Slow to Incorporate Crypto Regulations Could Fuel Arbitrage Risk: French Central Banker

Francois Villeroy de Galhau, the governor of the French Central Bank, has warned of the risks of arbitrage that may be fueled by uneven crypto regulations on the global scale.


As reported by Reuters, Villeroy was quoted saying that the failure of some countries to develop regulations to govern the broader crypto ecosystem quickly can create a safe haven for global players in the emerging industry.

“We should be extremely mindful to avoid adopting diverging or contradictory regulations or regulating too late,” Villeroy said in a statement at a conference on digital finance in Paris. According to him, failure to provide sound regulations “..would be to create an uneven playing field, risking arbitrage and cherry picking.”

As far as Villeroy is concerned, the bottom line that is being pursued by regulators, including the protection of consumers and the prevention of money laundering, may not be achieved.

Villeroy’s comments trail the push by the key European Union regulators, including the Central Bank, Parliament, and Council agreeing on the Markets in Crypto Assets (MiCA) framework earlier this year. The framework is comprehensive, and it is set to usher in a standard for the crypto industry at a time when most other economies, including the United States, are still largely at the earliest stages of their regulatory designs. 

With the details about MiCA now finalized, Villeroy said he sees full implementation to commence next year in March.

Harmonizing crypto regulations has been a very difficult move. While the G7 and G20 member states have made some attempts to unify tax-related levies on tech startups and by extension players in the crypto ecosystem, the leniency of some smaller countries tagged as Tax havens can still make this move a very long shot.

Unless global regulators find a way to set a standard that can easily be implemented by most local regulators, the regulatory approaches of nations will always be uneven.

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France’s CBDC Projects to Manage DeFi Liquidity, Settle Tokenized Assets

On Tuesday September 27, Villeroy de Galhau, the Governor at the Banque de France, the Central Bank of France, announced two new projects that aim to achieve the benefits of Central Bank Digital Currencies (CBDCs) used at a wholesale level by banks and financial markets.

The governor made the announcement during his speech at the bank’s digital currency conference on Tuesday. The Head of Central Bank said the first project will look at improving CBDCs’ liquidity management in decentralized finance (DeFi), such as via automated market makers. As a liquidity creator, the CBDC will play a role similar to that of investment banks to sustain trading in particular securities.

On the other hand, the second project will focus on issuing and distributing tokenized bonds on a blockchain. This will build on previous findings about CBDCs being used to settle Web3 securities, such as the French Central Bank’s Project Jura.

In his speech, the governor stated that: “A wholesale CBDC could significantly contribute to improving cross-border and cross-currency payments.” But then he acknowledged that: “CBDCs at the wholesale level attract less attention than their headline-grabbing retail equivalent.”

The governor pledged to add more details about the new projects in the coming weeks. A point to remember is that France’s wholesale CBDC is currently in the second stage of the experimentation programme, which will see four to five new projects introduced.

Intensifying CBDC Efforts

In July this year, France’s Central Bank began the second phase of experimentation with its wholesale CBDC, designed to streamline domestic and cross-border transactions between commercial banks.

France’s Central Bank wants to bring CBDC as a settlement asset as early as 2023. The bank is working to get closer to a viable prototype, testing it in practice with more private financial institutions and foreign central banks in the second half of 2022 and 2023.

Banque de France, which started experiments on a wholesale CBDC in March 2020, completed its first stage of experimentation in December 2021. During the experimentation period, the bank had been exploring the use of the CBDC for the exchange of money between financial institutions.

Besides the wholesale CBDC, the Banque de France is also exploring a retail CBDC as part of the European Central Bank’s broader work on the potential development of a digital euro.

Central banks across the globe are exploring the development of digital currencies not only to address the decline in the use of cash but also to tackle the rising interest in private cryptocurrencies among users.

Central banks are increasingly exploring wholesale CBDCs that are built on blockchain technology and promise to help speed up interbank settlements.

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Customers Trust in Banks More than in Crypto, France Central Bank Governor Says

François Villeroy de Galhau, the Governor of the Bank of France, on Sunday said the recent crypto market meltdown caused by massive sell-offs has pushed consumers to trust more in banks than digital assets.

The French central bank head made the remarks at the World Economic Forum, where Galhau said the shift might be due to the nature of private cryptocurrencies. The executive, therefore, stated users might seek to align themselves with products promoting trust, like Central Bank Digital Currencies (CBDC).

The France’s central bank governor said crypto coins are unreliable because they lack an underlying claim backed by the government. He, therefore, noted that the trust concerns would likely accelerate the use of CBDCs.

“In recent weeks, citizens have lost trust in cryptos, but more than in central banks without any doubt… Nobody is responsible for the value of cryptos, and it must be accepted universally as a means of exchange,” Villeroy stated.

The Governor said trust still exists in traditional banks, despite most central bankers being blamed for the surging inflation.

However, Villeroy emphasized the need for collaboration between central banks and the private sector to promote the development of CBDCs. He suggested that while banks guarantee user trust, private sector technology and innovation are important to improve the operational efficiency of government services.

Although, in the past, the Governor praised Bitcoin for introducing innovative technology, he said France’s central bank has maintained a sceptical approach towards private cryptocurrencies.

Crypto Sell-Offs Triggered by Inflation

Over the past few years, cryptocurrencies, which are often viewed as an escape from legacy banking and fiat currency, have been the focus of much attention by governments across many nations. In March, US president Biden issued an executive order to evaluate the risk and opportunities of cryptocurrencies.

The popularity of cryptos has partly been driven by high valuations and volatility, attracting attention from investors, the media, and the public.

Though user trust in crypto is declining, that doesn’t seem to matter. Purchase intention for cryptocurrencies has remained relatively unchanged since the beginning of the year.

Whether cryptocurrencies find their way into mainstream payment systems or remain a speculative investment depends on how governments, regulators, and central bankers act to protect their economies and citizens. Recent actions by central banks to raise interest rates to combat soaring inflation have adversely affected the prices of cryptocurrencies.  

The crypto market recently saw one of the worst meltdowns, with the total market capitalization dropping by 40% to $1.3 trillion in just a month. However, traders have stayed put, and are confident that the market will soon revamp.

The market downturn was triggered by massive sell-offs spiked by speculations because of rising inflation in most nations, together with a move by some countries, including India, Australia, the US, and the UK, to raise interest rates to tackle rising commodity prices.

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