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France to pilot national digital currency in Q1 2020, the first in Europe

Posted: 5 December 2019 12:38 pm
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The pilot will start with wholesale CBDC to help lay the groundwork for future developments.

France will be piloting a national digital currency by the end of Q1 2020, said French central bank governor François Villeroy de Galhau at a Prudential Supervision and Resolution Authority (ACPR) conference on 4 December.

"We intend to start experimenting quickly, and launch a call for projects (for private sector players) by the end of the first quarter of 2020," he said.

On this timeline, it will be Europe's first live national digital currency trial, and "would provide a powerful lever for asserting our sovereignty against private initiatives of the Libra type," Villeroy de Galhau added.

He described Facebook's Libra project as a "trigger" for these efforts, while France's economic minister Bruno Le Maire has previously said it's important for France not to be outdistanced by China in the emerging field of digital currency.

Distance

While France is trying to close the distance between itself and China, it's also trying to put some distance between consumers and its new digital currency by ensuring that the experimental Franc numérique stays out of the hands of individuals, and starts off for use between financial institutions only.

This is the most risk-averse end of the central bank digital currency (CBDC) spectrum. It's known as "wholesale" central bank digital currency (CBDC), where the new currency is only available for a small, controlled circle of financial institutions. At the other end of the spectrum, you have the much more complex and risky "retail" CBDC, where any individual can start holding and using the digital currency.

Then, between these, you have a lot of different nuances and shades of grey. As a general rule, you get more theoretical efficiency benefits towards the retail end of the spectrum, but you also get more risks and complexity.

The problem that some countries, including the USA, are running into is that:

  • The limited benefits of wholesale CBDC don't justify its creation. When two financial institutions are holding their money in the same central bank, transfers between them just mean moving money around on the central bank's ledger. There's no point in having a digital currency for this.
  • The high risks of retail CBDC don't justify its creation. A non-zero chance of inadvertently burning down the entire global economy is kind of a deal-breaker.

Understanding this framework makes it much easier to see what Villeroy de Galhau is talking about when he explains why France is exploring digital currency now.

"I see a certain interest to advance quickly on the issue of at least a wholesale CDBC," he said, "to be the first issuer at the international level and thus derive the benefits reserved for a reference CDBC."

The idea is that even though the immediate practical advantages of a wholesale CBDC are limited, it's still worth getting it out there as soon as possible to cement its position, to help put up a bulwark against Libra and the Chinese CBDC and to help lay some groundwork for further advances.

"We must make our contribution to the building of this innovation, but in a serious and methodical way," Villeroy de Galhau said.

To this end, France's central bank will be undergoing some internal renovations, he said, with the payment supervision and market infrastructure branch expanding into the Directorate of Infrastructure, Innovations and Payments (DIIP).

France's risk-averse wholesale CBDC pilot is just the beginning.



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