23/11/2021 | Banque de France

Executive summary

The ongoing digitalisation of financial markets and payments brings the promise of substantial benefits through improvements in the functioning and efficiency of the financial system. However, this movement also comes with new challenges and potential risks for users, consumers and investors. In order to continue to fulfil their public objectives of monetary stability and financial stability while promoting sustainable innovation, central banks are considering issuing a new form of central bank money (CeBM), called central bank digital currency (CBDC), which can be used for retail or wholesale payments. Meanwhile, the financial industry has been exploring the opportunities of new technologies, such as Distributed Ledger Technologies1 (DLT) with a view to tokenising traditional financial instruments, i.e. designing a digital representation of rights and circulating them on a network in the form of tokens. More generally, the landscape for payments is rapidly shifting, at both the retail and wholesale level. Along with the rise of new technologies such as DLT, new crypto-assets are emerging – including stablecoins – and new actors such as BigTechs, are entering the market for payments and financial services, or amplifying the role they already play. These trends could raise three types of challenges from the perspective of central banks. First, they could lead to a loss of sovereignty in the field of payments if foreign players become dominant in those markets. Secondly, as foreign CBDCs or stablecoins linked to foreign currencies develop, monetary sovereignty could be challenged. Finally, the role of CeBM could then be challenged up to a point where it no longer serves as an effective anchor for the financial system. These challenges require central banks and policymakers to adopt a holistic approach with three types of response. The first one is regulatory, to ensure that new actors do not benefit from regulatory arbitrage. The second one is to facilitate the development of private initiatives which sustain innovation and autonomy in Europe. Finally, the last response is for central banks to become innovators themselves and to conduct their own experiments.

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