Central banks in the Euro area are preparing to unveil plans for a wholesale central bank digital currency (CBDC). The primary aim is to modernise the way financial institutions manage securities and foreign exchange transactions.
François Villeroy de Galhau, the governor of France’s central bank, provided details during an event in Paris on Tuesday.
“The Eurosystem has started exploring new technologies for the settlement of central bank money, including the issuance of a first type of tokenised CBDC,” Villeroy de Galhau said.
“The eligibility criteria and the call of interest will be published in the coming weeks and experiments will be rolled out over the course of next year, including trials with real transactions.”
The EU’s blockchain strategy
This CBDC plan could be propped up by a permissioned network that is combined with smart contracts. This would allow central banks to maintain their role in supplying money to the economy, a function critical for managing inflation and maintaining financial stability according to Villeroy de Galhau.
The central bank intends to explore “alternative protocols and blockchains”. It will also focus on its proprietary Distributed Ledger for Securities Settlement System, also known as DL3S.
A recent report by finance lobbyists indicated that implementing distributed ledger technology in financial markets could lead to annual savings of around $100bn. This would be achieved by automating back-office processes and freeing collateral.
Wholesale vs. retail CBDCs
While plans for this wholesale CBDC are advancing, proposals for a digital euro for general citizens appear to be moving more slowly. There have been widespread concerns for this retail option, with criticism focused on its privacy and potential effects on commercial banks.
Currently, lawmakers are struggling with legislation that has raised opposition and barriers to the retail CBDC.
Earlier this year, the European Central Bank had meetings to discuss the wholesale CBDC. Currently, it looks like the wholesale CBDC initiative is progressing more quickly than its retail counterpart.
In a recent letter, a group of lawmakers in the EU argued to the Eurpean Central bank that it should halt any decisions on a retail CBDC until a legal framework has been agreed on.
The letter has been signed by notable politicians, including the former Belgian Finance Minister Johan van Overtveldt and Netherlands’ Member of European Parliament Michiel Hoogeveen.
Crossborder CBDC trials
Last week, the Bank for International Settlements (BIS) partnered with the central banks of France, Singapore, and Switzerland to test cross-border trading of wholesale CBDCs (wCBDCs). Results from this trial were made public in a report.
The trial, named Project Mariana, used hypothetical versions of the euro, Singapore dollar, and Swiss franc wCBDCs. These were traded between simulated financial institutions. The project relied on “a common token standard on a public blockchain”, as per an official press release. This ensured smooth exchanges of wCBDCs across different payment and settlement systems of participating central banks.
The results confirmed that trading wholesale CBDCs across borders is possible. Cecilia Skingsley, the head of the BIS Innovation Hub, stated: “It successfully demonstrated that it is feasible to exchange wholesale CBDC across borders using novel concepts such as automated market makers (AMM).”
The project’s press release added: “DeFi (decentralised finance) elements tested in the project, specifically automated market makers, could form the basis for a new generation of financial market infrastructures.”