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22/ The recent wholesale central bank digital currency initiative taken jointly by Banque de France and Banque centrale du Luxembourg
19/01/2023
Blog post by Gaston Reinesch, Governor of the BCL
What is a wholesale central bank digital currency?
The term wholesale central bank digital currency (CBDC) refers to the settlement of interbank transfers and related wholesale transactions in central bank money.[1],[2] In the euro area, a wholesale CBDC is provided by the TARGET services operated by the Eurosystem, which ensure the flow of cash, securities and collateral, settled in central bank money.[3]
Wholesale CBDCs may therefore not be confused with retail CBDCs (such as the Digital euro currently investigated by the Eurosystem[4]) which aim at providing a digital form of central bank money which, inter alia, could be used by citizens and retailers to make payments.[5]
As pointed by ECB Executive Board member F. Panetta “Despite the uncertainties surrounding DLT’s[6] potential, we want to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement. We must ensure that, in such a scenario, central bank money would still retain its role as the settlement asset for wholesale transactions. If market players start to use DLT for securities settlement but face difficulties using TARGET Services, they may turn to alternatives like commercial bank money or stablecoins. This would entail a number of risks, such as central bank money having a reduced role in settlement processes, as well as trading and liquidity becoming fragmented. The result would be payments and securities settlement becoming less safe and less efficient, which would undermine financial stability. “
The Eurosystem is therefore continuously investigating means to enhance its financial market infrastructure so that it continues to meet market needs, stays ahead of cyber security challenges and keeps up with the latest technological developments.
The so-called Venus issuance
On November 29, the Banque de France and the Banque centrale du Luxembourg jointly seized a wholesale CBDC initiative. The two national central banks successfully assisted the European Investment Bank (EIB) in the so-called Venus initiative, by providing a safe settlement asset in the form of a tokenised representation of euro central bank money that can be described as an experimental CBDC. The Venus initiative consisted in a EUR 100 million digital native bond issuance by the EIB under Luxembourg law[7], and settled using a tokenised representation of wholesale euro central bank money. The EIB appointed Goldman Sachs Bank Europe, Santander and Société Générale as the banking syndication issuing and distributing the digital native bonds.
From a technical standpoint, the EIB digital native bond was issued and registered on a permissioned DLT and the subscriptions were cash settled using experimental CBDC tokens issued on a distinct permissioned DLT jointly operated by the Banque de France and the Banque centrale du Luxembourg. The initiative required the development and deployment of a trusted message exchange mechanism between DLTs in order to simultaneously transfer the experimental CBDC tokens and distribute the digital native bond on the day of the issuance.
As a key element of the innovative EIB bond issuance, the Banque de France and the Banque centrale du Luxembourg offer a possible cross-border answer to the rising market interest in digital native securities settlement in central bank money.
Going forward
The BCL’s active involvement in the Venus initiative marks another step in its continuous efforts to develop innovative solutions for the market. As part of this process, in 2018, the BCL started to analyze the potential of the DLT, for instance by participating in the Eurochain Hackathons[8] and by maintaining regular contacts with the market to better assess the needs in the field of digitalization and tokenization.
Going forward, the BCL intends to enhance its research in the field of wholesale CDBC and welcomes cooperation with, inter alia, other central banks on issues related to cross-border wholesale CBDC models.
[1] See also the speech “Payments and Securities Settlement in Europe – today and tomorrow” held by ECB Executive Board member F. Panetta on September 26, 2022.
[2] Central bank money refers to money that is a liability of the central bank. In the euro area, there are currently two types of central bank money, i.e. physical cash and digital balances held by commercial banks at the Eurosystem national central banks. Banknotes and coins are currently the only central bank money available to the public. Unlike central bank money, commercial bank money - such as bank deposits – are a claim against commercial banks.
[3] These financial market infrastructure services include TARGET2 (for settling payments), T2S (for settling securities), TIPS (a service for instant payments) and ECMS (a service for collateral management).
[4] For further information about the Eurosystem’s ongoing work on a Digital euro please consult the dedicated web site at https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html#know
[5] A digital retail CBDC can be imagined as a digital banknote.
[6] Distributed Ledger Technology
[7] The legal framework in Luxembourg explicitly permits the use of DLT technology for the issuance, holding and settlement of non-listed securities. Under the 2013 Act on dematerialization, securities may be issued using the DLT, by a so-called “central account keeper”. Under the law of 1st August 2001 on the circulation of securities, securities may be held and settled, using the same DLT.
[8] https://www.bcl.lu/fr/Recherche/publications/technicalpapers/2020_BCL_Technical-Paper_DCB-Services.pdf
