ECB Explores a blockchain for settlement of banking transactions

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The European Central Bank is working on ways to settle transactions between banks on blockchain in an effort to maintain control of funds even if banks switch to distributed ledgers, ECB member Fabio Panetta said.

The ECB is among central banks around the world working to issue digital versions of their currency in response to the popularity of digital currencies such as bitcoin and the blockchain technology that powers them.

This distributed ledger technology (DLT) is based on market participants certifying transactions and keeping a copy of them instead of relying on a trusted medium such as a central bank.

In addition to a digital euro for consumers, the ECB is looking at how it could allow banks to settle wholesale transactions between themselves in an accounting ledger rather than with central banks themselves.

“Despite the uncertainties around the potential of DLT, we want to be prepared for a scenario where market participants adopt DLT for wholesale payments and securities settlement,” 

– Fabio Panetta

He added that leaving banks to settle on their own or using stablecoins, which are crypto linked to a conventional currency, would lead to “fragmentation of trade and liquidity”.

Meanwhile, giving ECB support to stablecoins would lead to the central bank’s right to give out money being delegated to private entities, putting monetary sovereignty at risk, Panetta added.

As a possible solution, Panetta pointed out that the ECB could create a bridge between private sector blockchain platforms and its own Target 2 settlement system.

Alternatively, it could make ECB money available on these platforms, or create its own, he added.