innovation, our common challenge as Europeans is to leverage – all together – the tremendous potential for innovation opening up before us: the development of wholesale CBDC would extend the anchoring role of central bank money in the tokenised sphere.”
The Banque de France is behind a pioneering experimentation programme
It is for these reasons that the Banque de France launched an ambitious wholesale CBDC experimentation programme in 2020. The Banque de France was one of the first central banks to initiate experiments as part of a learning-by-doing approach. This programme, conducted in partnership with public and private market players – including banks, central banks, fintechs and technology providers – explores various different use cases across a wide range of assets, using a variety of technologies, within a national as well as a cross-border framework, potentially involving a number of CBDCs.
It has given Banque de France teams a better understanding of how DLT works and the potential benefits for financial markets. The European regulation setting up a pilot programme, which came into force in March 2023, will make it possible to continue these experiments within a simplified regulatory framework.
A strategic reflection process backed by the ECB and many central banks around the world
The key takeaways and learnings from the wholesale CBDC experimentation programme of the Banque de France are featured in a report published on 21 July 2023. The Banque de France is not alone in tackling these issues. Successive reports from the BIS have highlighted central banks’ growing interest in CBDC – 93% are currently looking into the possibilities offered by issuing CBDC. The BIS itself sees this as an opportunity to improve cross-border payments. At present, cross-border payments are settled using the correspondent banking model, which involves a large number of intermediaries, making settlement a time-consuming and costly process. Based on this observation, the BIS and the Banque de France have carried out two experimental projects, Jura and Mariana, with the aim of improving cross-border payments by using several CBDCs within interoperable systems. Naturally, to actually improve cross-border payments, putting such systems into production would require extensive international cooperation.
In the wake of this reflection process, on 13 December 2023, the European Central Bank (ECB) published a call for expressions of interest to participate in exploratory work on the settlement in central bank money of tokenised financial assets from May to November 2024. The aim of this exploratory work is to test different wholesale cetral bank money settlement solutions, including on distributed technologies (DLTs), to gain a better understanding of how these solutions could facilitate interaction between TARGET services and DLT.
Three Eurosystem interoperability-based solutions are proposed as part of these exploratory works, among which the “Full-DLT Interoperability” solution developed by the Banque de France. In this wholesale experimental CBDC solution, central bank money is issued in the form of tokens (“Exploratory Cash Tokens”) circulating on a DLT platform (“DL3S”). It is interconnected with a Market DLT, from which transactions with tokenised financial instruments trigger payments in central bank money.
In addition, the Eurosystem regularly liaises with the industry via a Market Contact Group (NTW-Contact Group) that provides input for the Eurosystem's strategic reflections on the use of DLT and all new technologies on the financial markets.