In the Deutsche Bundesbank’s July monthly report, the central bank explored digital money, including central bank money, tokenized deposits, and stablecoins. While tokenized deposits only received a few paragraphs of attention, it was enough to create uncertainty.

Many banks consider tokenized deposits to be legally equivalent to bank deposits. According to the Bundesbank, they may or may not be considered a deposit. Depending on the design, it could be an electronic money token under MiCA regulations or a tradable security. It also notes that “it is unclear whether tokenized deposits would be covered by deposit insurance.”

Most of the essay focuses on the need for central bank money to settle DLT transactions. However, the central bank has a conservative, or not particularly optimistic, view of DLT.

DLT skepticism

For example, he cites an Accenture report as proof that the efficiency gains, cost savings, and resiliency of DLT are yet to be proven. We were curious about such a report, until we realized that it was the review of the failed ASX CHESS project. Our reading of that analysis was that blockchain should have been used where it offered strategic advantages rather than everywhere. And there were project management issues.

With respect, the Bundesbank omitted the DLT successes. That includes one of its own, the HQLAᵡ project for collateral mobility, where Deutsche Boerse is a partner and investor. There is also the Broadridge DLT repository platform that processes around $1 billion monthly and the DLT provider Baton Systems, which has facilitated over $11 billion in deals.

That being said, a recent DLT survey released this week found that the ability to quickly demonstrate ROI is the biggest challenge in launching DLT projects.

Skepticism around DLT is a key driver behind the Bundesbank’s approach to DLT settlement, which is to use a central bank trigger solution that links DLT platforms to the real-time gross settlement system (RTGS). With their reservations about DLT, the effort involved in developing a wholesale CBDC is not yet justified. However, the ECB’s recently announced roadmap includes a German activation solution, an Italian activator-like solution, and wholesale CBDC experiments in France.

The chicken and egg problem

The central bank views DLT as having a chicken and egg dilemma. On the one hand, central banks and commercial banks will only develop solutions when there are live use cases that need to use digital money. And DLT projects will not be implemented in earnest until there is a solution for the cash part of the transaction.

While there is some truth to that, there is another argument that is even more important. “Financial market infrastructures show a high level of inertia, even if superior solutions have been made available in the meantime.” Getting the majority of the industry to use DLT is the only way to make a profit. That is now starting to happen with most of the major institutions developing DLT and digital asset expertise.

The crux of the matter was succinctly stated in the report: “If new technologies like DLT reach maturity and market penetration, it must be ensured that central bank money can also be used for these new types of settlement. Central banks are caught between innovation and stability.