The French central bank believes distributed ledger technology (DLT) will enhance financial stability due to its transparent nature.

Banque de France said in a report on July 21 that DLT has the “potential to enhance the efficiency and effectiveness of the monetary and financial system.” The watchdog also believes it can make central bank digital currencies (CBDCs) more efficient and secure.

The potential of the technology has given rise to a number of projects in the private and public sectors that are attempting to revolutionize the financial system.

The private sector is developing stablecoins, cryptocurrencies, and tokenizing real-world assets in an attempt to bring the aforementioned innovations to the financial system.

For the public sector, the regulator said that central banks around the world need to ensure that they “maintain the value” of central bank money (CeBM) in the evolving financial landscape.

According to the report:

“CeBM can help mitigate the risks of liquidity fragmentation that could arise from the widespread adoption of private settlement assets.”

The regulator believes the best way to maintain the value and relevancy of CeBM is by developing CBDCs, which are “a new form of central bank money.”

Central bank digital currencies would counter some of the risk arising from private settlement assets that are becoming more popular and allow the central bank to effectively manage financial stability as it becomes more digital, according to the report.

The watchdog added that its pilots have shown that issuing a wholesale CBDC (wCBDC) would complement a retail CBDC (rCBDC) as it allows the former to become a “safe settlement asset solution.” It also improves the security and efficiency of cross-border transactions.

Splitting rCBDCs and wCBDCs ensure that there is always “convertibility at par” between CeBM and commercial bank money (CoBM) regardless of the different types of settlement assets present on DLT.

Banque de France said there are two main use cases for a wCBDC — settlement of tokenized assets and settlement of cross-border transactions.

Central banks around the world are working on CBDCs and are in various stages of development. The BIS recently urged regulators to focus on interoperability when it comes to CBDCs as they need to be global in scope to compete with cryptocurrencies.

Banque de France said that the inherent transparency in DLT is a boon for stability and will help strengthen the global financial system.

The watchdog said that DLT allows law enforcement and regulators to track  illicit financial activity much more quickly and easily compared thanks to clear financial records that cannot be tampered.

The report said:

“This increased supervisory capability can contribute to overall financial stability.”

The central bank also highlighted that the transparent nature of DLT can give rise to concerns around privacy and confidentiality.

The report lays out a number of ways to deal with some of these issues by using identity mixers and limiting access to user data. It also recommends creating new regulation and laws.

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