The European Central Bank (ECB) has shared its direction to explore wholesale central bank digital currency (wholesale CBDC) following the first meeting of the “New Technologies Contact Group for Wholesale Settlement”. Exploratory work will begin in 2024, and the ECB is considering a wide range of options to enable DLT transaction settlement beyond a simple wholesale CBDC or trigger payment solution.

Variety of DLT Settlement Options Explored

At a high level, the ECB outlined four potential paths. The first two are the ones commonly considered: connecting to a conventional central bank payment system versus a standalone wholesale CBDC solution that is interoperable with DLT networks on the market.

In addition, he outlined an “integration” approach with the Eurosystem by creating a DLT T2S (Target 2 Securities) network for securities settlement. Another “distribution” option is for a wholesale CBDC issued on DLTs shared with market participants.

However, the first round of experiments will focus on interoperable approaches as expected. Initially there will be three working sets based on trials and designs previously outlined by the central banks of Germany, Italy and France.

The Banque de France has focused on an interoperable wholesale CBDC based on DLT. Germany and Italy have proposed linking to conventional payment systems in different ways. Germany’s is known as a “trigger” solution and Bank of Italy’s as the TIPS Hash-Link solution, as described in a meeting presentation.

Wholesale CBDC for Securities Settlement on Demand

The minutes of the meeting included the results of the survey for the 29 market participants regarding their interest in the DLT liquidation. Twenty-seven participants (93%) rated their interest in delivery versus payment of securities (DvP) as significant (a score of four or five on a scale of five).

FX Payment versus Payment (PvP) came in second, with 16 people (55%) expressing significant interest and eight participants (28%) showing some interest (a score of three). Only two participants had an interest in other applications.

While the experiments were expected to start this year, the main reason for postponing to 2024 seems to come from market participants saying their budget and resource allocations are already committed to 2023.

The ECB’s work will include tests with real money from the central bank, as well as pure experiments.

Other market players in addition to the members of the working group will be canvassed and invited to participate. However, the rules about who has access to central bank money have not changed.

It should be noted that during trials in Canada several years ago, the problem of brokers not being able to use central bank money undermined some of the benefits. As we wrote at the time:

Brokers are not members of the payment system. So, to allow access to cash on the ledger, brokers were given credit from a credit extender, which is how it works in the current system. But using this conventional process reintroduced credit risk, thus undermining one of the significant benefits.

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