EU central banks work on DLT-based asset settlement

European central banks ramp up their efforts to utilize distributed ledger technology (DLT), the foundation of blockchain, in central bank money settlements.

Banca d’Italia and Deutsche Bundesbank, central banks of Italy and Germany, respectively, joined forces to work on settlements in central bank money of DLT-based asset exchanges.

The official announcement stressed that the primary goal of the joint workshop was not to use DLT as a replacement for conventional systems. Instead, the initiative aims to complement the current central bank money settlement practices with a programmable trigger mechanism that connects the DLT-based asset, like a tokenized security, and cash to be settled via conventional payment systems.

The proposed system would minimize the counterparty risk for both sides by preserving the delivery-versus-payment mode of settlement, the announcement reads. The programmable trigger would complement the digital euro and serve as a technical bridge between existing payment systems used by Eurosystem central banks and the DLT-based settlement of tokenized assets.

DLT has the potential to usher in new products and services, generate additional revenue streams, reduce the cost of operations and make organizational structures more efficient, said Italian central bank governor Ignazio Visco. He underscored that an infrastructure-level DLT adoption in traditional markets would take time “because of the necessary in-depth investigations and cost and risk assessment.”

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“If market participants want to reap the benefits of new technologies like DLT for the settlement of tokenized assets, central banks should support that by enabling the settlement of the responding cash leg in secure central bank money,” said Deutsche Bundesbank President Jens Weidmann. He added:

“The tested trigger solution could well serve the market’s need and keep central bank money in the systems run by central banks. In comparison to creating wholesale central bank digital currency, a trigger solution could be operational in a much shorter time frame.”

Deutsche Börse, Deutsche Bundesbank and Germany’s Finance Agency conducted a pilot test with the participation of Citibank, Barclays, Goldman Sachs, Commerzbank, DZ Bank and Société Générale, bridging traditional finance with distributed ledger technology in March 2021. The German Finance Agency issued a 10-year federal bond via the DLT trigger system and tested securities trading on primary and secondary markets as part of the pilot.