Bank of France Believes Distributed Ledger Technology Will Enhance Financial Stability

DLT has the “potential to increase the efficiency and effectiveness of the monetary and financial system,” the Banque de France said in a July 21 report.

The Bank of France believes that distributed ledger technology (DLT) will enhance financial stability due to its transparency.

DLT has the “potential to increase the efficiency and effectiveness of the monetary and financial system,” the Banque de France said in a July 21 report. The regulator also believes it can make central bank digital currencies (CBDCs) more efficient and secure.

The potential of the technology has spawned numerous private and public sector projects that seek to revolutionize the financial system.

The private sector is developing stablecoins, cryptocurrencies, and tokenizing real-world assets in an attempt to introduce the aforementioned innovations into the financial system.

For the public sector, the regulator said central banks around the world need to ensure that "the value of central bank money (CeBM) is maintained" in the changing financial landscape.

According to reports:

“CeBM can help mitigate the liquidity diversification risks that may arise from the widespread adoption of private settlement assets.”

The regulator believes that the best way to maintain the value and relevance of CeBM is to develop a CBDC, which is "a new form of central bank money."

CBDC Wholesale

Central bank digital currencies would address some of the risks posed by the growing popularity of private settlement assets and allow central banks to effectively manage financial stability as digitization increases, the report said.

The regulator added that its pilots had shown that issuing a wholesale CBDC (wCBDC) would complement a retail CBDC (rCBDC) as it made the former a “safe settlement asset solution.” It also improves the security and efficiency of cross-border transactions.

Splitting rCBDC and wCBDC ensures that there will always be "equal convertibility" between CeBM and commercial bank money (CoBM), regardless of the presence of different types of settlement assets on the DLT.

According to the Banque de France, there are two main use cases for wCBDC: settlement of tokenized assets and settlement of cross-border transactions.

Central banks around the world are researching CBDCs and are in various stages of development. The BIS recently urged regulators to focus on interoperability when it comes to CBDCs, as they need to compete globally with cryptocurrencies.

Transparency will bring more stability

The Bank of France stated that the inherent transparency of DLT is conducive to stability and will help strengthen the global financial system.

The watchdog said DLT enables law enforcement and regulators to track illicit financial activity faster and easier thanks to immutable and clear financial records.

According to the report:

"Increased regulatory capacity contributes to overall financial stability."

The central bank also highlighted that the transparency of DLT could raise concerns about privacy and confidentiality.

The report lays out a number of ways to deal with some of these issues by using identity mixers and restricting access to user data, and it also recommends new regulations and laws.