EU central banks working on distributed ledger technology-based asset settlement

As various banks globally are mulling to adopt blockchain technology for its daily operations, in Europe, two central banks have come together to use Distributed Ledger Technology for asset settlement

As various banks globally are mulling to adopt blockchain technology for its daily operations, in Europe, two central banks have come together to use Distributed Ledger Technology (DLT) for asset settlement.

Banca d’Italia and Deutsche Bundesbank have recently participated in a joint workshop to share experiences on the settlement in central bank money of assets exchanged on emerging and innovative market solutions based on DLT using the programmable features available on DLT-based systems.

The initiative focused on the possibility of complementing established means of central bank money settlement with a programmable trigger mechanism connecting the DLT-based asset (i.e. a tokenized electronic security) and the cash to be settled by means of conventional payment systems, preserving the delivery-versus-payment mode of settlement, which minimizes the counterparty risk for both the buyer and the seller, the bank said in a statement.

This so-called trigger solution could serve as a technical bridge between the DLT-based settlement of tokenized assets and existing payment systems, e.g. TARGET2 or TIPS (the Eurosystem’s TARGET Instant Payment Settlement system). 

The business case was successfully tested in March 2021 by Deutsche Börse, Deutsche Bundesbank and Germany’s Finance Agency by simulating securities settlement using DLT and triggering the settlement of the cash leg in the Eurosystem’s TARGET2 payment system. 

Speaking on this, Governor of the Bank of Italy Ignazio Visco said, "Like other new technologies, 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 and effective."

"However, it's possible adoption in the field of Market Infrastructures will require time because of the necessary in-depth investigations and cost and risk assessment; therefore, it seems wise to experiment with solutions that address the needs of the market by extending the scope of the existing infrastructures to interoperate with DLT," Visco stressed.

Banca d’Italia has recently conducted a simulation to test a trigger solution with settlement of the cash leg in TIPS.

The bank statement said that a trigger solution would support the wholesale market and can be seen as complementary to the Digital Euro, which is currently under consideration by the Eurosystem and is more focused on retail payments.  

"“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. 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," president of the Deutsche Bundesbank, and Chairman of the Board of the Bank for International Settlements Jens Weidmann said.

In March 2021, Deutsche Boerse, Deutsche Bundesbank and Germany’s Finance Agency conducted a pilot test along with Citibank, Barclays, Goldman Sachs, Commerzbank, DZ Bank and Societe Generale, bridging traditional finance with distributed ledger technology. 

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.

Jagdish Kumar
Klever Writer
Follow me on Twitter.com/TokenBharat

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