MNBC: how France came to be at the forefront

The race is on. In recent years, blockchain infrastructures have continued to develop, particularly in the wake of the adoption of cryptocurrencies and decentralised finance (DeFi).

The aim of this alternative financial system is to make the traditional system more efficient, with in particular : increased transparency, reduced costs and automation of a number of operations.

Faced with this, and the proliferation of projects such as Meta (which wanted to launch its own cryptocurrency), the monetary authorities have launched major projects.

Everywhere you look on the planet, central banks are virtually all studying an overhaul of their system with the creation of a native currency, in other words, a digital euro, dollar or yen that is compatible with this new technological universe.

One of the most active areas on the subject is Europe. For more than two years, experiments have been conducted by various banks on a national scale including the possible launch of a central bank digital currency (MNBC) that would serve as a reference settlement asset for public and private institutions (banks and businesses).

The aspect concerning the digital euro for private individuals (euro retail) is less advanced, however, not least because it is a highly political subject, particularly as regards the traceability of transactions. At a Banque de France conference in early October, its governor, François Villeroy de Galhau, acknowledged the complexity of introducing a digital euro for retail customers, without ruling out the idea.

Meanwhile, of all the MNBC projects for institutional customers, several stand out, such as the one in France.

The digital currency solution proposed by the Banque de France is the one "that seems to most embrace the new paradigms of blockchain", points out Xavier Lavayssière, an independent payments expert and specialist in crypto topics.

The Banque de France's ambitious project

Overall, three projects have caught the eye of the European Central Bank, which will co-pilot the experiments from 2024.

The Italians are banking on their TIPS Hash-Link instant payment system, which they propose to connect to Target 2, the eurozone banks' settlement system.

Banca Italia has designed it to "overcome certain failure scenarios commonly encountered" with settlement systems based on blockchain smart contracts. TIPS Hash-Link would then act as a "trusted escrow" to ensure that settlements run smoothly.

For its part, the Bundesbank is banking on its Trigger payment systems, which operate via a distributed ledger (DLT) specific to the three-tier Eurosystem.

To make a settlement, companies would connect to the network managed exclusively by the commercial banks and the central bank. The Germans claim that their system is compatible with several payment systems, and not just Target 2.

The Banque de France, for its part, is defending the idea of a more significant modification to the current system with DL3S, a kind of licensed European blockchain via which both MNBC and... regulated stablecoins could circulate!

It would also be compatible with other blockchains at international level with a view to making cross-border payments. To this end, the Banque de France has already carried out experiments as part of the Mariana project with the Monetary Authority of Singapore (MAS), the Swiss National Bank (SNB) and the innovation centre of the Bank for International Settlements (BIS), a sort of "bank of central banks".

Technically, Mariana incorporates some of the technical principles of a decentralised finance exchange platform (DeFi). It operates thanks to an automated market maker (AMM), as well as a decentralised platform for automatically exchanging and settling spot foreign exchange transactions.

"Such a major project enables the Banque de France to propose a standardisation of processes that could be adopted internationally," explains Frédéric Ocana, cybersecurity project manager at the Banque de France from 2017 to 2021.

As part of Mariana, a technical token standard has been proposed to facilitate interoperability and exchanges.

One of the first positioned

If the Banque de France can afford to propose such an ambitious project, it is because unlike its neighbours, "it positioned itself very early on the subject", explains Xavier Lavayssière, an independent payments expert. Indeed, the Banque de France began work on the subject as early as 2019.

"Synergies seem to be greater between the Banque de France and its national financial ecosystem than in Italy or Germany. It has also benefited from a very dynamic French crypto ecosystem," adds Xavier Lavayssière.

In fact, one of the most active banks on the subject on a European - and even global - scale is Société Générale via its SG-Forge subsidiary. In addition to having notably carried out its first refinancing operation using a DeFi protocol, in this case Maker, since April it has launched ConVertible, a licensed stablecoin replicating the value of the euro.

Convincing investors

After this initial phase conducted at national level, it is the ECB that will be responsible for directing the next experiments, which should start in early 2024, based on the various solutions proposed by the Italians, Germans and French.

The smooth transition proposed by the Germans and Italians could work in their favour against the Banque de France's ambitious project. "What remains to be done is to convince institutional investors of the benefits of such a major overhaul of the system, which at the moment is working rather well," warns Stéphanie Lheureux, head of digital asset competence at Euroclear.

For Jean-Marc Stenger, CEO of SG-Forge, "the timing is very good" since, in parallel with these ECB-led experiments, the MiCA text, which aims to harmonise crypto regulations between the 27 member countries, will come into force from 31 December 2024.

In place since last March and for a period of three years, the pilot scheme will also allow market players to test the use of blockchain as part of asset tokenisation. The race is on.