• As the digital Euro finds its way into France's financial sector, how will the cryptocurrency industry respond to this addition, and what effect will it have on France's CBDC?

    A nation-wide digital currency seems to be the focus of many major national banks lately. As France has commenced the testing of a digital euro, what has been done so far, and will the cryptocurrency market be affected? Let's try to find the answers to these questions.

    On March 30, the Bank of France published a document revealing it's undertaking a project to develp a central bank digital currency (CBDC) with the purpose of making inter-bank settlements easier. The Bank of France has sent invitations across Europe to institutional, private, as well as individual experts in the field to work on the CBDC project.

    France's central bank is to choose 10 applications related to CDBC By July 10, with innovative utility as the criteria for their choice. Interestingly enough, the bank is not exclusive regarding blockchain as the technological solution for CBDC implamentation, other solutions will be given an equal opportunity.

    There are three points for the experiment to determine. The first pertains to inter-bank settlements and whether they could be completed effectively with CBDC. Then, the aim is to explore the added benefits of digital currency. Lastly, the understanding of the potential impact of digital currency on financial stability is sought.

    As the bank already emphasized multiple times over and over again, this test will remain completely experimental, and only for a short time. The project will be used for interbank transfers only, with the aim of eventually replacing older and obsolete systems, as it wasn't meant for commercial use from the start. The project's results should provide deeper insight into digital currencies, such as the digital euro. The quistion is whether CBDC will be able to fix the obsolete payment systems in the Eurozone, and how will it affect the crypto ecosystem?

    The good, the bad and the ugly sides of CBDC The most prominent attribute of the digital currency format is its utility. CBDC can be classified into several classes, with retail and wholesale being used the most. Retail CBDCs are issued by the central bank and, as such, basically represent fiat money in a digital format. What the Bank of France is experimenting with is considered a wholesale CBDC that, like the reserves held by central banks, would only be used for interbank settlements. There is also a hybrid CBDC, which is a combination of the two, with commercial banks also having the right to issue it.

    As the chief operating officer of a provider of digital money rails for banks - M10, Martin Nelson stated, the type of CBDC will determine it's utility. The wholesale CBDC has many benefits over current legacy systems, as Nelson says:

    “A wholesale CBDC can bring benefits over the incumbent model such as programmability, enablement of cross-border transactions and be a stepping stone to a ‘synthetic CBDC’ (distribution of digital currency to the general public through an intermediary such as a bank or e-money provider).”

    As the type of CBDC France is testing is wholesale, introduction of a digital euro of the retail, or even hybrid type seems extremely likely. The CEO and co-founder of LGO, a French institutional crypto exchange, Hugo Renaudin stated that the next logical advancement of the financial system will come through the usage of synthetic CBDCs, emphasizing that “it is extremely important for a central bank to understand where its currency is and who owns it. Today, as it stands, it is almost impossible.”

    Renaudin then pointed out the unscalability of fiat currency when referring to a digital dollar proposal in the preliminary version of the coronavirus stimulus bill issued by the United States government:

    “The U.S. government is living a logistical nightmare to be able to send checks to millions of Americans as part of their COVID-19 stimulus plan. With programmatic money, such as CBDC, it becomes very straightforward to send money to and collect it from a large amount of people at once.”

    The transition to digital fiat will hardly be painless, Renaudin warns. As privacy could be undermined if the implementation of CBDC left out important provisions, governments would then obtain complete information pertaining to the financial affairs of their citizens. Renaudin pointed out that: “They give more control to their issuers who can monitor transactions, balances, debit and credit accounts — potentially at will.”

    Stay tuned!
    Aleksandar JELIC
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