Blockchain technology can help the ECB keep central bank money competitive

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  • The European Central Bank (ECB) is allegedly considering its possibilities for incorporating distributed ledger technology (DLT) into current payment settlement systems.

Panetta made his remarks on settlements during a lecture he gave on Monday at a symposium in Frankfurt.

As “technologies and preferences are changing, and sustaining the function of central bank money as a safe asset at the heart of the system remains vital,” there is a need to concentrate on DLT.

The definition and explanation of the phrase “wholesale CBDC,” which “refers to the settlement of interbank transfers and related wholesale transactions in central bank reserves,” took up a significant chunk of the executive board member’s speech.

Panetta stated that the ECB has started “assessing the possibilities of DLT and the extent to which it could improve our services” in order to enhance wholesale payment systems.

Although it was not run using DLT, central bank money has been available in digital form for wholesale transactions between banks for decades. The key challenge right now is how to enhance and modernize services provided by the ECB while simultaneously allowing for the establishment of retail CBDCs.

Banks and other financial market infrastructures that are involved in payments and securities settlement have already started experimenting with the technology. “Our ongoing interactions with these stakeholders demonstrate that many of them anticipate that DLT will be widely adopted in the financial sector.”

The member of the ECB Executive Board listed a number of advantages of incorporating DLT, such as the capacity to instantaneously settle transactions, 24 hours a day, and the capacity to schedule transactions for automatic payments depending on specified circumstances.

Additionally, industry participants in the wholesale payments sector believe that DLT has the potential to enhance cross-border and cross-currency transactions by removing some of the irregularities associated with banking. Overall, the ECB wants to make sure that central bank money does not “alternatives like commercial bank money or stablecoins” as a settlement instrument for wholesale transactions.

Such a scenario, “would involve some risk” and may result in “trading and liquidity fragmentation,” which would make payments and securities settlements “less secure and less efficient,” which would have an impact on the market.

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