The European Central Bank Explores DLTs for Interbank Settlements

Since the emergence of Blockchain and distributed ledger technologies (DLTs), the main question was how can this technology be deployed in a business environment.
Clearly, DLTs have the capacity to open up considerable opportunities for the financial industry; the DLT is predicated on market participants verifying transactions and keeping a copy of them rather than relying on a trusted party, such as a central bank.

In this regard, Fabio Panetta, board member of the European Central Bank, commented, “Despite the uncertainties surrounding DLT’s potential, we want to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement. The ECB is looking at how it could let banks settle wholesale transactions between them on a distributed ledger, rather than the central bank’s own.”

Meanwhile, giving stablecoins the ECB’s backing would “outsource the provision of central bank money to private entities, endangering monetary sovereignty”, Panetta said.

As a possible solution, Panetta said the ECB might build a bridge between the private sector’s blockchain platforms and its own Target 2 settlement system.

Currently, the market has been facing a multi-day delay between payment and settlement for a typical cross-border transaction processed by the correspondent banking network. However, using CBDC, a fiat currency issued by a central bank and made available on a DLT platform, can substantially increase transaction speed while reducing cost by up to half.

Recently, the Central Bank of the UAE announced the successful completion of the first CBDC pilot involving four jurisdictions and real-value transactions. It took place from August 15 to September 23, 2022, on the mBridge Ledger, a custom-developed DLT platform.
The BIS noted, “A trusted and widely usable retail CBDC must be secure and accessible, offer cash-like convenience and safeguard privacy.”

All across the financial services industry, DLT is developing at pace. Over the past few years, we have witnessed a number of advancements with the technology, addressing many of the critical requirements necessary for the DLT to potentially achieve industry-wide adoption.

In 2019, SWIFT had announced a proof-of-concept (PoC) on e-Voting, using DLT to provide a more efficient and transparent management of the proxy voting process for shareholder meetings.
The PoC aimed to explore whether DLT can help simplify the currently inefficient management of shareholder meetings and the associated voting processes that are often time-consuming and resource-intensive.

Experts generally believe that adoption of DLT will follow the typical technology curve, with a few leaders out in front, then fast followers and finally the laggards.
To that end, entrepreneurs are now faced with the challenge of establishing the networks of entities that together can take advantage of DLT to radically change how they share and keep records, and innovating where DLT can enable entirely new processes and business models