Central banks in the Euro area are poised to unveil their plans for a wholesale Central Bank Digital Currency (CBDC) in the coming weeks, with a focus on revolutionizing how financial institutions settle securities and foreign exchange transactions. François Villeroy de Galhau, the governor of France’s central bank, made this announcement on Tuesday.
Faster Wholesale Progress
While the wholesale CBDC plans are advancing rapidly, a more contentious proposal for a Digital Euro intended for everyday citizens lags behind. Lawmakers have raised significant concerns related to privacy and the potential impact on commercial banks in the case of a Digital Euro.
François Villeroy de Galhau shared insights into the Eurosystem’s exploration of new technologies for the settlement of central bank money, including the issuance of a tokenized CBDC. The eligibility criteria and a call for interest will be published in the coming weeks, and experiments will commence in the next year, including trials involving real transactions.
Use of Permissioned Networks and Smart Contracts
Central banks are considering the use of permissioned networks working in tandem with smart contracts. This approach would enable central banks to retain control over the supply of money to the economy, a crucial aspect of their role in managing inflation and ensuring financial stability, according to Villeroy de Galhau. It will also ensure privacy, which is a concern raised by many regulators, politicians and industry
They are not limiting themselves to a single blockchain technology. They are exploring “alternative protocols and blockchains” in addition to developing their proprietary Distributed Ledger for Securities Settlement System (DL3S).
Potential Cost Savings by using DLT
A recent study conducted by traditional finance lobbyists indicates that financial markets powered by distributed ledger technology (DLT) have the potential to save an estimated $100 billion annually. This could be achieved by streamlining collateral management and automating back-office processes.
Progress in Wholesale CBDC Plans
The idea of a wholesale CBDC has been discussed at various industry meetings convened by the European Central Bank earlier this year. These plans appear to be moving forward more swiftly than the retail-oriented digital euro concept, which faces legislative challenges and significant political opposition. Central banks in the Euro area aim to modernize the financial landscape while addressing the unique challenges associated with both wholesale and retail digital currencies.
France’s plans to launch a CBDC
At a digital currency conference in September 2022, Bank of France Governor Villeroy de Galhau highlighted the potential benefits of wholesale Central Bank Digital Currencies (CBDCs) in enhancing cross-border and cross-currency payments.
He noted that while retail CBDCs often dominate headlines, wholesale CBDCs, intended for use by permitted institutions for cross-border settlements, deserve more attention. De Galhau also mentioned that the European Central Bank (ECB) is exploring the possibility of issuing a digital euro by 2026, a move in line with the global trend of central banks investigating CBDCs for everyday use and financial markets.
Additionally, he suggested that automated market makers could play a crucial role in maintaining liquidity for CBDCs in decentralized finance, akin to the role investment banks play in sustaining trading in specific securities.