(Kitco News) – According to Fabio Panetta, an executive ECB board member, the European Central Bank (ECB) is reportedly evaluating its options for integrating distributed ledger technology (DLT) into existing payment settlement systems.
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 are changing, and preserving the role of central bank money as a safe asset at the heart of the system remains key,” according to Panetta.
A major portion of the executive board member’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 issue now is how to improve and modernize services that the ECB already offers, while also accommodating the introduction of retail CBDCs.
To improve wholesale payment systems, Panetta said that the ECB has begun “assessing the potential of DLT and the extent to which it could improve our services.”
Market participants that are active in payments and securities settlement, such as banks and financial market infrastructures, have already begun experimenting with the technology.
“Our ongoing engagement with these stakeholders reveals that many of them expect DLT to experience a significant uptake in the financial industry,” Panetta said. “This would entail a shift from using centralized databases for transferring cash and assets to using decentralized networks instead.”
The ECB board member cited some of the benefits offered by the integration of DLT, including the ability to settle transactions instantly, around the clock, with the possibility of programming transactions to be settled automatically based on predefined conditions.
“And in the area 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 frictions related to correspondent banking,” Panetta said.
Overall, the ECB wants to make sure that central bank money still retains its role as the 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 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 the integration of DLT with its current TARGET payment service.
One involves the creation of a bridge between market DLT platforms and central bank infrastructures, which would allow a securities transfer on a DLT platform to trigger 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 any event, implications for governance, settlement efficiency and liquidity management need to be carefully assessed,” Panetta said. “But regardless of the technology used by market participants for their wholesale payments and securities transactions, our goal will always be the same: ensuring that central bank money remains the anchor of stability of the monetary system.”
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