The European Central Bank (ECB) announced it’s expanding the settlement of transactions recorded on distributed ledger technology (DLT) in central bank money with a two-track approach.
First, as soon as feasible, the Eurosystem will develop and implement a safe and efficient platform for such settlements in central bank money through an interoperability link with TARGET Services. No timeline was provided.
Second, the Eurosystem will look into a more integrated, long-term solution for settling DLT-based transactions in central bank money. This will also include international operations, such as foreign exchange settlement.
“We are embracing innovation without compromising on safety and stability,” said ECB Executive Board member Piero Cipollone, who oversees the initiative, in a statement. “This is an important contribution to enhancing European financial market efficiency through innovation. Our approach will pay due attention to the Eurosystem’s goal of achieving a more harmonized and integrated European financial ecosystem.”
The initiative will build on the Eurosystem’s exploratory work on new technologies for wholesale central bank money settlement, conducted between May and November 2024. This work gave 64 participants – comprising central banks, financial market participants and DLT platform operators –the opportunity to conduct over 50 trials and experiments. Trials included actual settlement in central bank money, while experiments were tests with mock settlement.
AFME response
The Association for Financial Markets in Europe (AFME) wrote in emailed commentary that linking the solution to existing infrastructure will ensure the most substantial degree of legal certainty and enable swift implementation and adoption by market participants.
In its further work on the interoperability solution, AFME calls on the ECB to also take serious account of other important considerations, in particular the ability of market participants to efficiently manage central bank reserves and avoid liquidity fragmentation.
James Kemp, managing director and head of Technology and Operations at AFME, said in a statement: “The swift implementation of an interoperability solution will serve as an important enabler to the further scaling of DLT-based capital markets in Europe and is key in supporting Europe’s leadership position in DLT adoption”.
In addition to enabling settlement in central bank money, AFME also emphasized the need for the ECB to review its collateral eligibility framework in a way that allows DLT-based securities to serve a collateral in ECB credit operations. Such an inclusion is vital to further unlocking market liquidity and adoption of DLT-based securities.