Digitization of payments and equilibrium of the monetary system

The appearance of crypto-assets and the digitization of payments are confusing the cards of the classic distribution between central bank money and commercial money. Article published as part of Printemps de l'Economie, of which La Tribune is a partner. The author, Nathalie Aufauvre, is Director General of Financial Stability and Operations at the Banque de France.

The creation of Bitcoin in 2008 sparked renewed media, public but also academic interest in the nature and role of money. But this effervescence has been inversely proportional to the real footprint of this first generation of crypto-assets, whose use in the field of payments remains marginal: more than ten years after its launch, Bitcoin has not carried out the project. displayed to replace legal currencies. More recently, a second generation of crypto-assets has appeared, stablecoins, which have the ambition to overcome the limits of first-generation crypto-assets, in particular their very high volatility. However, these crypto-assets remain nonetheless bearers of risks, all the more important as certain stablecoins have a global ambition that could make them systemic.

These technological breakthroughs sharpen our awareness of the need to promote innovations favorable to a financial sector that is more stable, more inclusive and more suited to the expectations of consumers in the contemporary digitalized world. Conceptually, these new assets muddy the waters of the classic split between central bank money and commercial money.

The paradigm that characterizes modern monetary systems is based on the interaction between central banks and commercial banks in the issuance of money. Central bank money, which is the safest settlement asset, is made available in the form of banknotes but also in the form of deposits by credit institutions in the books of the central bank. It coexists with the commercial bank money made up of the sums entered in the accounts of customers in banks In a functional monetary system, the money issued by commercial banks and the money issued by the central bank coexist in a free convertibility and at parity. Coexistence of central money and commercial money does not mean absence of specialization. Indeed, central bank money and commercial money fulfill complementary roles, both contributing to the proper functioning of the economy: central money as an anchor and guarantor of the stability of the monetary system, commercial money as a key instrument for financing the economy and a privileged means of exchanges between economic agents in a digitalized economy.

The digital transformation of payments currently observed responds to a demand from consumers, who wish to have simple, instantaneous, transparent, more secure and less expensive payment solutions. It shifts the balance between central and commercial currencies, with significant differences in dynamics depending on whether we are talking about interbank transactions, on financial markets, or retail payments. The share of interbank payments settled in central money is increasing. This increased use of the quintessential risk-free settlement asset is a long-term effect of the 2008 financial crisis. In 2018, 60% of euro area interbank transactions passing through payment systems were settled on the books. of the Central Bank, for 90% of the total amount of these transactions.

Regarding retail payments, digitization, further accelerated by the health crisis linked to COVID-19, is a long-term trend. This works in favor of an increase in the share of electronic means of payment, and therefore in commercial currency, rather than in cash and therefore in central currency. Thus, SEPA payment methods and even more so the bank card are constantly increasing. Cash, which remains a simple, secure and widely accepted means of payment because it is legal tender, has seen its share in payments decrease. Finally, the appearance of crypto-assets, especially second generation, which aim to offer new payment methods on a broader basis and at a cost which is presented as having to be lower, upset this balance and revive the debate on the role of central money.

Faced with these developments, Europe must collectively defend a strategy which promotes innovation and takes risks into account, protects citizens' data and European payment sovereignty. As such, we must welcome the digital finance package that the European Commission unveiled last September, in particular the retail payments strategy. This initiative supports creativity and the development of new services benefiting all users, both individuals and businesses, and promotes European scientific and technological expertise (artificial intelligence, cryptography, distributed registers, etc.). At the same time, it ensures that the deployment of new payment solutions does not create an excessive dependence on suppliers located outside the European Union, the corollary of which could be a weak capacity to control how these manage the personal and payment data of European consumers. The EPI (European Payments Initiative) project led by a group of 16 European banks and aimed at offering a unified pan-European payment solution meets these criteria and has received the full support of the Commission and the Eurosystem.
In conjunction with national and international regulators, Europe must assume its role as regulator and supervisor, to ensure financial stability.

The issue of a private means of payment backed by a reserve fund without fixed parity can be compared to an attempt to create a private currency. The substitution, at least partially, of this type of crypto-asset for central money or traditional commercial money as a settlement asset would raise significant risks from the point of view of financial stability and consumer protection. . These assets indeed offer weak guarantees in terms of counterparty and liquidity risks and in terms of business continuity. The presentation by the European Commission at the end of September of a draft regulation aimed at regulating crypto-assets and the publication in October of the report of the Financial Stability Council on the regulatory framework of stablecoins mark an important step towards the framework of these initiatives.

The Eurosystem is fully involved in supporting innovation and overseeing crypto-assets. As an operator and supplier of payment and money systems, central banks also have a role to play in making a concrete contribution to harnessing technological progress for a better financial system. Current technological developments are forcing central banks to rethink the conditions for making central money available. The issuance of a central bank digital currency (MDBC), both for interbank payments and for retail payments, requires a thorough examination in order to bring the benefits in terms of liquidity, security, stability of the central bank money to citizens, businesses and financial institutions.

It is in this context that the publication by the Eurosystem on October 2 of a consultative report on a digital euro falls. Prior to any decision, the Eurosystem will ensure that it understands all the economic and financial consequences of an MDBC and will rigorously assess the technological and operational feasibility, in particular through experiments. The Banque de France is a pioneer in this area, since we have already launched an experimentation program with innovative private players to work on an MDBC for the purposes of interbank settlements. This open approach will also be followed for the retail MDBC. It testifies to the conviction that it is through a public-private partnership approach, and not according to a logic of competition, elimination or "war" of currencies, that technological progress can be put to the service of a monetary system that serves the interests of our economy and our citizens.

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