In the Deutsche Bundesbank’s July monthly report, the central bank explored digital money, including central bank money, tokenized deposits and stablecoins. While tokenized deposits only received a few paragraphs of attention, it was sufficient to create uncertainty.
Many banks consider tokenized deposits as legally equivalent to bank deposits. According to the Bundesbank they may or may not be considered a deposit. Depending on the design, it could be an e-money token under MiCA regulations or a tradable security. It also notes it “remains unclear whether tokenized deposits would be covered by deposit insurance.”
Most of the essay focuses on the need for central bank money to settle DLT transactions. However,the central bank has a conservative, or not particularly upbeat view of DLT.
For example, it cites an Accenture report as proof that the efficiency gains, cost savings and resilience of DLT are as yet unproven. We were curious about such a report, until we realised is was the review of the failed ASX CHESS project. Our reading of that analysis was that blockchain should have been used where it offered strategic advantages rather than everywhere. And there were project management issues.
With respect, the Bundesbank omitted the DLT successes. That includes one its own back yard, the HQLAᵡ project for collateral mobility, where the Deutsche Boerse is a partner and investor. There’s also the Broadridge DLT repo platform that processes around $1 trillion monthly and DLT provider Baton Systems, which has facilitated more than $11 trillion in settlements.
That said, a recent DLT survey released this week found the ability to quickly demonstrate return on investment as the biggest challenge in launching DLT projects.
The skepticism around DLT is a key driver behind the Bundesbank’s approach to DLT settlement which is to use a central bank trigger solution that links DLT platforms to the real time gross settlement (RTGS) system. With its reservations about DLT, the effort involved in developing a wholesale CBDC is not yet justified. Nonetheless, the recently announced work plan from the ECB includes a German trigger solution, an Italian trigger-like solution and French wholesale CBDC experiments.
The Chicken and egg problem
The central bank sees DLT as having a chicken and egg conundrum. On the one hand, central banks and commercial banks will only develop solutions when there are live use cases that need to use digital money. And DLT projects won’t be rolled out in earnest until there is a solution for the cash leg of the transaction.
While there’s some truth to that, there’s another argument that’s even weightier. “Financial market infrastructures show a high level of inertia, even if superior solutions have become available in the meantime.” Getting most of the industry to use DLT is the only way to reap benefits. That is now starting to happen with most major institutions developing DLT and digital asset expertise.
The crux of the matter was stated succinctly in the report: “Should new technologies such as DLT reach market maturity and market penetration, it must be ensured that central bank money can also be used for these new types of settlement. Central banks are caught between innovation and stability.”