Banque de France, the French central bank, has completed what it is calling the first successful test of a digital euro, as part of its ongoing experiments with central bank digital currency (CBDC).
According to the announcement, Banque de France used its in-house developed blockchain technology to experiment with the use of CBDC. The bank used its digital euro on 14 May, to settle an issue of digital financial securities carried out by investment bank Société Générale.
“Since the start of the year, the Banque de France has embarked on an experimental approach to central bank digital currency, aimed at exploring with partners the potential contributions of new technologies to improve the functioning of the financial markets and more particularly interbank regulations (so-called “wholesale” central bank digital currency),” read a statement from the bank.
The French central bank further said that it will begin more robust testing of the technology in the coming weeks. Though not much info was released regarding the tests, they did indicate that the pilot program is focusing more on the wholesale use of CBDC, rather than retail. Where as retail CBDC’s will be open to regular consumers, a wholesale CBDC will be used mainly by banks and institutional players.
As far as we know, the only entity that is currently focused on retail CBDC implementation of digital euro is the European Central Bank (ECB). During the Consensus 2020 crypto event on 11 May, an executive member of the ECB, Yves Mersch, outlined that the bank had set up a task force to look into CBDCs earlier this year, and that they are focused on retail implementation of the technology.
With the euro being the official currency of 19 European Union countries, a project to develop a digital euro would require a collaborative approach between the ECB and the various central banks in the member states. Different countries have put themselves forward to play a leading role.
The Bank of France published a document on March 30th announcing its intentions to launch a CBDC for use between banks, partly as a remedy to ailing legacy systems that currently encumber settlement between institutions.
The Dutch National Bank has put its hand up to play a leading role in the development of a digital euro, publishing a paper in which it describes CBDCs role in retaining public money. This is more aligned to the ECB’s vision for a retail CBDC, while the Banque de France’s would be for wholesale use.
The DNB’s paper states that CBDCs must be universally accessible, which the wholesale model would fail to meet. It would also not address the decline in the use of cash, a leading motivation of the DNB in seeing a digital euro developed.
The DNB identifies three factors that will affect the urgency of the debate around a digital euro. The first two are the decline in cash usage and the competition from private currencies such as Libra and how they impact development in digital payments and financial inclusion.
The third is the present COVID-19 crisis. On the one hand, this will be assumed to be closely linked to the use of cash – more use of contactless payments, more online shopping, less brick-and-mortar retailers open etc – but the overall picture is more complicated.
While some countries, including the Netherlands, are seeing the ongoing trend of cash usage decline accelerate, other countries may in fact be seeing the opposite. Quite often, the importance of cash increases at times of crisis.
The DNB’s paper states that the relative percentages of transactions carried out using cash and electronic means have effectively switched since 2010. While Dutch consumers paid 35% of their transactions electronically and 65% in cash a decade ago, the figures stood at 32% for cash and 68% electronic in 2019.
While most countries with a strong digital infrastructure have indeed witnessed a sharp downturn in cash usage in recent years, the Netherlands is ahead of the curve holding the lowest percentage of payments in cash in the eurozone in 2017.
According to research by the DNB, Deutsche Bundesbank and ECB, cash was still very much in the ascendancy in 2017 in France (69% of transaction), Spain (87%), Germany (80%), Italy (86%), Belgium (63%), Portugal (81%) and Ireland (79%).
The Netherlands may not have a huge competition to be the testing ground for a eurozone digital euro, however it will not amount to anything if its neighbours do not have the same desire to proceeded.