The European Central Bank (ECB) considers Distributed Ledger Technology (DLT) as “one of several possibilities” when it comes to assessing possible technical solutions, according to Yves Mersch, ECB Executive Board Member. At the Deutsche Bank Transaction Bankers' Forum 2016 on Monday, Mersch stated that not only is there “big demand for research into the DLT related questions and their policy implications,” the ECB is “certainly open to new technologies and, like many market players, have launched some experimental work.”
The European Central Bank (ECB) considers Distributed Ledger Technology (DLT) as “one of several possibilities” when it comes to assessing possible technical solutions, according to Yves Mersch, ECB Executive Board Member.
At the Deutsche Bank Transaction Bankers’ Forum 2016 on Monday, Mersch stated that not only is there “big demand for research into the DLT related questions and their policy implications,” the ECB is “certainly open to new technologies and, like many market players, have launched some experimental work.”
The ECB and the National Central Banks (NCBs) of countries that have adopted the euro, currently 19 out of 28 EU countries, make up what it know as the Eurosystem.
Payments across the Eurosystem are settled through TARGET2, a real-time gross settlement system under the responsibility of the Governing Council of the ECB. TARGET2 replaced the older TARGET system in 2008, which was created to settle large-value payments in 1999.
“The Eurosystem has the statutory task of promoting the smooth operation of payment systems.”
— – European Central Bank
“The Eurosystem has the statutory task of promoting the smooth operation of payment systems.”With €492.4 trillion turnover in 2014, and 90,337,036 transactions, TARGET2 is the leading payment system in Europe, and one of the biggest in the world, according to ECB’s TARGET 2014 annual report, released in June 2015.
The system settled 91 percent of the large euro value payment systems during 2014. More than 1,700 European credit institutions use it to make payments, and approximately 56,000 banks across the globe, including branches, subsidiaries and all of their customers, can be reached on it.
In spite of the systems reach, it isn’t large or diverse enough for the needs of Europeans. The Eurosystem has been making plans for additions, and working to put in place a unified, harmonized financial market infrastructure.
In June 2015, the Eurosystem launched their latest platform to enable integrated securities settlement across Europe, Target2-Securities (T2S). “After seven years of hard work to make this happen, T2S will benefit people in 21 countries and will support the creation of a true single capital market in Europe,” Mersch said at the time.
According to the ECB’s 2016 Harmonisation Progress Report, five EU markets had joined by August 2015. 21 European markets, covering 23 central securities depositories (CSDs), will be connected by September 2017.
“T2S is one of the largest infrastructure projects launched by the Eurosystem so far. It brings substantial benefits to the European post-trading industry by providing a single pan-European platform for securities settlement in central bank money.”
— – European Central Bank
Mersch outlined several key action points while discussing the development and operation of the Eurosystem’s financial market infrastructure. “At present, we are in the design phase,” Mersch said. “When it comes to assessing possible technical solutions for the envisaged developments, we consider DLT as one of several possibilities.”
However, he cautioned that the wider implications of using DLT for central banks must be thoroughly analyzed prior to any adoption: “It has the potential to advantage some actors, by lowering back-office costs and collateral or capital requirements. At the same time, it may possibly disintermediate or even make redundant some market actors that do not provide core functions.”
Mersch went on to discuss the implications of moving the Eurosystem’s market infrastructure from TARGET2 and T2S to DLT.
“Bringing our Eurosystem market infrastructures on DLT automatically means bringing central bank money on DLT. This may have implications on the central bank functions which go beyond the operational and technical sphere. It is therefore important to structure the discussion along the lines of who could access the central bank ledger.”
— – Yves Mersch, ECB Executive Board Member
He introduced three scenarios where the central bank offers a DLT network, where entities “access the central bank money on the ledger.”
The first is one where “access to the ledger for payments and securities settlement could be restricted to banks.” Other market infrastructure providers could also be included, such as central securities depositories (CSDs) and central counterparties (CCPs), as well as automated clearing houses (ACHs), he added.
Broadening the concept further, the second scenario is one where payment service providers and individuals have access to the central bank digital currency on the ledger via their bank accounts. “This scenario would preserve the current relationship model of banks with central banks,” he proposed.
His third scenario is that the central bank could offer “a DLT network that is open to all citizens,” a “far-reaching” proposal. “Citizens would have the choice to hold commercial bank deposits with banks or digital currency at the central bank.”
In a speech at the London School of Economics, in March, Deputy Governor for Monetary Policy at the Bank of England, Ben Broadbent, discussed how a central bank digital currency could compete with the main form of money in the economy, commercial bank deposits. “The private and central-bank versions of a digital currency are actually rather different,” Broadbent explained, “The one would expand what the other seeks to replace."
— – Ben Broadbent, Deputy Governor for Monetary Policy at the Bank of England
“Some admirers of bitcoin see it as a means of bypassing central banks altogether. They are in some ways the descendants of the supporters of ‘free banking’ in the 19th century. Conversely, others see the distributed ledger as an opportunity for the central bank to expand its role, via a ‘central bank digital currency’ available to a much wider group of counterparties.”The Society for Worldwide Interbank Financial Telecommunication (SWIFT) maintains a pivotal role in the Eurosystem. SWIFT currently provides connectivity services for both TARGET2 and T2S, having been selected as the sole network provider for TARGET2 in 2004.
The selection was in large part due to time constraints, and the vast majority of market participants already had established connections to SWIFT. As a consequence, TARGET2 relied heavily on a number of specific, or proprietary, solutions developed by SWIFT, according to the ECB.
T2S was designed so that “it did not rely on any service specifically provided by one provider,” and two providers were eventually selected via a public tender. The ECB believes that competition amongst network providers should translate into service and cost benefits for end-users.
After much competition, SWIFT was again chosen as one of the two licensees to provide network messaging system connecting to the new platform. The other provider was Sia, in partnership with Colt.
However, SWIFT may soon lose its role. On 15 February 2016, the Eurosystem issued a consultative report suggesting a merger of the two platforms, “Eurosystem’s vision for the future of Europe’s financial market infrastructure.”
The ECB is now exploring the possibility of accessing the platform via different network service providers and technologies. The report also states that the Eurosystem is open to new technologies, including DLT, as part of its vision.
SWIFT has since stated that it “will support the transition to ensure it is as smooth as possible.” The company also highlighted many benefits in continuing to use its services, such as cost and a lower technical entry barrier.
The company also stressed its openness to new technologies, and “conducting extensive research with our community on how these new technologies could be used in the financial sector.” Has has been exploring DLT for correspondence banking.
Last week, SWIFT and Accenture released a paper that investigated how DLTs could be used in financial services. In the paper, SWIFT affirmed that its focus is “building technical, operational and business capabilities with a view to evolving our platform such that DLT-based services could be offered to our 11,000+ members, when the technology matures and firm business use cases emerge.”
