EU central banks are working to settle DLT-based assets – News Couple
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EU central banks are working to settle DLT-based assets

European central banks are stepping up efforts to use distributed ledger technology (DLT), the basis of the blockchain, in central bank financial settlements.

Banca d’Italia and Deutsche Bundesbank, the central banks of Italy and Germany, respectively, have joined forces to work out settlements in central bank funds for DLT-based asset exchanges.

The official announcement emphasized that the primary objective of the joint workshop was not to use traditional digital processing technology as an alternative to traditional systems. Instead, the initiative aims to complement the central bank’s existing financial settlement practices with a programmable trigger mechanism that links DLT-based assets, such as tokenized security, and cash settled via traditional payment systems.

The proposed system will reduce counterparty risk for both sides by maintaining the method of delivery versus payment for settlement, the announcement reads. The programmable trigger will complement the digital euro and serve as a technical bridge between the existing payment systems used by Eurosystem central banks and the DLT-based settlement of tokenized assets.

Central Bank of Italy Governor Ignazio Visco said that DLT has the potential to usher in new products and services, generate additional revenue streams, reduce the cost of operations and make organizational structures more efficient. He stressed that the adoption of infrastructure-level digital processing technology in traditional markets will take time “due to the necessary in-depth investigations and cost-risk assessment”.

Related: The European Central Bank announces the members of the Digital Euro Advisory Group

“If market participants are to reap the benefits of new technologies such as DLT to settle token assets, central banks must support this by enabling the settlement of the responsive monetary portion with safe central bank funds,” said Deutsche Bundesbank President Jens Weidmann. he added:

A well-tested trigger solution can serve market needs and preserve central bank money in systems operated by central banks. Compared to creating a wholesale central bank digital currency, the operating solution can be up and running in a much shorter time frame.”

Deutsche Börse, Deutsche Bundesbank and the German Finance Agency conducted a pilot test with the participation of Citibank, Barclays, Goldman Sachs, Commerzbank, DZ Bank and Société Générale, linking conventional finance to distributed ledger technology in March 2021. The German Finance Agency issued 10 – Federal Bonds for the year via the DLT operating system and tested securities trading in the primary and secondary markets as part of the trial.