Banque de France, the French central bank, has successfully completed its 10-month trial using Central Bank Digital Currencies (CBDC) in the country’s debt market.
The trial was led by Euroclear, a Belgium-based financial services company that specialises in the settlement of securities transactions. The trial also included many of France’s largest banks, as well as the French public debt office and the central bank, which used a permissioned blockchain-based system developed by IBM on Hyperledger Fabric.
We have together successfully been able to measure the inherent benefits of this technology, concluding that the CBDC can settle central bank money safely and securely.
Isabelle Delorme, Euroclear executive
According to the report released by Euroclear, the pilot was launched in March 2020 by Banque de France to explore the uses of a digital currency issued by the central bank. The continued research and development of a CBDC for the settlement of government bonds and securities has been adjudged a success, according to Euroclear:
It showed that CBDC can be effectively used to support the settlement of securities in central bank money and that it is possible to run post-trade operations for an activity as critical for the capital markets as the management of OATs [order audit trail system].
Euroclear report
Enhancing the Traditional System
Typically, deals are reconciled between parties, recorded and assets transferred to a single centralised authority such as a central bank or securities depository. This process usually pushes out the time settlement takes and increases costs due to intermediaries.
This experiment made it possible to demonstrate the possibilities of interaction between conventional and distributed infrastructures. It also paves the way for other alliances in order to benefit from the opportunities offered by financial assets in a blockchain environment.
Nathalie Aufauvre, general director of financial stability and operations, Banque de France
The project tested use cases of a CBDC in a range of everyday activities, such as issuing new bonds, using them in repurchase agreements, as well as paying coupons and redeeming deals.
Dedicated smart contracts were developed to test the handling of coupon payments based on the holdings of securities tokens. Payments were automatically prepared at defined dates and automatically settled in CBDC at defined payment dates on the blockchain platform.
Smart contracts have the ability to provide more autonomy to capital market participants while maintaining the control imposed by regulators on a blockchain platform.
Landmark for CBDCs
According to Soren Mortensen, global director of financial markets at IBM, the project “went well beyond previous blockchain initiatives” because it successfully trialled “most central securities depository and central bank processes” while eliminating existing interim steps such as reconciliation between market intermediaries. Blockchain could therefore facilitate a reduction of the settlement cycle, leading to capital and margin cost reductions.
Veteran policymaker Benoît Cœuré warned central banks last month to act more quickly to develop official digital assets because new technologies such as decentralised finance posed a threat to banks and other depository institutions.
Due to the nature of Distributed Ledger Technology (DLT), it is possible to process transactions without the need for an intermediary, reducing fees and increasing speed, while transactions remain completely traceable and transparent. Policymakers are worried that private sector initiatives around payments and cryptocurrency issuance could lead to central banks losing control of monetary policy, therefore spurring the uptake of CBDCs.
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