Europe central banks working on DLT-based asset settlement

Central banks in Europe have been stepping up their efforts to use distributed ledger technology (DLT), the underlying technology of blockchain, in central bank money settlements.

The central banks of Italy and Germany, Banca d’Italia and Deutsche Bundesbank have teamed up to work on DLT-based asset exchange settlements in central bank money.

The major purpose of the joint workshop, according to the official statement, was not to employ DLT as a replacement for traditional systems. Instead, the initiative attempts to supplement current central bank money settlement methods with a programmable trigger mechanism that links a DLT-based asset, such as a tokenized security, to cash that may be settled using traditional payment systems.

According to the release, the new approach would reduce counterparty risk for both parties by keeping the delivery-versus-payment mode of settlement.

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The programmable trigger would be a technical bridge between conventional payment systems utilized by Eurosystem central banks and the DLT-based settlement of tokenized assets, complementing the digital euro.

According to Italian central bank governor Ignazio Visco, distributed ledger technology (DLT) has the potential to usher in new products and services, generate extra revenue streams, lower operational costs, and streamline organizational structures.

He emphasized that DLT adoption at the infrastructure level in traditional markets would take time “due to the requisite in-depth research and cost and risk assessments.”

“If market players want to benefit from innovative technologies like DLT for the settlement of tokenized assets, central banks should facilitate that by allowing the settlement of the first cash leg in secure central bank money,” stated Jens Weidmann, President of the Deutsche Bundesbank. He continued, “

“The tried-and-true trigger approach might potentially meet market demand while keeping central bank money in central bank systems. A trigger solution might be operational in a far quicker time frame than generating wholesale central bank digital money.”

In March 2021, Deutsche Boerse, Deutsche Bundesbank, and Germany’s Finance Agency performed a pilot test bridging traditional finance with distributed ledger technology with Citibank, Barclays, Goldman Sachs, Commerzbank, DZ Bank, and Societe Generale. As part of the pilot, the German Finance Agency used the DLT trigger system to issue a 10-year federal bond and test securities trading on primary and secondary markets.