ECB Seeks Distributed Ledger Technology to Streamline Interbank Settlement

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ECB Seeks Distributed Ledger Technology to Streamline Interbank Settlement

According to Fabio Panetta, an executive European Central Bank (ECB) official, the regulator is considering a uniform platform compatible with the existing interbank settlement system.

ECB Eyes Distributed Ledger Technology for Efficiency

In a move to improve the efficiency of interbank settlement, the ECB is considering the use of distributed ledger technology (DLT) to streamline interbank transactions. The ECB member added that implementing DLT will ensure faster transaction settlement across boards.

Moreover, using wholesale central bank digital currency (CBDC) as a new version of DLT is not lost on the ECB. Panetta added that DLT-based CBDC has existed for many decades and has been used for settling interbank transfers.

However, wholesale CBDC is independent of DLT because it can be based on any other type of digital technology.

Per Panetta, banks in the EU region use the ECB’s “Target Services” to settle wholesale transactions. It is worth noting that the explosion of cryptocurrency in 2021 prompted central banks worldwide to devise ways to keep a tab on the digital asset industry. This birthed the CBDC and the DLT technology to back it up.

Close to 100 countries are currently working on developing their own CBDC as the race for digital currency control continues to take shape.

Making a Case for DLT

The ECB is considering implementing the DLT technology in payment systems across Europe. With DLT, payments involving a wide range of assets are possible. More importantly, DLT systems can accommodate other non-financial corporations in accessing digital payment.

Considering that the Bank for International Settlements is working with several monetary authorities on the development of CBDC, the ECB executive noted that this is the perfect time to explore DLT.

Moreover, the debate about the efficiency of the Bitcoin-powered proof-of-work (PoW) consensus mechanism is still ongoing. However, the environmental impact of the energy-intensive activity calls for concern. 

Moreover, Bitcoin has a permissionless distributed ledger where anyone can participate. This makes it rank below the centralized platforms like that of the CBDC, added Panetta.

DLT, in this case, will have more appeal than Bitcoin due to the issue of environmental conservation. However, technology comes with some drawbacks as well.

Panetta noted that prominent actors controlling the DLT ecosystem are unknown to the ECB or are based outside the EU bloc. As a result, this raised genuine concerns about the technology’s autonomy. Moreover, DLT seems more secure than some existing systems used by major financial institutions.

Notwithstanding the perceived drawbacks, the ECB has to brace itself for conditions where market players choose to utilize DLT for wholesale payment.

Meanwhile, ECB will prioritize a system that builds on its “Target Services” over one based on the DLT system.