ECB: Financial Industry Adoption of Distributed Ledger Technologies — Implications for Central Bank Money Settlement

Posted on Jun 27, 2024 by Holger Neuhaus, Head of Division, Market Innovation and Integration, and Mirjam Plooij, Team Lead, Market Infrastructure, European Central Bank

1. Introduction

The Eurosystem — consisting of the European Central Bank (ECB) and national central banks in the euro area — is analysing the potential impact of emerging technologies, including distributed ledger technology (DLT), on the settlement of wholesale financial transactions. This work was initiated in response to increasing interest within the financial industry in the possible applications of DLT in areas such as securities-related transactions settlement on a delivery versus payment (DvP) basis and cross-currency payments settlement on a payment versus payment (PvP) basis.

Should there be a significant adoption of DLT by the financial industry, central banks may need to take action to ensure that wholesale transactions can continue to be settled in central bank money. Possible Eurosystem responses include enabling market DLT platforms to interact smoothly with Eurosystem settlement infrastructures based on existing technology, or making central bank money available in a new form that can be recorded and transferred on a DLT platform. These responses are not mutually exclusive.

The Eurosystem has launched exploratory practical work in cooperation with market players. The aim of this work is to gain further insights into how the interaction between existing or new DLT-based infrastructures for settlement in central bank money and market DLT platforms could be facilitated.

2. Central Bank Money at the Heart of the Financial System

The importance of central bank money settlement

To preserve and strengthen financial stability, international standards prescribe that financial market infrastructures (FMIs) should conduct settlements in central bank money where practical and available.[1] FMIs — that is, payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories — are the backbone of the financial system. They facilitate financial transactions between the customers of different financial institutions, and between financial institutions themselves.

Using central bank money is particularly relevant for the settlement of ...

[1] See Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions, “Principles for financial market infrastructures”, Bank for International Settlements and OICV-IOSCO, April 2012.

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