The central banks of the European Union are working on the liquidation of assets based on DLT technology

European central banks have stepped up efforts to use distributed ledger technology (DLT), the foundation of blockchain, in the settlement of central bank currencies.

Banca d’Italia and Deutsche Bundesbank, the central banks of Italy and Germany, respectively, banded together to work on stock exchange central bank cash settlements based on DLT.

The official announcement emphasized that the main objective of the joint workshop was not to use DLT as a replacement for conventional systems.Instead, the initiative aims to complement the central bank’s current cash settlement practices with a programmable trigger mechanism that connects the DLT-based asset, such as a tokenized security, and the cash settled via conventional payment systems.

The central banks of the European Union are working on the liquidation of assets based on DLT technology
The central banks of the European Union are working on the liquidation of assets based on DLT technology

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

DLT technology has the potential to introduce new products and services, generate additional sources of income, reduce operating costs and make organizational structures more efficientsaid the governor of the Italian central bank, Ignazio ViscoHe stressed that the introduction of DLT at the infrastructure level in traditional markets would take time “because of the in-depth research and cost and risk assessment required”.

“If market participants want to take advantage of new technologies such as DLT for the liquidation of tokenized assets, central banks should support this by allowing the corresponding cash tranche to be liquidated into central bank money.” The chairman of the Deutsche Bundesbank, Jens Weidmann, said:

“The proven trigger solution could meet market demands and hold central bank money in systems managed by the central bank. Compared to the creation of digital currencies by the wholesale central bank, an activation solution could be up and running in a much shorter time frame.”

Deutsche Börse, Deutsche Bundesbank and Deutsche Finanzagentur carried out a pilot test in March 2021 with the participation of Citibank, Barclays, Goldman Sachs, Commerzbank, DZ Bank and Societe Generale, which combines traditional finance with distributed ledger technology. The Federal Finance Agency has issued a 10-year federal bond via the DLT trigger system and tested securities trading on the primary and secondary market as part of the pilot project.

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