The European Union (EU) is preparing to reveal its plans for a wholesale central bank digital currency (CBDC) that would be used by financial institutions to settle securities and foreign exchange transactions. The governor of France’s central bank, François Villeroy de Galhau, said on Tuesday that the details of the initiative would be published in the coming weeks and that experiments would be carried out next year.
What is a Wholesale CBDC?
A wholesale CBDC is a type of digital money that is issued by a central bank and used only by authorized financial intermediaries, such as banks, clearing houses, and payment service providers. Unlike a retail CBDC, which would be accessible to the general public, a wholesale CBDC would not replace cash or bank deposits, but rather improve the efficiency and security of interbank transactions.
A wholesale CBDC would be based on distributed ledger technology (DLT), such as blockchain, which allows for the verification and recording of transactions without the need for a central authority. This could reduce costs, risks, and delays in the settlement of financial instruments, such as bonds, stocks, and currencies.
Why is the EU Interested in a Wholesale CBDC?
The EU is one of the major players in the global financial markets, with the euro being the second most used currency in the world after the US dollar. The EU also has a single market that allows for the free movement of goods, services, capital, and people across its 27 member states. Therefore, the EU has a strong interest in enhancing its financial integration and innovation, as well as its resilience to external shocks and cyberattacks.
According to Villeroy de Galhau, the governor of France’s central bank, the EU’s wholesale CBDC project is motivated by three main objectives:
- To foster cross-border payments within the euro area and beyond
- To support the development of new market infrastructures based on DLT
- To ensure that central banks remain in control of the supply and circulation of money
How Will the EU Implement Its Wholesale CBDC?
The EU’s wholesale CBDC project is led by the Eurosystem, which comprises the European Central Bank (ECB) and the national central banks of the euro area countries. The project is part of a broader strategy to digitalize the euro and to explore the potential benefits and challenges of issuing a retail CBDC in the future.
The Eurosystem will publish the eligibility criteria and the call for interest for its wholesale CBDC experiments in the coming weeks. The experiments will involve testing different protocols and blockchains, including a proprietary DLT platform developed by the ECB called DL3S (Distributed Ledger for Securities Settlement System). The experiments will also include trials with real transactions involving selected financial institutions.
The Eurosystem expects to complete its wholesale CBDC experiments by 2024. Based on the results, it will decide whether to pursue further development or deployment of a wholesale CBDC for the euro area.
