Lately, most major national banks seem to be playing with the idea of a national digital currency. France is now conducting its own tests and could pave the way for a digital euro. What do France’s experiments involve and how do they affect the crypto ecosystem? This is what is known so far.
According to a document released on March 30, the Bank of France is looking for a central bank digital currency that can facilitate interbank settlement. To find one, the institution called on Europe’s best inviting applicants – institutional or otherwise – to explore potential benefits of a CBDC.
On July 10, the central bank will choose ten CDBC-targeted applications based on the decision on innovative utility. Strangely enough, the bank is not only putting CBDC in a blockchain, but choosing to leave the door open for other technological solutions.
The intent of the experiment is threefold. First, to illustrate how a CBDC could effectively complete interbank settlements. Second, to discover additional benefits of digital currency. And third, to understand the potential impact of one on financial stability.
The bank has painstakingly emphasized that the test is purely experimental and will not take place in the long term. The project will also not be used commercially, as it will instead be used within interbank transfers, with the broader intention of replacing obsolete systems. However, it will set a precedent for a deeper investigation of a digital euro. So, can a CBDC fix the eurozone’s lagging legacy systems, and what will be the wider implications for the cryptocurrency industry?
A fundamental aspect of the digital currency business is utility. There are different classes of CBDC, including wholesale and retail. Each has its own utility. CBDCs for individuals are essentially digital fiat money, with the issue coming from a central bank. A wholesale CBDC – the kind the Bank of France is targeting – would work much the same as central banks’ reserves and would primarily facilitate interbank settlement. A hybrid (as the name suggests) combines the two, extending the issue to commercial banks.
For Martin Nelson, chief operating officer of M10 – a provider of digital money rails for banks – the benefits of a CBDC strongly depend on the type. Nelson pointed out the advantages of a wholesale CBDC over common legacy systems:
“A wholesale CBDC can bring advantages over the incumbent model, such as programmability, enabling cross-border transactions and being a springboard to a ‘synthetic CBDC’ (distribution of digital currencies to the general public through an intermediary such as a bank or e – money provider). “
While the French tests focus on a wholesale iteration of CBDC, the idea of an upcoming digital euro is inescapable. According to Hugo Renaudin, CEO and co-founder of the French institutional crypto exchange OCTs, synthetic CBDCs are the next logical step for the financial system as’ it is extremely important for a central bank to understand where its currency is and who it is possession. In the current form, it is almost impossible, “he said.
Renaudin then referred to a preliminary version of the U.S. government’s coronavirus stimulation bill – a version that included a digital dollar proposal, saying that fiat currency is not scalable:
The United States government is living a logistical nightmare to be able to send checks to millions of Americans as part of their COVID-19 incentive plan. With programmatic money, such as CBDC, it becomes very easy to send and collect money to a large number of people at once. ”
However, Renaudin warned that the transition to digitized fiat is not without its pitfalls. A CBDC can harm privacy if implemented without appropriate provisions, allowing governments to view the financial affairs of their citizens at will. Renaudin called the solution a two-edged sword: “They give more control to their publishers who can check transactions, balances, debit and credit accounts – possibly at will.”
As it promises to rejuvenate the ailing banking system, blockchain omission could be unwise, said Pascal Gauthier, CEO of hardware wallet manufacturer Ledger. Gauthier also voiced privacy concerns, noting that every new system must maintain anonymity and that the blockchain could be a way to facilitate that:
“There is no benefit if it remains a simple digital currency. Although, if it runs on a public blockchain, there are two main benefits, one for citizens, they will own their private keys so that they will be their own bankers, and the other for governments that can program the public blockchain to order the money in order to verify that it has been sent and used correctly, but it should absolutely remain anonymous. ”
The Bank of France is not necessarily against blockchain, it just wants to remain impartial for the available types of technology. However, Alex Beitlin, founder of the trust portfolio specialist Trustology, explained that while there are many technological duplicates, blockchain remains the best choice:
“If the Banque de France was only focused on money transfers, alternative technology such as hashgraph could be used. But this is not the case, it is specific to interbank settlement, suggesting the need for record immutability, transparency and real time. In this case, blockchain therefore fits better here. ”
Despite early designs for a CBDC pilot, Sweden’s central bank has remained reluctant to implement a blockchain, suggesting it wasn’t hardened enough in the fray. That was until recently. The so-called e-crown – the CBDC test by Sveriges Riksbank – is in full swing. The project uses distributed ledger technology, which the bank believes is synonymous with the blockchain.
DLT could very well be applied within France’s own CBDC test. Although they mark a positive step towards the implementation of decentralized-like technology, many believe that DLT pales in comparison to blockchain. “It’s just like apples and oranges,” said David Walsen, founder of the European-based trading platform Hedgetrade, adding, “A CBDC like the e-crown has strict rights and requirements to participate.”
Plans for a digital euro have been in the works for several months. The French central bank confirmed the targets for a wholesale CBDC in November 2019. Now, with initiatives in progress in Sweden and soon in France, the framework is finally being put together. However, according to Nelson, much more will have to be tested before a digital euro becomes a reality, and even then it is unlikely to fall into the hands of the public:
“Central bank experimentation with CBDCs will accelerate this and next year. The results are carefully analyzed before a decision is made. A large-scale CBDC is likely to appear before a version available to the general public. “
But Gauthier suggests that it is not wise for the European Central Bank to remain inactive for too long. He believes that, following private-sector initiatives such as Facebook’s Libra, traditional funding should act quickly, saying, “Central banks and traditional finance need to adapt to new technologies to remain relevant to consumers.” Gauthier also added that “CBDCs are the Central Bank’s response to Libra and more generally to the threat of private cryptocurrency.”
Which is the opposite question: how will cryptocurrencies perform once a digital euro is introduced? According to Renaudin, the introduction of a digital euro will usher in a more reliable crypto infrastructure that is not currently connected to other systems:
Purses and on-chain transactions are still clumsy and very few non-crypto companies have an IT infrastructure that uses these technologies. It’s a different story once adapted to a digital euro, which of course increases the ability of individuals and companies to access Bitcoin and cryptocurrencies. “
For Nelson, however, once a retail or synthetic CBDC hits the scene, Bitcoin (BTC) may lose some of its appeal, while a wholesale CBDC is unlikely to impact Bitcoin:
“A general purpose, or synthetic CBDC, can lead to a drop in demand for Bitcoin, but even that is questionable. Bitcoin is currently more of an alternative asset class mainly used by speculators. A digital euro is no match for that. ‘
On the contrary, Walsen argues that while CBDCs may threaten cryptocurrencies, Bitcoin’s inherent privacy and security features will surpass any digital fiat. He added that “established cryptocurrencies are off to a flying start and offer more in the areas of privacy, security and financial freedom.”
Overall, the French CBDC tests mark a relatively big step forward for traditional funding. However, if a digitized fiat is to be put in place, central banks must prioritize fundamental provisions such as privacy – otherwise those who are aware of those issues will turn to crypto.
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