European central banks working on DLT-backed asset settlement
As per reports, central banks in Europe are ramping up their efforts for utilization of distributed ledger technology (DLT), which is the foundation of blockchain, to initiate central bank money settlements.
The central bank of Italy, Banca d’Italia and that of Germany, Deutsche Bundesbank, have been jointly working on settlements in central bank money of DLT-backed asset exchanges.
In an official announcement, the primary goal of this workshop has been stressed as not using DLT as a replacement for traditional systems. Instead, the joint initiative of both the country’s banks is aimed at complementing the existing central bank money settlement practices with a programmable trigger mechanism that would possibly connect all the DLT-based assets, including tokenized security and cash that needs settlement via conventional payment systems.
The proposed system would minimize 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.
Italy centra; bank’s Governor, Ignazio Visco, was noted as saying that DLT holds great potential for ushering in new products and services, thus fueling revenue generation, reduction of operational costs, and proper organizational management structures.
He outlined that an infrastructure-level DLT adoption in conventional markets would take its own course in time as several “necessary in-depth investigations” as well as “cost and risk assessment” is pending.
President of the German central bank, Jens Weidmann, has said that if market participants are looking to reap the benefits of new technologies like DLT for ensuring settlement of tokenized assets, “central banks should support that by enabling the settlement of the responding cash leg in secure central bank money.”
He continued that the tested trigger solution could help serve the market’s present needs, keeping the central bank money in systems run by central banks. He compared it to creating wholesale central bank digital currency, which could be used as a trigger solution so that the function becomes operational “in a much shorter time frame.”
In March 2021, Deutsche Boerse, Deutsche Bundesbank and Germany’s Finance Agency have reportedly conducted a pilot test where significant participation was seen from Barclays, Citibank, Commerzbank, Goldman Sachs, Societe Generale, and DZ Bank. The pilot contributed to bridging the gap between traditional finance and distributed ledger technology.
The German Finance Agency has issued a 10-year federal bond via the DLT trigger system as a part of the pilot project, testing securities trading on primary and secondary markets.
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