The health crisis that we have all been living through for a year now has affected people's day-to-day habits, changing not only how we consume but also how we like to pay. This has sped up the transition towards more digital approaches.
This acceleration raises major challenges for Europe's payment
ecosystem, but also for payment regulators and supervisors. Thinking now
specifically from the viewpoint of the latter, the central question to
be addressed is as follows: how to facilitate and support the transition
whilst at the same time maintaining the foundations that underpin a
safe and efficient payment system. From a safety perspective, these
foundations are built on an appropriate regulatory framework and on the
availability under any circumstance of central bank money, which alone
has legal tender status and which anchors the stability of the whole
system; efficiency, meanwhile, relies on having diverse and competing
payment solutions and participants, to ensure inclusivity and
competitiveness.
I would like to share with you my perspective on the answers to this
question. I will begin by highlighting the challenges raised by the
accelerated digital transition of our payment system, seen from the
perspective of an authority tasked with safeguarding monetary and
financial stability (1), before going on to discuss how we at the Banque
de France are playing our part in tackling these challenges (2).
I/ Challenges
Major innovation in the field of payments has clearly accompanied the
increasing digitalisation of the ways in which we consume and behave,
fuelling the emergence of a dynamic and enhanced new ecosystem. As I see
it, this raises three types of challenges for the safety and efficiency
of our payment system.
A. Ensure that the rise of "decentralised finance" contributes positively to the safety and efficiency of our payment system
When I say decentralised finance, I am talking about the new trend
towards the tokenisation of financial assets, such as the creation of
new tradable assets associated with new rights, for instance utility
tokens, and the development of crypto-assets. These offer opportunities to improve our payment systems and solutions,
particularly for cross-border payments, but also for securities
issuance and settlement systems. They could also help to expand the
array of financing tools available to businesses. But they also
pose risks that could undermine the efficiency and safety of these
systems. These risks must be mitigated and controlled.
First-generation crypto-assets were born of a desire to create a
disintermediated means of payment that would not have an issuer and that
would circulate on decentralised settlement infrastructures beyond the
control of banks and governments. As a result of this, their actual
footprint remains marginal, however much media attention they may
receive. Furthermore, as intermediaries in exchanges, these assets are
far less efficient than our existing currencies, for a variety of
reasons, including their volatile prices, transaction costs and
transaction times, which make it hard to use these assets as a means of
payment, plus the risks to which users and service providers are
exposed. Stablecoins seek to remedy the shortcomings of first-generation
crypto-assets, especially their volatility, by being backed by real
assets. But even with Stablecoins, the whole crypto-asset payment chain
remains highly exposed to a range of risks, from legal, financial and
operational risks, to major vulnerabilities in terms of money laundering
and terrorist financing, and consumer and investor information and
protection issues, including a non-zero risk of capital loss even in the
case of Stablecoins. There are also issues, in our countries upholding
the Rule of Law and in our regulated market economies, in terms of
complying with core competition and privacy principles.
B. Fostering "co-opetition" between established players and new entrants
Innovation is often associated with FinTech firms and challengers,
such as the start-ups that build success from an ability to focus their
business and cut costs for a specific service or link in the payment
chain. Yet commercial banks, which have traditionally been a major force
in payments, also play a key role in innovation. Likewise, the main
card schemes helped to drive the emergence of new payment methods, such
as contactless payments and mobile payment terminals.
Through partnerships, acquisitions and incubation projects, but also
by harnessing in house R&D, established participants have expanded
their service offerings to add new solutions, while developing
competition and cooperation with new entrants. "Co-opetition"
relationships are a deep-rooted feature of the payment industry and are
proven to generate value. The challenge now is to nurture them over the
long run, taking care to ensure that relationships with BigTech firms
are included.
This is because the potential network effects enjoyed by BigTech
payment solutions and the upstream payment chain positions of these
firms could create risks of competitive distortion, particularly in
situations where these participants also provide hardware or software
components. Users could find themselves effectively captives of an
ecosystem and left with no choice in terms of payment service, or at
least be influenced by BigTech firms to use their services at the
expense of competitors. This market power might also lead to high fees
for payment transactions that could reduce the revenues – and hence the
innovative capabilities – of partner banks.
C. Consolidate European integration and sovereignty in the area of payments
The limits of Europe's integration and sovereignty in the area of payments have
been highlighted once again by the entry of tech giants into the field
of payments and the emergence of a systemically important project such
as the Libra/Diem initiative, which could see non-European participants
providing new solutions on the European market.
Although implementation of the Single Euro Payments Area (SEPA)
project was beneficial in supporting defragmentation for credit
transfers and direct debits, non-European participants have been able to
leverage regulatory harmonisation in their efforts to conquer the
entire European market, whereas domestic participants have struggled to
expand beyond their country of origin.
