To date, the European Central Bank’s (ECBs) work on central bank digital currency (CBDC) has focused on a retail or consumer-facing CBDC. In a speech today, ECB board member Fabio Panetta confirmed the central bank is starting to evaluate whether or not to enable a wholesale CBDC for the settlement of DLT-based securities transactions amongst institutions. Sources previously told Ledger Insights that banks have been canvassed on the topic by the ECB in the last few months. Update: on June 2023 ECB position.
Many institutions are exploring using DLT platforms either to tokenize assets such as security tokens or for using blockchain for post-trade settlement of transactions. This can provide significant efficiencies, enable faster settlement, longer transaction hours and reduce counterparty risks.
Additionally, the European Union passed laws to support the EU DLT Pilot Regime to address this area. “Our ongoing engagement with these stakeholders reveals that many of them expect DLT to experience a significant uptake in the financial industry,” said Panetta.
Panetta was talking at a Deutsche Bundesbank event. The German central bank has previously trialed using Europe’s TARGET 2 to trigger a central bank payment using the existing system to settle DLT-based transactions. While this may be a starting point, many believe that to benefit from the efficiencies of DLT fully, there needs to be cash on ledger.
Hene the second option is for the central bank to provide DLT-based money.
“The Eurosystem could, for instance, launch its own DLT platform for settlement in central bank money,” said Panetta. “Alternatively, we could make central bank money available on DLT platforms operated by market stakeholders, allowing both cash and assets to be transferred there.” This latter approach was trialed as part of Switzerland’s Project Helvetia when the Swiss National Bank issued wholesale Swiss Francs onto the SIX Digital Exchange platform.
One of the ECB’s primary motivations is to ensure that central bank money continues to play an important role. Panetta dismissed the use of stablecoins as risky, which could be safer if backed by central bank money. “Allowing them to be fully backed with central bank money would effectively outsource the provision of central bank money to private entities, endangering monetary sovereignty,” added Panetta.
Suppose the ECB is considering a wholesale CBDC. Where does that leave Fnality, the institutional payment network that is working on enabling DLT settlement using digital euros backed by money held at the central bank? The ECB would have to sign off on the launch of Fnality in Europe.
Panetta is also not entirely convinced about DLT at all. “Experiments conducted by both private firms and central banks must still prove that DLT can offer more benefits than existing technologies,” he said.