Eurosystem, the monetary authority of the eurozone, has been exploring the possible use cases of distributed ledger technology (DLT) to conduct wholesale settlement in central bank money. It has now completed its first experiment using DLT, giving the monetary authority a glimpse into the potential merits of the tech.
Over the next six months, onboarded companies will conduct trials and experiments on three Eurosystem interoperability-type solutions proposed for central bank money settlement of wholesale financial transactions recorded on DLT platforms. Furthermore, these tests will continue to explore the viability and benefits of actual central bank money settlement of wholesale financial transactions using DLT technologies.
The European Central Bank (ECB) and the national central banks of the euro area are among the first central banks to delve into the viable use of the tech. Initially, 16 private companies will conduct trials involving actual settlement in central bank money. They will also experiment with mock settlement in test environments. The exploratory work will provide the Eurosystem with insights into how the TARGET Services and DLT platforms could interact in wholesale financial markets.
Oesterreichische Nationalbank carried out the first experiment. It covered the tokenisation and simulated delivery-versus-payment (DvP) settlement of government bonds in a secondary market transaction against central bank money.
Looking to the future
Preparations for further trials and experiments are ongoing and will cover a variety of use cases. This includes DvP transactions in primary and secondary markets, securities lifecycle management, automated wholesale payments and payment-versus-payment transactions.
A set of key performance indicators will be used to assess the results of the trials and experiments. The participating companies will perform the assessment in cooperation with Eurosystem. In December 2023 the Eurosystem launched a call for expression of interest in exploratory work on the three interoperability solutions proposed by the Eurosystem and detailed these in the annexes to the notice.
Edvards Margevics, co-partner at fintech company CONCRYT
Commenting on Eurosystem’s trials, Edvards Margevics, co-partner at fintech company CONCRYT, the payments and banking fintech: “As the Eurosystem embarks on these trials, we will hopefully witness a pivotal moment in the evolution of blockchain and cryptocurrencies.
“Eurosystem is involving private companies and central banks in live trials. As a result, it is demonstrating a commitment to exploring innovative solutions for enhanced efficiency and security in financial markets. These trials offer valuable insights into the potential benefits of DLT integration in wholesale financial transactions. They are also paving the way for future advancements in blockchain infrastructure.
“However, Eurosystem’s exploratory work does not necessarily constitute a commitment to provide any steady-state solution(s) in the future. Nor does it need to make any changes to its current infrastructure. The responsibility for making DLT a success is on industry players. Additionally, if the market wants to go in this direction, it is on the ECB to find out what the cost-benefit of any solution will be. Therefore, the entire crypto industry will be interested in the outcome of these trials.”
What does the successful trial mean for the fintech industry?
Neil Vernon, CTO, Gresham Technologies
Neil Vernon, chief product and innovation officer at Gresham Technologies, a global fintech company specialising in mission-critical data and automation solutions for the finance industry, commented on the announcement saying: “Eurosystem’s successful trial indicates that the fintech sector is setting up for significant change in the next five to 10 years.
“Systems will improve, speed up and carry more ability than ever before. With T+1 settlement times entering the fray, and huge advancements in AI and automation shaping how we view technology, the fintech we know today could be unrecognisable sooner than we expect.”
Robert Brown, head of strategic development at MAS Markets
“The Eurosystem’s successful experiment with new technologies for settling wholesale transactions in central bank money marks a significant step toward modernising financial infrastructures,” said Robert Brown, head of strategic development at MAS Markets, the flexible multi-asset liquidity firm. “By involving 16 private companies, the trial explored both actual and mock settlements.
“DLT offers potential benefits such as increased efficiency, reduced reliance on intermediaries, and enhanced compliance through transparent, immutable transaction records. These advancements could aid in monitoring cross-border payments and reducing fraud. However, DLT adoption may require central banks to adjust their infrastructures, enabling DLT platforms to interface with existing systems or offering central bank money in a DLT-compatible form.”
The potential of DLT
Jorge Lesmes, senior director and client partner, banking at NTT DATA UK&I
Jorge Lesmes, senior director and client partner, banking at NTT DATA UK&I, said: “Eurosystem’s successful trial underscores the potential of DLT to revolutionise wholesale transactions by enhancing efficiency, security, and transparency.
“However, to achieve broader adoption of DLT, several steps remain. Firstly, regulatory frameworks need to be harmonised across jurisdictions to provide clarity and assurance to market participants. Secondly, the industry must invest in interoperability solutions to ensure seamless integration with existing financial systems. Lastly, robust cybersecurity measures are crucial to safeguard the integrity of DLT-based platforms.
“Eurosystem’s trial signals to the fintech sector that DLT is no longer a theoretical concept but a practical solution with tangible benefits. This successful experiment will likely spur further innovation and investment in DLT, accelerating its adoption across the industry and paving the way for more advanced applications in financial transactions.”
The post Eurosystem Completes First of Many Experiments To Test DLT Central Bank Money Settlements appeared first on The Fintech Times.
