The ECB is considering blockchain technology to keep central bank money competitive

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(Kitco News) – The European Central Bank (ECB) is reportedly considering its options for integrating distributed ledger technology (DLT) into existing payment settlement systems, according to Fabio Panetta, an executive board member of the ECB.

Panetta’s comments came during a Monday speech at a Frankfurt symposium dedicated to the topic of settlements.

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

A large part of the executive board’s speech was dedicated to defining and describing the term wholesale CBDC, which “refers to the settlement of interbank 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 just wasn’t operated using DLT. The main question now is how to improve and modernize services that the ECB already provides, while accommodating the introduction of retail CBDC.

To improve wholesale payment systems, Panetta said the ECB has begun “assessing the potential of DLT and the extent to which it can improve our services.”

Market players active in payments and securities settlement, such as banks and financial market infrastructure, have already started experimenting with the technology.

“Our ongoing engagement with these stakeholders reveals that many of them expect DLT to experience a significant upswing in the financial industry,” Panetta said. “This will involve a shift from using centralized databases for the transfer of cash and assets to using decentralized networks instead.”

The ECB board member mentioned some of the benefits offered by the integration of DLT, including the ability to settle transactions instantly, around the clock, with the ability to program transactions to be settled automatically based on pre-defined conditions.

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

Overall, the ECB wants to ensure that central bank money still retains its role as a means of settlement for wholesale transactions rather than “alternatives such as commercial bank money or stable coins.”

Such a situation would “involve a number of risks” and could potentially lead to “trading and liquidity becoming fragmented”, Panetta said, resulting in “payments and securities settlement becoming less safe and less efficient, which would undermine financial stability” .

As of now, the ECB is analyzing two options for integrating DLT with its current TARGET payment service.

One involves the creation of a bridge between market DLT platforms and central bank infrastructure, which will allow a securities transfer on a DLT platform to trigger settlement in central bank money. The second involves the creation of a new DLT-based wholesale settlement service with DLT-based central bank money.

“In any case, implications for governance, settlement efficiency and liquidity management need to be carefully considered,” Panetta said. “However, regardless of the technology used by market participants for their wholesale payments and securities transactions, our goal will always be the same: to ensure that central bank money remains the anchor of stability in the monetary system.”