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ECB Seeks Distributed Ledger Technology to Streamline Interbank Settlement – crypto.news

EU Finishes Drafting MiCA Text

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According to European Central Bank (ECB) chief executive Fabio Panetta, the regulator is considering a single platform compatible with the current interbank settlement system.

ECB Eyes Distributed Ledger Technology for Efficiency

To make interbank settlement more efficient, the ECB is considering the use of distributed ledger technology (DLT) to streamline interbank transactions. The ECB member added that the introduction of DLT will ensure faster settlement of transactions.

In addition, the ECB will not lose the use of the wholesale central bank digital currency (CBDC) as a new version of DLT. Panetta added that DLT-based CBDC has been around for decades and has been used to settle bank-to-bank transfers.

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

According to Panetta, banks in the EU use the ECB’s “Target Services” services to settle wholesale transactions. It is worth noting that the explosive growth of cryptocurrencies in 2021 prompted central banks around the world to devise ways to keep an eye on the digital asset sector. This gave birth to CBDC and DLT technology to support it.

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

Making the case for DLT

The ECB is considering the introduction of DLT technology in payment systems across Europe. With DLT, payments involving a wide variety of assets are possible. More importantly, DLT systems can adapt non-financial companies to use digital payments.

Given that the Bank for International Settlements is working with several monetary authorities to develop a CBDC, the ECB leadership noted that this is the perfect time to explore DLT.

Furthermore, the debate about the effectiveness of the Bitcoin-powered proof-of-work (PoW) consensus mechanism is still ongoing. However, the environmental effects of energy-intensive operations are worrisome.

Additionally, Bitcoin has a permissionless distributed ledger that anyone can contribute to. Panetta added that it ranks below centralized platforms like CBDC.

DLT in this case has more appeal than Bitcoin due to environmental protection. However, the technology also has some drawbacks.

Panetta pointed out that the major players controlling the DLT ecosystem, unknown to the ECB, are outside the EU bloc. As a result, this raised genuine concerns about the technology’s independence. In addition, DLT appears more secure than some existing systems used by large financial institutions.

Despite the perceived disadvantages, the ECB must be prepared for circumstances where market participants decide to use DLT for wholesale payments.

In the meantime, the ECB is prioritizing a system based on its “Target Services” system over a DLT-based system.

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