In 2020, Consensys announced four separate CBDC projects: the Hong Kong Monetary Authority, Société Générale - Forge, the Bank of Thailand, and the Australian Reserve Bank. As we explained in a recent blog post, the economic and political rationale for issuing central bank digital currencies can differ greatly per jurisdiction. In order to get to the heart of the quickly changing landscape of Central Bank Digital Currencies, we decided to ask Jean Michel Godeffroy, a monetary policy expert with sixteen years experience as director general at the European Central Bank.
Jean Michel Godeffroy joined Banque de France and started his professional career in the foreign exchange department, first as a trader and then in the management of the foreign exchange reserves. In June 1989, he was seconded to the Federal Reserve Bank of New-York. His stay was marked by significant reforms in Fedwire and CHIPS, the two major US payment systems. He then returned to Paris, to the General Secretariat of the Banking Commission, where he was appointed head of the section in charge of the supervision of the French investment banks.
In June 1991, a Working Group on Payment Systems was established by the Central Bank Governors of the European Union. Tommaso Padoa-Schioppa, the Group Chairman, asked Jean-Michel Godeffroy to become the rapporteur at the Bank for International Settlements which then housed the Secretariat of the Committee of EU Governors. By January 1994, the Secretariat of the Committee of Governors became the European Monetary Institute. He was appointed deputy head of the policy division. The division was in charge of the preparations for the establishment of the European Central Bank. As such, Jean Michel Godeffroy became chairman of the “TARGET working group”, in charge of connecting the payment systems of the different national central banks in order to create TARGET, the core payment system for the euro.
In June 1998, he became the youngest director general of the European Central Bank (ECB), which had just been created. The main task was to ensure the timely opening of the TARGET system, which played a key role in the smooth introduction of the euro. In this dual role of director general at the ECB and chairman of a Eurosystem committee, he played an active role in the launch of the Single Euro Payments Area (SEPA). He also contributed to the establishment of prudential standards for securities settlement systems.
From 1998 to 2009, he was also a member of the Committee on Payment and Settlement Systems of the Group of Ten. As such he has contributed, for example, to the oversight of CLS, the international system for the settlement of foreign exchange transactions. The private sector had experienced difficulties to set up a unified settlement system for Europe and the Eurosystem offered to help. In this context, he also participated in harmonizing standards and procedures relating to securities transactions in Europe.
Given this significant experience, we ask Jean Michel Godeffroy five questions to understand what he thinks lies in store for Central Bank Digital Currencies.
1. As a former director-general at the ECB, what is your vision for the future of money? Will digital currencies become the new norm?
There are very different concepts behind the generic term “digital currency.”
The first relates to cryptocurrencies of the first generation, the most famous of which are Bitcoin. These are assets issued and circulating thanks to blockchains or DLT. They have no intrinsic value because they are backed neither by valuable goods (such as gold) nor by the balance sheet of an issuer. Central banks prefer to call them crypto assets rather than cryptocurrencies because their lack of an anchor makes them extremely volatile, very attractive as speculative instruments, but very inconvenient as means of payment.
The second concept consists in stablecoins which are technically similar to cryptocurrencies of the first generation (they use DLT), except that they have a mechanism embedded to ensure that their value is at par with fiat money, usually a collateral pool called “reserve”. The most famous asset-backed stablecoin is Facebook’s Libra, even though it hasn’t been issued yet.
Central bank digital currencies, or CBDC, represent the third concept. These are liabilities of the central bank circulating electronically, available to all economic agents. They are a hybrid between banknotes, i.e. central bank money in a paper form, available to all economic agents, and bank reserves which circulate electronically but only between financial institutions. CBDC may, or may not, use distributed ledger technologies (DLT).
I do not think that cryptocurrencies of the first generation have a future as money because they are not stable enough to be generally accepted as a price reference, as a means of payment, and as a reserve of value. My understanding is that the digitalisation of the economy will progressively eliminate banknotes (but it can take twenty, thirty years, or even more). Therefore, I think CBDC will progressively replace banknotes, in the same way as banknotes replaced commodity money in the past century.
Stablecoins may also have a future as long as their issuers can convince the general public that their link with fiat money is credible. This probably means that stablecoins will have to be properly regulated. Until the 1990s, money in its electronic form was issued only by banks. Now non-banks can also issue money — more precisely electronic money, or e-money. Asset-backed stable coins are very similar to e-money, except that they use DLT. Will DLT increase the attractiveness of non-bank money? Possibly, especially if it is issued by a non-bank linked to a company like Facebook with a huge social network.
In the end, the issue is not whether digital currencies will become the new norm but rather when will central banks move their retail payment instrument to electronics and whether DLT will facilitate the provision of payment services by non-banks.
Finally, while CBDC and stablecoins can use the same “rails” (infrastructure, standards, …) they are likely to use conversion mechanisms to switch from one form of money to another one (like ATMs today between banknotes and bank money) to reflect difference in quality between public money (Banknotes, CBDC), fully regulated and insured money (bank money), and non-bank money, which is more lightly regulated and non-insured.
2. Do you think the policy and regulatory frameworks will have to change to enable the emergence of digital currencies? How?
I do not think major laws or regulations will have to be changed. In some countries, but not all of them, central bank laws will have to be changed for the central bank to be allowed to issue CBDC. Perhaps the law would have to be changed to make CBDC legal tender. But I do not think this is essential. As far as stablecoins are concerned, it would have to be investigated whether e-money legislations would not be appropriate.
3. What will be the impact of digital currencies on the role and activities of Central Banks, Regulators and Policy Makers?
I do not think their role will change fundamentally. What is important is that regulators understand clearly the risks embedded with new forms of money. I have no reason to think that this will not be the case.
4. What are the risks for Central Banks to issue CBDC? What are the risks of not issuing a CBDC?
The risks of issuing CBDC relate mostly to the lack of information about the latent demand for CBDC. If this demand is very low, for example because deposit insurance has blurred the difference between private money and central bank money, then central banks run a reputation risk in investing energy and money in a project with no future. If, on the contrary, demand for CBDC is very high, it would trigger bank disintermediation which could ultimately create financial stability problems and possibly impact on economic growth. This explains why central banks are very prudent!
The risks of not issuing CBDC is the risk of leaving the payment system entirely in the hands of the private sector, and to rely only on regulation and supervision to solve competition and efficiency issues. In many countries, this risk is particularly high because the payment industry tends to be more and more concentrated in the hands of very powerful operators based in the US or in China. Therefore, issuing CBDC may also be motivated by national sovereignty considerations.
5. What do you think will be the key milestones that will enable the emergence of CBDC in the next 3-5 years? What are the key stakeholders and what is expected of them?
Major central banks are likely to “haste slowly.” The economic issues behind CBDC are now relatively well understood. I see three probable developments in the short term (one to three years):
Testing DLT, first for bank reserves, a field where central bank already issue money in an electronic form
Discussing with the main stakeholders, banks and lawmakers in particular, in view of building a consensus around CBDC issuance
Coordinating within the central bank community in view of possibly issuing CBDC across countries according to the same standards so that CBDC also improves the efficiency of cross-border payments.
As a result, I expect progress towards CBDC to be relatively slow in mature economies. However, it seems to me that CBDC has a very strong potential to foster financial inclusion in developing countries where CBDC could replace mobile money, a very dynamic form of electronic money mostly issued at present by telecom companies.