At the end of October, Societe Generale – Forge, the digital capital markets platform of the Societe Generale Group, selected ConsenSys to provide technology and services as part of its central bank digital currency (CBDC) pilot activities.
SocGen wants to build on recent achievements such as the €100 million covered bond it issued as a digital native security token in 2019 and the €40 million covered bond that was settled with CBDC in a joint project with the Banque de France in May.
That was the first example of wholesale securities settlement against cash in the form of CBDC issued by a G7 central bank. However, it mostly took place in a closed loop between different organizations in the Societe Generale Group working on a single technology stack.
Jean-Marc Stenger, chief executive of Societe Generale – Forge, tells Euromoney: “We set up Societe Generale – Forge three years ago because we saw coming a fundamental transformation of securities markets onto blockchain infrastructure that brings greater security, speed and efficiency at lower cost.
We thought the transformation might take 10 years, but that timeframe is now shortening
Jean-Marc Stenger, Societe Generale – Forge
“We thought the transformation might take 10 years, but that timeframe is now shortening.”
He adds: “We are now building capacity to serve our issuing and investing clients across primary and secondary markets in digital securities markets and with custody solutions.”
Its next experiment with the Banque de France will be around cross-chain settlement.
Stenger explains: “We are working on a project to issue a bond as a security token that would be purchased by at least two different investors in different jurisdictions and different countries around the world. It would be settled in euros through CBDC on at least two different yet interoperable blockchains.”
Central banks are stepping up experiments with CBDC, even while remaining unclear on the business case for it, what value it might add or how its introduction should be phased.
Competition
They have been driven to this by advances in China’s CBDC and by the announcement of Facebook’s Libra project.
China has been talking about programmable money and considering how CBDC might allow policymakers to go beyond merely monitoring financial flows to certain sectors of the economy and their indebtedness.
Could programmable money provide a new means to encourage flows to sectors that may need cheap funding to support post-Covid recovery or, where activity needs to be dampened down, could it discourage flows of financing?
China has hinted at this while also discussing ways to freeze a digital currency that has found its way to money-launderers or terrorists.
The European Central Bank (ECB) has also discussed tiered levels of remuneration on deposits held in CBDC form and ways to discourage hoarding – some might call it saving – by the imposition of penal negative rates.
Whatever China does, control of national currencies used by their own populations is a pressing issue of sovereignty for governments.
Central banks know that if any new form of private money – even a stablecoin linked to the national currency – should look likely to gain mass adoption, they must be able to crush it.
They are now testing the technology so as to be ready with their own digital currencies.
ConsenSys, founded and headed by Joseph Lubin, co-creator of Ethereum, is the leading Ethereum software company, aiming to build new financial market infrastructure on the largest programmable blockchain.
In August, it acquired Quorum, the network on which JPMorgan developed its JPM Coin.
ConsenSys has worked on CBDC projects with the central banks of Australia, Hong Kong, Singapore, South Africa and Thailand, and now will work with the Banque de France and, by extension, with the eurosystem and the ECB.
While ConsenSys helped the Bank of Thailand on a retail CBDC, most of this work has been on wholesale finance and in particular enabling the delivery-versus-payment leg of transfers of digital securities.
Ken Timsit, global head of enterprise solutions at ConsenSys, tells Euromoney: “The Banque de France clearly believes that instead of deciding itself what the business case for CBDC is, it should rather invite private-sector participants such as Societe Generale – Forge to propose experiments, support those experiments and then gauge what value they might add.”
Interoperability
The next phase is further work on how issuers of security tokens might receive CBDC in payment, transfer that digital currency and use it to pay for other securities on blockchain, which they might then raise finance against.
To realize the benefits of that new market infrastructure, CBDC is a necessity
Ken Timsit, ConsenSys
The potential benefit here is that delivery versus payment with CBDC might enable real-time settlement of securities that could then immediately be repo’d to achieve greater access to liquidity.
Interoperability is key.
Timsit says: “Our observation is that whether you seek payment versus delivery with CBDC or with JPM Coin or Fnality, you are unlikely to see the cash and the security both moving on the same blockchain, even if they are both built on Ethereum technology.
“We need to explore delivery versus payment across two ledgers. Indeed, it looks like many blockchains will need to work with each other.”
ConsenSys has been working with the Hong Kong Monetary Authority on the movement of wholesale CBDC in a corridor between Hong Kong and Thailand, for example. The assumption is that the two countries would manage their CBDCs on different ledgers.
Timsit says: “A couple of years ago, the ECB and the Bank of Japan began an experiment on interoperability with hash time-locked contracts. The key problem we are working on right now is increasing the scalability and privacy of these bridges that make blockchains interoperable.”
At the start of October, the ECB issued its latest report on the possible introduction of a digital euro.
This came right after the European Commission published a draft proposal for a regulation on markets in crypto-assets (Mica) that suggests an intention both to enable new digital securities markets and the tokenization of traditional financial assets.
Fierce debate
Among those seeking to take capital markets onto the blockchain, there is a fierce behind-the-scenes debate.
Some advocate concentrating on new markets in native digital securities as smart contracts that automate the entire lifecycle of a security from issuance, transfer, payment of coupons or dividends and response to corporate actions, all the way through to redemption.
They see no great benefit in adding a new blockchain layer to existing securities changing hands through many intermediaries on legacy infrastructure.
Others see a bigger prize in managing the transition of the many trillions of dollars of existing financial assets into tokenized form.
Timsit says: “Once financial institutions are comfortable with next-generation market infrastructure, we will need to find ways to move the existing stock of securities onto it.
“To realize the benefits of that new market infrastructure, CBDC is a necessity.”
By providing wholesale CBDC, central banks will speed up the creation of new financial market infrastructure.
Stenger at Societe Generale – Forge says: “What we are also proposing is a global framework for common business standards across the security legs and cash legs of transactions.
“The blockchain industry is not mature yet. Some very promising value propositions are also being built by small innovative companies. And we want to work with a global ecosystem to build a common framework, a shared language.”
He adds: “I don’t mean the technical language. Whatever the technology or the blockchains on which the new digital securities market works, what we need first is a framework which allows all market participants – issuers, investors, intermediaries – to adopt blockchain technology, whichever it might be.”
