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Banque de France trials CBDC as governor warns of digital yuan threat

Villeroy de Galhau: 'Europe must move quickly'

France’s central bank governor sounds the alarm over the risk facing European monetary sovereignty posed by digital payments infrastructure, particularly the one being set up in China

The governor of the Banque de France, François Villeroy de Galhau, believes the development of China’s central bank digital currency poses a threat to monetary sovereignty and that other countries must step up their efforts. The Banque de France is working on its own CBDC project, completing its latest experiment just last week.

Villeroy de Galhau said that time was running out for central banks to set up central bank digital payments infrastructure. “On both digital currency and payments, we in Europe must be ready to move as quickly as needed or risk an erosion of our monetary sovereignty,” he said at a press conference on Tuesday.

Richard Turrin, author of Cashless: China’s Digital Currency Revolution, said: “China’s CBDC project is advanced, but the key factor is the degree to which it has inspired its neighbours to launch their own projects. The risk to the dollar and the euro is not that the digital yuan supplants them, but that a new trading region develops using a CBDC network.”

The European Central Bank is due to make a decision on the future of its approach to a digital euro. The Banque de France is at the forefront of the experiments in Europe. “The EU will do very well with its CBDC,” said Turrin. “It’s pursuing it very seriously.”

The Agence France Trésor simulated the sale of an government bond (OAT) on a permissioned blockchain to several participants, including BNP Paribas, BNP Paribas Securities Services, Crédit Agricole, HSBC and Société Générale.

Several secondary market operations and repo operations between private actors were conducted between June 21 and June 24. CBDC was issued against both tokenised bonds on the blockchain and securities in T2S test platform, demonstrating how the process of intra-day financing could work with CBDCs.

The cash legs of the transactions were conducted with CBDC tokens provided by the Banque de France. These tokens were issued by the Banque de France and controlled via smart contracts that ensured they are transferred simultaneously with the delivery of the OAT tokens to investors’ portfolios.

“A key goal of this experiment was to demonstrate that a CBDC/blockchain system could co-exist with legacy platforms,” said Adeline Bachellerie, head of digital currency and innovation at Banque de France. “In Europe, a great deal of work has been done over the past 10 years to reduce liquidity fragmentation. The positive potential of tokenised assets is interesting, but it wouldn’t be satisfactory from the financial stability perspective for CBDCs to break up liquidity pools. CBDC could play a pivotal role in connecting legacy platforms with tokenised asset exchanges on blockchain, because it’s the safest and most liquid asset.”

The Banque de France collaborated with the European Investment Bank to facilitate the sale of a €100m two year zero coupon bond via Goldman Sachs, Santander and Société Générale in April. It is also working on a project with the Swiss National Bank, the BIS Innovation Hub and Accenture to develop the systems required to make cross-border payments of euros versus payments of Swiss francs.

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