To date, the European Central Bank’s (ECB) work on central bank digital currency (CBDC) has focused on retail or consumer-facing CBDC. In a speech today, ECB board member Fabio Panetta confirmed that the central bank is beginning to assess whether or not to enable a wholesale CBDC for the settlement of DLT-based securities transactions between institutions. Sources previously told Ledger Insights that the ECB has asked banks about the issue in recent months.

Interbank CBDC is an area that the Banque de France has focused on and the French central bank previously stated that it planned pilots in 2023.

Many institutions are exploring the use of DLT platforms to tokenize assets such as security tokens or to use blockchain for settlement of post-trade transactions. This can provide significant efficiencies, enable faster settlement, longer trading hours, and reduce counterparty risks.

In addition, the European Union passed laws to support the EU DLT Pilot Scheme to address this area. “Our ongoing engagement with these stakeholders reveals that many of them expect DLT to see significant uptake in the financial industry,” said Panetta.

Panetta was speaking at a Deutsche Bundesbank event. The German central bank has previously tested the use of Europe’s TARGET 2 to trigger a central bank payment using the existing system for settling DLT-based transactions. While this may be a starting point, many believe that to fully benefit from the efficiencies of DLT, there must be cash on the ledger.

So the second option is for the central bank to provide money based on DLT.

“The Eurosystem could, for example, launch its own DLT platform for settlement in central bank money,” Panetta said. “Alternatively, we could make central bank money available on DLT platforms operated by market stakeholders, allowing cash and assets to be transferred there.” The latter approach was tested as part of Switzerland’s Helvetia Project when the Swiss National Bank issued wholesale Swiss francs on the SIX Digital Exchange platform.

One of the ECB’s main motivations is to ensure that central bank money continues to play an important role. Panetta dismissed the use of stablecoins as risky, which could be safer if backed by central bank money. “Allowing them to be fully backed with central bank money would effectively outsource the provision of central bank money to private entities, endangering monetary sovereignty,” Panetta added.

Suppose the ECB is considering a wholesale CBDC. Where does that leave Fnality, the institutional payment network that is working to enable DLT settlement using digital euros backed by money held at the central bank? The ECB would have to give the go-ahead for the launch of Fnality in Europe.

Panetta is also not entirely convinced about DLT. “Experiments by both private companies and central banks have yet to show that DLT can offer more benefits than existing technologies,” she said.