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ECB should have DLT wholesale settlements when the market wants it, official says

ECB should have DLT wholesale settlements when the market wants it, official says

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The European Central Bank (ECB) needs a wholesale central bank digital currency (CBDC) because market participants are waiting for it, ECB Executive Board member Fabio Panetta told a banking industry symposium in Germany on Monday. There are currently two options being considered for wholesale CBDCs.

Wholesaling CBDC is not a new concept, Panetta said. The Eurosystem’s Target2, strictly speaking, uses a centralized CBDC. Target2 is a real-time gross settlement system that has been in use since 2017, which also offers a securities settlement platform and an immediate payment settlement service. Despite this, banks and financial market institutions continue to explore distributed ledger technology (DLT), Panetta said.

If Target2 is difficult to use, market participants will turn to commercial bank money and stablecoins, Panetta continued. This would undermine financial stability by fragmenting trading and liquidity and removing central bank money from the process. Additionally, stablecoins “are stable in name only.”

Related: European Central Bank bets on CBDC over BTC for cross-border payments

While he saw the potential for DLT to improve parts of the settlement system, Panetta felt that CBDC’s advantages over existing technologies were unproven. Also, cost optimization may sometimes be possible, Panetta said, but he was still concerned:

“Importantly, the governance of large DLT technologies and networks is controlled by actors who are either unknown or located outside of Europe, raising concerns about strategic autonomy.”

Panetta acknowledged the ECB’s need for a CBDC with little enthusiasm:

“Despite the uncertainties related to DLT’s potential, we want to be prepared for a situation where market participants adopt DLT in wholesale payments and securities trading.”

The ECB is considering two options for integrating DLT and Target services. The first is to create a bridge between DLT platforms and central bank infrastructures. This course of action would likely be faster to implement than the alternative of creating a “DLT-based wholesale payment service with DLT-based central bank money”.

Market conditions would be the deciding factor, Panetta said.

The ECB has weighed the merits of CBDC v. Target2 in the past. Target2 is broadly comparable to the proposed FedNow system that has been under consideration in the US since 2019.