BIS Innovation Summit: “Central banks in a world of DLT”

March 22, 2022

Speech by François Villeroy de Galhau,

Governor of the Bank of France

Ladies and gentlemen,

It is a pleasure and an honor for me to deliver this keynote address of the second BIS Innovation Summit, which illustrates the commitment of central banks in the field of new technologies, in particular through the innovation cluster. BIS innovation. Since their inception nearly fifteen years ago, distributed ledger technologies (distributed ledger technologies – DLT) have evolved and opened up new possibilities, creating alternative circuits and removing middlemen, supporting new solutions and use cases. Are these upheavals as powerful as those wrought by the invention of the Internet thirty years ago? It’s probably too early to tell, but DLTs are growing rapidly and are likely to bring about profound changes.

The invention of bitcoin, the first crypto-asset, results from the desire to create a new “currency” – I insist on the quotation marks here – that is not the responsibility of states or central banks. This invention dates back to 2008, and since then we have observed that the use of bitcoin as a means of payment remains very marginal, because it does not have any of the fundamental characteristics of a currency. It is also not a store of value, but rather a speculative asset, somewhat akin to tulip bulbs in the Netherlands in the 17th century.and century.

The most disruptive feature of bitcoin was its underlying technology, which has since been replicated in different versions of DLT, underlying multiple asset types and uses. The second generation of crypto-assets now incorporates smart contracts that have enabled the development of new services and products, the latest being non-fungible tokens (non-fungible tokens – NFT). Among second-generation crypto-assets, stablecoinsor backed assets, attempt to reduce their volatility by anchoring themselves to legal currencies or sovereign assets. The fact remains that they create a certain fragmentation and are marred by regulatory and operational uncertainties.

Again, there are historical precedents such as free banking during the 18and and XIXand centuries, when each private bank issued its own notes. This practice had major drawbacks, such as the credit risk associated with settlement assets. The introduction of central bank money as a common and safe settlement asset was a major step forward and has since become the rule – in the interest of all economic agents. It is now a public good taken for granted, at least in advanced economies.

We central bankers have mixed feelings about crypto-assets: on the one hand, they bring innovation and meet certain expectations, especially in emerging economies; on the other hand, they present significant potential risks relating, in particular, to money laundering, the violation of personal data and high volatility. Although stability is fully enshrined in our mandates, resisting innovation is not part of our DNA, quite the contrary. Financial stability without innovation would be synonymous with conservatism; innovation without financial stability would fuel distrust, and would therefore not be sustainable. Although sometimes considered old fashioned, we have been at the forefront of financial innovation for decades. However, our achievements often remain unknown to the general public: our state-of-the-art settlement systems are intended for banks, not end users. How do we find our rightful place in this emerging world of DLT? Benevolent indifference or, conversely, prohibition, are no longer options. While keeping our eyes and minds open, we need to regulate and innovate now.

First, we have to regulate and supervise all the players who issue these new assets, determine their value, distribute them, settle them, offer custody and related services. Bitcoin’s initial ideology aimed at total disintermediation – even disembodiment – ​​has proven to be unsuited to real life: most users do not intervene directly on the blockchain, they resort to platforms and new intermediaries. The term “decentralized finance” could be inappropriate, because it could lead to the concentration of certain private players, who are not currently regulated. The judicious principle of supervision “same activities, same risks, same rules” should apply and be broken down into a “quartet of guarantees”: (1) same security; (2) same compliance; (3) same liability; and (4) same accessibility. Regulation needs to be developed consistently across jurisdictions and is of particular importance as the ties between the real world and the crypto-asset world grow stronger. In this context, and in line with the G20 agenda launched two years ago, most countries are considering legislative changes to take crypto-assets into account. For example, the European Union must soon adopt a regulation called “crypto-asset markets” (MiCA). It is crucial that we together ensure that there is an ambitious and real-time approach at the global level.

Second, central banks must continue to play an active role in innovation. Some have already launched a digital currency, some – including the Eurosystem – are in the pilot experimentation phase. We, at the ECB, have chosen a two-year investigation phase, under the aegis of my colleague Fabio Panetta, before deciding by the end of 2023 whether we are going to continue or not. Retail MNBCs have captured mainstream attention; however, they raise sensitive issues, particularly in terms of use cases for households and the role of commercial banks. This is why I wish to plead for the establishment of a ceiling on the individual detentions of MNBC.

Let’s not forget the other possible digital currency, a “wholesale” MNBC for banking institutions. DLT could increase the benefits of the digitalization of central bank money, thanks to the increased efficiency of certain interbank processes and the development of new services, in particular in a cross-border context. Let’s be clear, an MNBC is not a “Big Brother” of central banks threatening the free world of decentralized finance (DeFI). Rather, it should be seen as the way to make DeFI a success and make it sustainable. The Banque de France successfully conducted nine experiments in 2021, with a wide range of partners and on different compartments, and a new series of experiments devoted more particularly to cross-border payments will take place in 2022. It is a great satisfaction to see the BRI’s innovation hub is making progress on several wholesale MNBC projects, such as the Jura and Dunbar projects, in which the Banque de France is actively participating. And more generally, it is also a satisfaction to see that more and more central banks, in particular certain central banks in Asia, are showing interest in a wholesale MNBC.

I will conclude by quoting Zaha Hadid, architect of Iraqi origin and the first woman to win the Pritzker Prize in 2004. Her emblematic buildings, all of voluptuous curves and fluid spaces, have never had a single right angle. “There are 360 ​​degrees, why settle for just one? said Zaha Hadid. What a rich thought of inspiration for us today! Thank you for your attention.

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