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French CBDC strategy is characteristically conservative
With virtually every central bank on the planet investigating the risks and benefits of central bank digital currencies (CBDCs) it is easy to lose sight of the differences between their approaches. The Banque de France, in keeping with its longstanding suspicion of market-led innovation, is trying to control the pace of the digital currency revolution.
The invitation issued to banks by the Banque de France to conduct experiments in the use of a central bank digital currency (CBDC) to settle inter-bank payments is a reminder that the official mind of France is never comfortable with market-led innovation. Instead, technological change must be suborned by the State to ensure that control and stability – in effect, the maintenance of economic sovereignty – are not compromised by an excess of economic liberty.
French central bankers have always revered monetary and exchange rate stability as the keys to economic expansion. During the classical period of the gold standard (1880-1914) the Banque de France was the most zealous in resisting interest rate fluctuations. Throughout the acute phase of the inter-war economic crisis (1928-32) the French central bank hoarded gold without loosening domestic monetary conditions, preferring to export deflation to the rest of the world to any loss of national control.
Even as the crisis deepened, the Banque de France resisted devaluation longer than any other major economy, not coming off the gold standard until 1936 – five years after Britain and three years after the United States. Throughout Les Trente Glorieuses (1945-75) the French central bank controlled the expansion of credit by quantitative means with the goal of preserving interest as well as exchange rate stability. Today, the euro, the most audacious monetary experiment in history, is at root the traditional French official attitude to monetary policy conducted on a continental scale.
So it is not surprising that the Banque de France perceives private digital currencies, from Bitcoin through Libra to Tether, primarily as a threat to monetary sovereignty and financial stability. “Of course, as central bankers and supervisors, there is no question of us standing by and letting this change happen unchecked,” the governor of the Banque de France, François Villeroy de Galhau, warned in a speech about private digital currencies 12 months ago.
His answer at the time was not to suppress them but to nationalise them, by the European Central Bank (ECB) issuing a wholesale central bank digital currency (CBDC) for use in inter-bank payments (though as it happens the ECB does not enjoy that right under the existing treaties). “Creating a CBDC would give us a powerful lever with which to assert our sovereignty in the face of private-sector initiatives such as Libra,” he said. Villeroy de Galhau even added a favourable reference to the People’s Bank of China, which is pursuing a similar policy.
The French central bank confirmed plans to investigate a wholesale CBDC in November last year. The report of an internal Banque de France task force on CBDCs, published on 2 April, elaborated on the distinction between a controllable wholesale CBDC (confined to bank-to-bank transactions, probably in digital assets issued and traded on blockchain-based networks) and an inherently unpredictable retail CBDC (which would be a parallel form of central bank money alongside notes and coins and central bank reserves). Though the tone is non-committal, the preference of the Banque de France for a wholesale CBDC (especially one that bolsters the euro against the “domineering” US dollar) is still plain.
Though the temptations of higher growth (driven by lower rates of interest, nugatory financial transaction costs and innovations such as smart contracts and programmable money) from a retail CBDC are mentioned, these pleasing prospects are implicitly resolved in favour of a modified status quo. “The risk that bank money could be crowded out by a retail CBDC, which is a key difference between a wholesale and a retail CBDC, should be carefully assessed,” says the paper. It estimates a transfer of €600 billion from conventional bank deposits to a retail CBDC. That is almost certainly an under-estimate, especially in a crisis, when everybody will want to hold central bank money.
Whether it is an under-estimate or not, what worries the Banque de France is that a transfer of liabilities from commercial bank money to central bank money obviously threatens conventional banks with a funding problem. Naturally, the banks will try to solve the problem by borrowing from the central bank, creating a concomitant squeeze on eligible collateral, unless they hike the rate of interest on bank deposits or switch their funding to the equity and bond markets.
And the Banque de France definitely does not like what it foresees as a result of that sequence of events: higher bank funding costs, shrinking loan books, more bank runs and central bank policy measures – such as changes in the rate of interest – reduced to ciphers.
This is the context in which the Banque de France issued its call on 27 March to European banks to apply (by 15 May) to work with it in the testing of a wholesale CBDC in inter-bank settlements. This approach could scarcely be more distinct from the CBDC outlined by the Bank of England, which aims unashamedly at providing consumers and businesses with a retail form of central bank money other than physical cash.
In short, the Bank of England is entertaining the replacement of retail bank deposits with a sterling-denominated CBDC, while the Banque de France is expressing a strong preference for a euro-denominated wholesale CBDC to replace commercial bank deposits (a.k.a. reserves) at the central bank only.
Yet this difference in the attitudes of the Bank of England and the Banque de France towards CBDCs is, in the long run, illusory. If everybody in France held central bank money only, the Banque de France would obtain a degree of information and control that even Jean-Baptiste Colbert could only dream of. When it comes to CBDCs, the choice may not be between French dirigisme and English liberty after all, but between liberty and CBDCs tout court.
Written by Dominic Hobson – Co-Founder Future of Finance
April 2020