The Italian Banking Association (ABI) has 18 members participating in a trial of wholesale central bank digital currency (CBDC) with the Bank of Italy, Project Leonidas. It is one of the 14 projects that the central bank selected for the DLT experiments. The CBDC test comes as the ECB has announced plans to experiment with new technologies for wholesale payments without mentioning wholesale CBDCs.

There is some uncertainty about whether the ECB exploration will use a DLT-based CBDC, as preferred by the ABI, or link a DLT to conventional central bank payments (trigger solution), or both.

The ABI has an exceptional track record when it comes to DLT. He has a blockchain project, Spunta, which has been in production for three years and includes around a hundred banks. Using a shared ledger for interbank payment reconciliations radically reduces the number of interbank inquiries and allows the process to occur nightly instead of monthly.

At the end of the reconciliation process, each bank knows what it owes to the other banks. This latest test aims to settle that interbank liability with a wholesale CBDC using the same Spunta infrastructure based on R3’s Corda enterprise blockchain.

Many other CBDC wholesale trials have focused on securities settlement.

Wholesale CBDC v fires up payment debate

France has already conducted several wholesale CBDC trials and stated that it planned to conduct more this year. But so far nothing concrete has been announced.

In most cases, a wholesale CBDC is issued on the securities ledger that allows for the simultaneous exchange of securities and cash as delivery versus payment (DvP). In the blockchain world, it’s called atomic liquidation because if one leg fails, both fail.

Meanwhile, Germany favors so-called trigger payments. This design avoids putting a CBDC on a ledger. Instead, it creates an intermediary blockchain for payments that links to Europe’s Target 2 payment system to trigger settlement. The Bank of Italy also prefers this route, although it is experimenting with a wide range of alternatives.

The Italian Banking Association wants a CBDC mermaid

The Italian Banking Association, with its DLT track record, strongly favors a wholesale CBDC. “As Italian banks, we are not dogmatic that we want DLT because we want DLT,” said Silvia Attanasio, ABI’s chief innovation officer. “We want atomic DvP. If this problem can be solved in other ways with other technologies, we’re perfectly fine.”

However, he followed up with a vivid metaphor. “I am an optimistic person and I believe in mermaids. So when we talk about DvP, because that’s what a wholesale CBDC is all about, we’re talking about two legs: the asset leg and the cash leg should be one leg, not two legs tied very tightly together. Because tying the legs (together) never turned a woman into a mermaid. A mermaid has a tail. We want only one leg: Atomic DVP. This is the idea. Experiments under the umbrella of the Eurosystem will help identify an effective solution.”

Central banks that oppose this concept say it will fragment liquidity, despite the design of the retail digital euro having a cascading feature that drags excess cash into accounts. The same could be done by these wholesale books.

Our view is that the crux of the matter is fragmentation from a central bank perspective. A wholesale CBDC would spread across multiple securities books, which the central bank wants to oversee, complicating its job. That contrasts with today, where they only have to keep an eye on central bank accounts.