European central banks have been stepping up their efforts to use distributed ledger technology (DLT), the foundation of blockchain, in central bank currency settlements.
Banca d’Italia and Deutsche Bundesbank, the central banks of Italy and Germany, respectively, joined forces to work on central bank money settlements of DLT-based asset exchanges.
The official announcement emphasized that the main goal of the joint workshop was not to use DLT as a replacement for conventional systems. Instead, the initiative aims to complement the central bank’s current money settlement practices with a programmable trigger mechanism that connects the DLT-based asset, such as a tokenized security, and the cash to be settled through payment systems. conventional.
The proposed system would minimize counterparty risk for both parties by preserving the delivery versus payment settlement mode, the announcement read. The programmable trigger would complement the digital euro and serve as a technical bridge between existing payment systems used by Eurosystem central banks and DLT-based settlement of tokenized assets.
DLT technology has the potential to introduce new products and services, generate additional revenue streams, reduce the cost of operations, and make organizational structures more efficient., said the governor of the Italian central bank, Ignazio Visco. He stressed that the adoption of DLT at the infrastructure level in traditional markets would take time “due to the necessary in-depth research and cost and risk assessment.”
“If market participants want to take advantage of the benefits of new technologies such as DLT for the settlement of tokenized assets, central banks should support this by allowing the settlement of the corresponding cash tranche into central bank safe money,” Deutsche Bundesbank Chairman Jens Weidmann said. He added:
“The proven trigger solution could well meet market needs and keep central bank money in systems managed by central banks. Compared to wholesale central bank digital currency creation, a trigger solution could be operational in a much shorter time frame. “
Deutsche Boerse, Deutsche Bundesbank and the German Finance Agency conducted a pilot test involving Citibank, Barclays, Goldman Sachs, Commerzbank, DZ Bank and Societe Generale, linking traditional finance with distributed ledger technology in March 2021 . The German Finance Agency issued a 10 year federal bond through the DLT trigger system and tested securities trading on the primary and secondary markets as part of the pilot.
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