Today, Banque de France published its second article on wholesale CBDC, following a dozen experiments with central bank digital currency (CBDC). The two main use cases for an interbank CBDC are for securities settlement on DLT systems and cross-border payments. Based on its experience, the bank outlined three potential models.

While other European central banks suggest that DLT systems could be linked to existing payment systems for settlement, the French central bank acknowledges that a wholesale CBDC would enable atomic settlement, or delivery-versus-payment where cash and value are exchanged simultaneously. This eliminates the reconciliation process, a key friction that DLT addresses.

The central bank makes a number of policy and technical recommendations. The need for interoperability and standardization are highlighted as essential requirements, both for cross-border CBDCs and for DLT adoption in securities markets.

In recent months, the BIS has proposed its concept of a unified ledger in which banks and central banks transact on the same network. And the IMF has its similar XC concept focused on cross-border payments. Both require interoperability and standardization, as highlighted by the Banque de France.

“This is just the beginning of the journey; we contemplate that multiple DLT wCBDCs could coexist on a global scale. Therefore, it is key to explore its interoperability from the beginning of its design, to avoid replicating the obstacles experienced when interconnecting existing real-time gross settlement (RTGS) systems,” said Emmanuelle Assouan, General Director of Financial Stability and Operations at Banque de France.

Three wholesale CBDC models

One of the puzzles for a central bank is how a wholesale CBDC system should work. The simplest option is an interop model, which works similar to how DLTs interact today. This means that tokenized assets do not leave your ledger and ownership changes within the ledger.

If a DLT securities network needs to settle using a wholesale CBDC, it would have an interoperability mechanism whereby the wholesale CBDC is transferred from one bank to another on the central bank’s ledger. This would be timed to happen simultaneously with the change of ownership of the financial assets in the securities ledger.

A second model is the integration model in which there is a single shared network operated by the Eurosystem (the ECB and the EU central banks). In this case, the tokenized securities and the wholesale CBDC exist on the same ledger for settlement purposes. Cash and securities change hands simultaneously on the same ledger. In reality, the tokenized securities could have originally been issued on a separate infrastructure. Therefore, some interoperability will be required.

In third place is the distribution model, a hybrid of the first two. There is a shared network, operated independently. And each individual network is integrated with the shared network. Therefore, the Eurosystem CBDC network, a foreign CBDC network or multiple financial market infrastructure DLTs would be integrated with the shared network.

The Banque de France does not see the models as mutually exclusive and recognizes that the interoperability solution is the simplest. But he also expects the integration model to be useful.

Meanwhile, the Eurosystem has formally launched work on the subject, and the Banque de France is continuing its wholesale CBDC work, including for the EU DLT pilot regime. The central banks of Germany and Italy will focus on linking DLT networks to existing payment systems.