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ECB Exploring Distributed Ledger Technology for Interbank Settlements: Panetta
A system that builds on existing interbank settlement infrastructure instead of one based entirely on DLT can be implemented "more rapidly" according to ECB executive board member Fabio Panetta.
Updated Apr 10, 2024, 2:28 a.m. Published Sep 26, 2022, 11:02 a.m.
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The European Central Bank (ECB) is looking at "the potential" of distributed ledger technology (DLT) in improving the efficiency of interbank settlements, said Fabio Panetta, a member of the executive board.
After listing the many benefits of DLT, Panetta also highlighted some drawbacks, and made a case for a system that builds on the ECB's existing infrastructure for wholesale settlements instead of building a new one based entirely on DLT.
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A distributed ledger is a decentralized database that is maintained and updated independently by individual participants in a large network. Wholesale central bank digital currencies (CBDC), which are typically framed as a new type of DLT-based central bank digital currency that can be used exclusively for settling interbank transfers, have actually existed "for decades" according to Panetta.
"But wholesale CBDC is not synonymous with DLT, as it can be based on any digital technology," Panetta, who is a vocal critic of crypto, said during a Monday speech. In the European Union, banks can already settle wholesale digital transactions using the ECB's own TARGET Services on a centralized ledger, he said.
Cryptocurrency markets reached a market capitalization of around $3 trillion in 2021, which prompted central banks around the world to consider how to keep up with the crypto world and the DLT technology that backs it. Around 100 countries around the world are exploring retail CBDCs, which are consumer and payments-focused digital currencies, while The Bahamas and then Nigeria became the first countries to issue them. The ECB is also in the middle of its own two-year investigation into a retail CBDC.
Read more: 9 Out of 10 Central Banks Exploring Digital Currency, BIS Says
However, wholesale CBDC experiments have been progressing faster – something Panetta attributes to the "narrower set of stakeholders" involved in interbank settlements compared to retail payments. France recently kicked off the second stage of a wholesale CBDC experiment while numerous monetary authorities around the world are working with the Bank for International Settlements (an association of central banks) on multiple wholesale CBDC experiments.
Panetta says DLT can enable the instant settlement of transactions in a wider range of assets around the clock "with a broader spectrum of participants, potentially including non-financial corporations." Although he said DLT could also be more secure than existing systems, Panetta outlined some drawbacks as well.
He pointed to the ongoing debate around the efficiency and scalability of the Bitcoin network powered by the proof-of-work consensus mechanism, and the environmental implications of the large amounts of energy needed to power the system. Bitcoin's distributed ledger is permissionless – meaning anyone can participate – which "may still compare unfavorably" to centralized infrastructures according to Panetta.
"Importantly, the governance of major DLT technologies and networks is dominated by actors who are either unknown or based outside Europe, which raises concerns about strategic autonomy," Panetta added.
Despite these drawbacks, Panetta says the ECB must be prepared for a scenario where market players "adopt DLT" for wholesale payments as well as securities settlement. But a system that builds on the ECB's existing TARGET Services could be "implemented more rapidly" than a system "based entirely" on DLT, Panetta said.
Read more: Digital Euro Must Be Green, Private and Possibly Capped, National Officials Say
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- Consumers benefit from this competition, positioning the current administration as firmly on the side of technological innovation.
- The President renewed a pledge at the event to establish the United States as the undisputed "crypto capital of the world".
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- The Senate Banking Committee has postponed its markup, requiring further mediation on issues like stablecoin rewards and ethics.
- Witt expressed confidence that despite these delays, the legislation will eventually be reconciled and brought to the Senate floor.
Reading Between the Lines: Stablecoins are acting as a "gateway drug" for global business leaders who are beginning to grasp the technology's potential—and its threat.
- Witt observed a cycle where traditional players move from a lack of understanding to fear, and finally to incorporating crypto into their own product offerings.
- While some Senate Republicans worry about stablecoins causing deposit flight from community banks, Witt believes a "smooth glide path" into these future technologies is possible with patience and cooperation.
- “Consumers win when there’s choice,” he said, while also acknowledging concerns from Senate Republicans about community banks and financial stability. The administration, he suggested, sees convergence between crypto and traditional finance as inevitable but wants the transition to be smooth rather than destabilizing to all parties.
- U.S. regulators intend to lead the global regulatory conversation, even if the domestic legislative process results in imperfect "directionally accurate" rules.
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- Witt suggested there is still a window of opportunity to pass additional digital asset legislation this year before midterms dominate the congressional calendar.
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