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Understanding the scope of CBDC from Bank of France

Updated: Apr 19

On March 27th, 2020, the Bank of France launched « a call for applications for experiments with central bank digital currency (CBDC) in interbank regulations. » 

What’s the CBDC?

According to the report published by the bank of France on January 14th, 2020, the CBDC would be a digital asset issued and destroyed by the only central bank, tradable with banknotes and reserves, permanently available in transactions peer-to-peer and circulating on digital media. This digital currency would diverse from the non-cash money by the use of blockchain technology. Thus, it could meet the most demanding security objectives and allow greater liquidity by operating 24/7. François Villeroy de Galhau - Governor of the Bank of France - believes that Central Bank Digital Currency’s creation will allow « to have a lever to assert our sovereignty in the face of private initiatives. »This project also has its origins in the desire not to be too far behind certain countries that have embarked on the creation of national virtual currencies for a few months or years already, like China or Russia.

This French experiment should weigh in the study of a possible e-euro, a virtual European currency called for by Christine Lagarde, President of the European Central Bank.

Analyzing the reasons given in the report for CBDC’s creation highlights its probability of non-success with a plausible threat to democracy.

One of the reasons for issuing a CBDC is the reduction in the costs of managing the currency, the report tells us.

An older ECB study had shown that half of the total cost of cash payments, or around 1% of GDP, was borne by merchants (ECB, 2012). The same study, however, estimated the average unit cost of cash payments at 42 cents, making it already the cheapest form of payment.

However, one of the reasons for the CBDC’s implementation would be the reduction in the costs of money management. But blockchain, i.e. a chain of blocks, where each of them contains validated and immutably saved transactions, is a technology whose security is mainly justified by its cost. Indeed, immutability is due to the exorbitant processing cost, which disinterests fraudsters from trying to modify reality.

Besides, isn’t the reduction in production costs the corollary of the decrease in value? The more the costs of monetary production reduces, the more its production intensifies. And everyone is aware that an increase in the money supply inevitably results in money devaluation. Cases like this have occurred since ancient times, such as the Rai Stones (huge extracted stones), which served as a form of currency on the island of Yap. After the arrival of the Europeans who were able to produce these coins very easily, the Yap Stones suffered from strong hyperinflation, which destroyed the island’s economy. All reductions of money value in History generate a progressive and discreet loss of capital savings until the system’s failure, which has dramatic consequences on people’s life.

Instead of bringing a solution to the lack of soundness of the mixed fiat/scriptural money, the CBDC is the coup de grâce of the contemporaneous monetary devaluation process..

The Bank of France Governor and President of ACPR declares on December 4th, 2019 that the CBDC will be a secure means of payment by using the «hopeful blockchain technology ». Blockchain is a reliable and secured ledger because of its intrinsic property: decentralization. Yet, the report precise that they do not intend to make this blockchain decentralized, as this currency must be centrally issued and managed. If the blockchain is governed by a central authority, reaching consensus on transactions will be a child’s play, and consequently also modifying past information will not require great efforts. Here fraud barriers are falling. This also applies to decentralized projects in the hands of actors on the same side, responding to each other hierarchically. Blockchain security can only exist in the presence of different players who do not know each other, do not respond to each other.

« Having a CBDC would then preserve trust in the financial system, which results in part from the possibility of exchanging assets for legal tender», said the Governor of the Bank of France. In other words, people will trust the financial system because CBDC is legal tender. May this make us wonder about where is the blockchain revolution if users still need to trust a central authority issuing money and managing its supply.

By the way, it is only without being decentralized that the money production costs decrease at the expense of security.

Some might consider that the excellent reputation of our institutions is sufficient to convince us of a trustful use of this «blockchain,» to keep the term used by the Bank of France. However, a good reputation, of the highest distinction, has no protective properties in the face of external attacks - and I would even say that it attracts them like the attraction that fresh dung exerts on flies. The concentration of all monetary value of the European Union under the aegis of one authority creates an inevitable central point of failure. The least decentralized blockchains have demonstrated their low resistance to attacks. And, as here we are not speaking about the least one, we can be sure it will attract hackers eager to compromise the servers of the European Union’s money supply manager. Plus, considering the unpredictable risk of bugs and the states’ inability to anticipate those risks, the protection of this monetary system could only express in a mutable ledger erasing fraudulent attacks.

Thus, we need to trust the central authority to modify retroactively only the attacks from the outside, and we need to believe that no attacks from the inside will occur.

The authors seem to be aware of hacking dangers. The report says CBDC remains « a means of payment that respects privacy, {even if} subject to the risk of capturing personal data in the event of hacking». This risk is possible because the Bank of France, and a fortiori the European central bank, will possess on their ledgers the exhaustive information of transactions made by individuals. By a complete recording of all transactions of individuals, the CBDC becomes a consumption control authoritarian tool. This inestimable knowledge at the hand of one central authority, whose legitimacy rests only on trust, can turn into an inconspicuous political weapon.

Recently on, Jean-Michel Mis, member of parliament, claims that « France now has the opportunity to reclaim sovereignty that has been greatly eroded by the previous failed technological turns of the Internet and the Cloud.» The question of sovereignty also appears in the report and in a declaration of Bank of France Governor, whose guarantee would be undermined by « the growth of private crypto-assets ».

The Bank of France wants to assert its sovereignty over emerging cryptocurrencies of “private” origin. While some of them are the result of an entrepreneurial initiative (XRP, Libra…), others are the result of the voluntary work of individuals who are isolated and independent of each other. If public means: concerning the people as a whole, how such protocols implying the freedom to use it, mine it, propose updates, vote democratically for/or against them, abandon or ignore it, could be private? CBDC does not allow any of these actions, so it is false to consider this project as public currency. Would it be appropriate to specify that the Bank of France is independent of the State, which takes its legitimacy from its people? This institution, a sui generis organization, is a private company (independent from the State) with a mission of a so-called public service: minting currency. But how does that give it any monetary sovereignty? The supreme standard is very clear: "National sovereignty belongs to the people who exercise it through their representatives and by referendum. "Article 3 of the French Constitution, and" The principle of all sovereignty resides essentially in the Nation. No body, no individual, can exercise an authority which does not emanate from it expressly. » Because the Governor and his delegates are appointed and not elected, their authority does not come explicitly

from the Nation.

Monetary sovereignty of the central bank does not exist. Even the statutes of the Bank of France do not mention it once. The bank of France, walking in the wake of Sweden, Russia, and China, the pioneer states in the development of state digital money, seems to have missed a step, mingling sovereignty and power when sovereignty is the power through legitimacy.



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