The Banque de France has been exploring the feasibility of incorporating distributed ledger technology into payments systems for financial markets. Claudine Hurman, director of innovation and financial market infrastructure at Banque de France, discusses the Banque’s strategic approach to digital payments in capital markets.

OMFIF: Can you give a brief summary of the Banque de France’s cutting-edge experiments with wholesale central bank digital currencies?

Claudine Hurman: The Banque de France has conducted 12 experiments on wholesale CBDC since 2020 in collaboration with market participants, exploring different distributed ledger technologies and focusing on two key strategic use cases: the tokenisation of finance and the improvement of cross-border transactions.

The experiments demonstrate the operational feasibility and practical implementation of three models for issuing a wCBDC directly on DLT: the interoperability model, the distribution model and the integration model, all three being complementary. The BdF has published a report on the main conclusions of these experiments.

These analyses contribute to the Eurosystem’s exploratory work announced in April 2023, which aims to study how large-value financial transactions recorded on DLT platforms could be settled in central bank money.

O: In financial markets, many asset classes are settled in central bank reserves. How would wCBDC improve on that?

CH: The use of central bank money to settle most securities is a lesson from the 2008 financial crisis. The Bank for International Settlements’ Committee on Payments and Market Infrastructure and the International Organization of Securities Commissions have strongly encouraged its use and it is a key principle for financial market infrastructures as it is the safest and most liquid settlement asset. But today central bank money is not available in a tokenised form for wholesale payments. Investors could therefore decide to resort to cryptoassets, mainly stablecoins, for settling the cash leg of securities transactions on DLT.

The use of stablecoins as settlement assets triggers risks and inefficiencies, such as liquidity fragmentation, and does not provide the safety brought by central bank money. This is why a wCBDC needs to accompany and secure the settlement of tokenised transactions. This view is widely shared by central bankers. There is a real push for CBDCs at the global level for financial stability and to avoid privatisation of money.

O: What are the key advantages of an on-chain means of settling cash?

CH: The existence of cash and security tokens on the same ledger could allow for an atomic settlement – in other words a settlement of a delivery versus payment transaction that is both instant and simultaneous. It could also facilitate the development of potential smart contracts to implement desired features, such as automated compliance monitoring. On the contrary, separate cash and security ledgers would require a third party or a mechanism to coordinate the transaction.

O: Could a stablecoin or other tokenised form of private money achieve the same ends?

CH: Alternative forms of tokenised money are emerging, such as stablecoins or tokenised commercial bank money in the form of tokenised deposits. Stablecoins have proved that they are prone to counterparty and liquidity risks because of their fluctuating value and their strong dependence on the quality of their issuer. Tokenised commercial bank money appears to be a more serious alternative as the two-tier model has already proved its worth.

However, in this case, the use of central bank money will still be necessary in ensuring the convertibility of the various commercial bank tokens issued. It will also be required to settle systemic transactions as it is the safest settlement asset available. Tokenised commercial bank money and wCBDC do not achieve the same ends, but are complementary as they are not intended to be used for the same transactions or at the same scale.

O: How would a wCBDC work for transactions taking place across borders?

CH: Currently, real-time gross settlement systems are not interoperable, and the introduction of wCBDCs would be an opportunity to start from scratch and enable interoperability between market infrastructures at an international level. As part of Project Mariana, the Banque de France is working on its distribution model for issuing wCBDC, which involves multiple domestic DLT platforms that are all connected to a single shared DLT platform, where payment versus payment and delivery versus payment take place. This experiment contributes to the design of a single platform, as envisaged by the BIS with the concept of a unified ledger, or by the International Monetary Fund with the concept of XC platforms.

O: What’s the next step on the journey towards digital capital markets?

CH: As outlined in our report, implementation of wCBDC will require international co-operation to ensure strong interoperability and the adoption of common standards. New technologies offer an opportunity to improve this situation but, in the absence of coordination, each actor could be tempted to develop its own standards, which would be detrimental to improving cross-border payments. Central banks and international regulators have a key role to play in steering this change in the right direction. It is with this objective in mind that we have conducted experiments in partnership with other central banks and will continue to do so.

The way forward also lies in the exploration of settlement in central bank money of transactions recorded on DLTs launched by the Eurosystem earlier this year, which created a market contact group to foster dialogue with the industry and will lead to new experimentation.

This article was originally published in ‘Digital assets: building the markets of the future’. Download the report below.