EU central banks working on DLT-based asset settlement

EU central banks working on DLT-based asset settlement

European central banks are increasing their efforts to use distributed ledger technology (DLT), which is the foundation of blockchain, for central bank money settlements.

Banca d’Italia, Deutsche Bundesbank, and the central banks of Germany, joined forces for settlements in central bank money on DLT-based asset swaps.

Official announcement stated that DLT was not intended to replace conventional systems. The initiative is intended to enhance the existing central bank money settlement processes with a programmable trigger mechanism. This connects the DLT asset, such as a tokenized security and cash that can be settled via traditional payments 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 will complement the digital Euro and act as a technical bridge between the existing payment systems used in the Eurosystem central bank and the DLT-based settlement for tokenized assets.

Ignazio Visco, the Italian central bank governor, stated that DLT could bring in new products and services, increase revenue streams, lower costs, and improve organizational efficiency. He stressed that DLT adoption at the infrastructure level in traditional markets would require time due to cost and risk assessments, in-depth investigations, and other necessary steps.

Related: European Central Bank announces members of digital euro advisory group

Jens Weidmann, President Deutsche Bundesbank, stated that if market participants wish to reap the benefits from new technologies such as DLT for settlement of tokenized assets they should support it by enabling settlement of the responding cash leg with secure central bank money. He also said:

“The tried trigger solution could serve the market’s needs and keep central bank money within the central bank systems. A trigger solution is likely to be more effective than creating digital currency wholesale from central banks.

Deutsche Boerse and Deutsche Bundesbank conducted a pilot testing with Citibank, Barclays and Goldman Sachs as well as Commerzbank and DZ Bank. The test aimed to bridge traditional finance and distributed ledger technology. It was completed in March 2021. As part of the pilot, the German Finance Agency issued a federal 10-year bond using the DLT trigger system. It also tested securities trading on primary as well as secondary markets.

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