The Italian Banking Association (ABI) has 18 members participating in a wholesale central bank digital currency (CBDC) trial with the Bank of Italy, Project Leonidas. It is one of 14 projects that the central bank selected for DLT experiments. The CBDC trial comes as the ECB has announced plans to experiment with new technologies for wholesale payments without mentioning wholesale CBDC.
There is some uncertainty about whether the ECB exploration will use a DLT-based CBDC as favored by the ABI, or link a DLT to conventional central bank payments (trigger solution), or both.
The ABI has an exceptional track record when it comes to DLT. It has a blockchain project, Spunta, that has been in production for three years and includes around a hundred banks. Using a shared ledger for interbank payment reconciliations radically reduces the number of interbank queries and allows the process to happen nightly instead of monthly.
At the end of the reconciliation process, each bank knows what it owes every other bank. This latest trial aims to settle that interbank liability with a wholesale CBDC using the same Spunta infrastructure based on R3’s Corda enterprise blockchain.
Many other wholesale CBDC trials have focused on securities settlement.
The wholesale CBDC v trigger payment debate
In most cases, a wholesale CBDC is issued on the securities ledger enabling the simultaneous exchange of securities and cash as delivery versus payment (DvP). In the blockchain world, it’s called atomic settlement because if one leg fails, both fail.
Meanwhile, Germany favors so-called trigger payments. This design avoids putting a CBDC on a ledger. Instead, it creates an intermediary blockchain for payments that links to Europe’s Target 2 payment system to trigger settlement. The Bank of Italy also prefers this route even though it is experimenting with a wide range of alternatives.
The Italian Banking Association wants a mermaid CBDC
The Italian Banking Association, with its DLT track record, strongly favors a wholesale CBDC. “As Italian banks, we are not dogmatic that we want DLT because we want DLT,” said Silvia Attanasio, the ABI Head of Innovation. “We want atomic DvP. If this issue can be solved in other ways with other technologies, we are perfectly fine.”
However, she followed that up with a vivid metaphor. “I’m an optimistic person, and I believe in mermaids. So, when we talk about DvP – because that is what a wholesale CBDC is all about – we are talking about two legs: the asset leg and the cash leg must be one single leg, not two legs tied very strictly to each other. Because tying legs (together) never made a woman a mermaid. A mermaid has a tail. We want a single leg: atomic DVP. This is the idea. Experimentations under the Eurosystem umbrella will help to identify an effective solution.”
The central banks that oppose this concept say it will fragment liquidity, even though the retail digital euro’s design has a waterfall feature sweeping excess cash into accounts. So could these wholesale ledgers.
Our view is the crux of the issue is the fragmentation from the central banker’s perspective. A wholesale CBDC would spread across multiple securities ledgers, which the central bank wishes to supervise, making their jobs messier. That contrasts with today, where they only have to keep an eye on central bank accounts.