Meanwhile, European integration in the area of card payments has failed.
The so called international card schemes exclusively manage all
cross-border payments within the European Union, not to mention a large
share of domestic payments. This situation has created a dependency with multiple consequences. I am talking particularly about
the definition and control of technical standards, financial aspects,
but also challenges related to payment data, i.e. our capacity to
protect these data and enforce compliance with European standards such
as the GDPR, if decision-making centres are based outside Europe.
II/ What is the Banque de France doing?
To help to meet these challenges, we at Banque de France are focusing our activities around two main areas:
1/ Support and implement regulatory frameworks and
supervisory practices that promote innovation and the stability of our
financial system
Most of the current regulatory framework predates the technological breakthroughs that we are now facing. Accordingly,
it makes sense to adjust the regulatory framework to these
technological developments, the challenges they present and the
attendant risks. The same naturally applies to our supervisory framework
and methods. For this reason, we are actively involved in
multilateral cooperation work, such as the G7, the G20, the Financial
Stability Board and the Committee on Payments and Market
Infrastructures, particularly on crypto-assets and enhancing
cross-border payments.
We are also supporting the European strategies on digital finance and
retail payments published by the Commission in the final quarter of
2020 and especially the two flagship initiatives, namely the draft
Markets in Crypto-Assets (MiCA) Regulation and the future Digital
Operational Resilience Act (DORA) Regulation on operational risks in the
financial sector.
2/ Be involved as a participant in the evolution of payment systems
However, adapting the regulatory framework will not be enough. At the
Banque de France, we believe we also need to be part of the evolution
of payment systems by pursuing, at this stage, two goals: facilitate and experiment.
As regards the first of these goals, we want to build on the major
integration projects that have come before and promote the emergence of
European initiatives that can strengthen Europe's payment market.
Right now, just one initiative looks capable of providing a
satisfactory response to the challenges: the European Payments
Initiative, or EPI.
With this initiative now under way, we feel that it is vital for EPI to make good on its promises.
On the experimental front, the Banque de France is currently conducting a programme exploring the use of a central bank digital currency (CBDC) to settle interbank transactions,
to assess to what extent and under what conditions such a currency
could make the settlement of financial-asset transactions safer and more
efficient, while at the same time preserving the fundamental role of
central bank money in the proper execution of these transactions.
The Banque de France is also playing a very active role in
the Eurosystem work, under the aegis of the ECB, on a retail digital
euro. An ECB report published in October 2020 said that the
Eurosystem should get prepared for the swift introduction of a retail
digital euro should the need arise. The Eurosystem held a public
consultation that closed in late January, attracting over 8,000
responses. The input from this will inform the meticulous examination of
the reasons, consequences and prerequisites for the potential
introduction of a CBDC that we are conducting. A first report
will be presented by summer 2021 to the Governing Council, which will
then decide whether to extend the analytical work by carrying out an
investigatory phase.
In the end, the challenge is to determine whether and in what way a
central bank digital euro is necessary. Key areas of analysis include a
consideration of ways to prevent a digital euro from leading to
excessive conversion of bank deposits into CBDC, which could disrupt
bank refinancing and banks' capacity to lend to the real economy, in
turn destabilising the financial system and financing of the economy. A
report published by the Bank for International Settlements and seven
central banks in October 2020 stressed that three foundational
principles must govern any CBDC-related decisions: do not compromise
overarching public policy objectives such as monetary and financial
stability; organise coexistence with other forms of public and private
money; and promote innovation and efficiency in the financial system.
If the decision were taken to introduce a central bank digital euro,
this currency would also have to help to strengthen the sovereignty and
competitiveness of the European payment market, while interacting
smoothly with EPI. Finally, we believe there is a form of continuity
between a retail CBDC and an interbank CBDC: logically, a retail digital
euro should be able to rely on a CBDC for interbank settlement purposes
to support optimal circulation.
Conclusion
Unquestionably, the trend towards greater digitalisation of the
economy, which has accelerated to an unprecedented degree since the
onset of the health crisis, has illustrated the payment ecosystem's
ability to adjust to the health restrictions affecting our economy on an
everyday basis. But this positive assessment must not cause us to
overlook the challenges connected with payment innovation, which touch
on issues of safety, accessibility, competition and sovereignty. At the
Banque de France, we are committed to supporting the development of an
independent, innovative and resilient European payment market that can
maintain confidence in the currency while also strengthening our
monetary and financial sovereignty.
This commitment, which stems from our core statutory tasks, has a
central place in the roadmap followed by our institution. As you may
have seen in the annual report that we published a few days ago,
payments have their rightful place in the Banque de France's strategic
guidelines for 2024, with three initiatives centred on modern, safe
payments and on maintaining confidence in the currency in all its forms
more broadly.
Full speech
BIS
© Banque de France
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