ECB eyes blockchain technology to keep central bank money competitive

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(Kitco News) – According to ECB Executive Board Member Fabio Panetta, the European Central Bank (ECB) is evaluating its options for integrating distributed ledger technology (DLT) into existing payment settlement systems.

Panetta’s comments came during a speech on Monday at a Frankfurt symposium devoted to the theme of settlements.

The need to focus on DLT comes as “technologies and preferences evolve, and preserving the role of central bank money as a safe asset at the heart of the system remains critical,” according to Panetta.

Much of the executive board member’s speech was devoted to defining and describing the term wholesale CBDC, which “refers to the settlement of interbank wire transfers and related wholesale transactions in central bank reserves.”

According to Panetta, “central bank money has been available in digital form for wholesale transactions between banks for decades,” it was simply not mined using DLT. The main question now is how to improve and modernize the services that the ECB already offers, while taking into account the introduction of retail CBDCs.

To improve wholesale payment systems, Panetta said the ECB had started “to assess the potential of DLT and the extent to which it could improve our services.”

Market participants active in payments and securities settlement, such as banks and financial market infrastructures, have already started experimenting with this technology.

“Our ongoing engagement with these stakeholders reveals that many of them expect DLT to see significant adoption in the financial industry,” Panetta said. “This would involve moving from using centralized databases to transfer money and assets to using decentralized networks instead.”

The ECB Executive Board member cited some of the benefits of DLT integration, including the ability to settle trades instantly, 24 hours a day, with the ability to schedule trades to settle automatically based on predefined conditions.

“And in the area of ​​wholesale payments, market participants see the potential of DLT to improve cross-border and cross-currency transactions, as it would overcome some of the frictions associated with correspondent banking,” Panetta said.

Overall, the ECB wants to ensure that central bank money retains its role as a settlement asset for wholesale transactions rather than “alternatives like commercial bank money or stablecoins.”

Such a situation “would entail a number of risks” and could potentially lead to “trading and liquidity fragmentation”, Panetta said, resulting in “payments and securities settlements becoming less secure and less efficient, which would compromise the financial stability“.

Currently, the ECB is analyzing two options for the integration of DLT with its current TARGET payment service.

One concerns the creation of a gateway between market DLT platforms and central bank infrastructures, which would allow a transfer of securities on a DLT platform to trigger a settlement in central bank money. The other involves the creation of a new DLT-based wholesale settlement service with DLT-based central bank money.

“In all cases, the implications for governance, settlement efficiency and liquidity management must be carefully assessed,” Panetta said. “But no matter what technology market participants use for their wholesale payments and securities transactions, our goal will always be the same: to ensure that central bank money remains the anchor of market stability. monetary system.”