Bank of France Governor: Protect the Banks, We Need Them

On the role of central banks: “caution yet confidence”, says Denis Beau. CBDCs are not a panacea, and should not be allowed to harm commercial banks.


Denis Beau in 2019; Source: European Central Bank


key takeaways

  • CBDCs are inevitable, but institutions should ensure they can be designed and implemented in a manner that maximizes benefits while minimizing risks
  • Crypto assets and DeFi must be regulated to prevent disintermediation and maintain stability of the payment system

Denis Beau, First Deputy Governor of the Bank of France, thinks that innovation in digital currencies can lead to greater efficiency in payments and reduced costs  — an unquestionable public good — but only when the health of the existing commercial banking industry is maintained.

In remarks made to attendees at a conference titled, “The new challenges of financial regulation,” in Paris on November 19, 2021, but released in English on Sunday by the Bank for International Settlements, Beau characterized the risks facing central banks as they attempt to navigate the digitalization of global economies.

His view, which is largely representative of global central bankers, puts digital asset payment and settlement rails based on geopolitically neutral cryptography — i.e. DeFi — on a collision course with the global banking elites.

Innovations have potential, but…

New technologies, notably distributed ledgers, new settlement assets (crypto-assets), Beau said, are likely “to profoundly alter our euro payments ecosystem.”

“These innovations have the significant potential to improve the functioning of our payment system, in particular by making payment means simpler, easier and cheaper to use, and faster if not instantaneous.”

However, the benefits from these innovations can only be realized if policymakers proceed with “caution and confidence.”

What are the risks?

Beau called “the dominance of currencies linked by a legally binding rule of convertibility at par” as the first of three “organisational principles of our payment system.” This, combined with the principle that only central bank money can be accepted as legal tender is what allows the dominant central bank currencies to play, what he terms “complementary roles” of money that “fulfills an integrating and anchoring function [and] guarantees the efficiency and stability of our payment system.”

However, Beau says, “these foundations are threatened by the diffusion of innovations across the payments field, which has been sped up by the health crisis and social distancing, if no measures are taken to preserve them.”

The negative normative slant evoked by reference to a “foundational threat” seems rather at odds with the concept of being “technology-neutral”, one goal expressed by, among others, BIS economists Raphael Auer and David Tercero-Lucas in July 2021.

However, much of the ideological and political heft behind the momentum of digital assets is indeed explicitly aimed at questioning Beau’s premises. What are the ontological underpinnings of central bank money? How can we ensure the enforcement of their dominance serves the public interest?

Please don’t hurt the banks

“The introduction of a CBDC raises complex issues that need to be resolved without penalising banks,” Beau asserts.

In a section titled, “Avoiding disruptive effects for financial intermediaries,” Beau warned that a failure to do just that, “would conflict with our mandate to safeguard monetary and financial stability.”

He outlines the “risk of fragmentation” of the payment system — which is aimed simultaneously at decentralized finance and stablecoins, as well as Big Tech initiatives like the Diem project of Meta Platforms — and also the “risk of concentration,” targeted squarely at the latter.

Beau is also concerned with ways in which CBDCs may interfere with the conduct of monetary policy by central banks.

“The introduction of an unremunerated retail CBDC with no holding limit could make it difficult for central banks to pursue a negative interest rate policy, as market participants would prefer to hold the CBDC instead of assets remunerated at negative rates.”

The positive yields widely available in DeFi would face the same objection, and Beau hinted at the tightening of the regulatory noose around this aspect of the digital asset market, while providing no concrete prescription and acknowledging the practical challenges regulators face.

“I’m referring in particular to the supervision of the development of decentralised finance, where the usual regulatory frameworks are constrained by the fact that issuers and service providers are not easily identifiable in an environment where protocols are automatically executed without intermediaries, and there is no fixed jurisdiction for the services offered.”

The BIS has said that nine out of ten central banks report having, at a minimum, undertaken research and development programs towards a CBDC. Although, to date, Beau noted, only two retail CBDCs have been introduced: the Bahamas’ Sand Dollar and DCash for the Organisation of Eastern Caribbean States. Over twenty pilot projects are underway around the world, he said.

As for the European Union, banks evidently have nothing to fear. Beau concludes that, “given the way in which investigations are being conducted into a digital euro…it is unlikely that banks will be erased from a future payments landscape in which stablecoins and central bank digital currency dominate.”

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