EU-based central banks work on DLT-based asset settlement

Europe-based central banks have been ramping up their efforts to utilise distributed ledger technology (DLT), the foundation of blockchain, in central bank money settlements. Banca d’Italia and Deutsche Bundesbank, the central banks of Italy and Germany, respectively, joined forces to work on settlements in central bank money of DLT-based asset exchanges.

The official announcement stressed that the primary goal of the joint workshop was not to use DLT as a replacement for conventional systems. Instead, the initiative aims to complement the current central bank money settlement practices with a programmable trigger mechanism that connects the DLT-based asset, like a tokenised security, and cash to be settled via conventional payments systems. The proposed system would minimise the counterparty risk for both sides by preserving the delivery-versus-payment mode of settlement, the announcement reads. The programmable trigger would complement the digital euro and serve as a technical bridge between existing payment systems used by Eurosystem central banks and the DLT-based settlement of tokenized assets.

DLT has the potential to usher in new products and services, generate additional revenue streams, reduce the cost of operations, and make organisational structures more efficient, said Italy’s central bank governor. An infrastructure-level DLT adoption in traditional markets would take time ‘because of the necessary in-depth investigations and cost and risk assessment’.

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