Fabio Panetta, an executive board member of the ECB, said that a system that uses existing interbank settlement infrastructure rather than one based solely on DLT could be implemented “more quickly.”
Fabio Panetta (a member of the executive committee) stated that the European Central Bank (ECB), is looking into “the potential” for distributed ledger technology (DLT), to improve the efficiency of interbank settlements.
Panetta outlined the many benefits of DLT and argued for a system that uses the existing infrastructure of the ECB for wholesale settlements rather than building a completely new system based on DLT.
Fabio Panetta states there are many benefits to using distributed ledger technology
A distributed ledger , which is a decentralized database that can be maintained and updated by individuals in large networks, is called a distributed ledger . According to Panetta, wholesale central bank digital currencies (CBDC) are a new type DLT-based central banking digital currency that can only be used for interbank transfers.
Panetta, a vocal critic of crypto said in a Monday speech. He said that banks in the European Union can now settle wholesale digital transactions by using the ECB’s TARGET Service on a centralized ledger.
The market capitalization for cryptocurrency markets was around $3 trillion by 2021. This prompted central banks all over the world to consider how to keep up to date with the crypto-world and DLT technology. There are around 100 countries that are currently exploring retail CBDCs. These digital currencies are consumer-focused and payment-focused and were first issued by The Bahamas, and then Nigeria. The ECB is currently conducting a two-year investigation into a retail CBDC.
Wholesale CBDC experiments are moving faster than retail payments, which Panetta attributes to the smaller number of parties involved in interbank settlements. France has recently launched the second stage in a wholesale CBDC experiment. Many monetary authorities around world are also working with the Bank for International Settlements, an association of central banks, on multiple wholesale CBDC trials.
DLT can provide instant settlements
Panetta claims that DLT allows instant settlement of transactions in a wider variety of assets round the clock, “with a broader range of participants, potentially including other non-financial companies.” Panetta acknowledged that DLT is more secure than other systems but also pointed out some drawbacks.
He referred to the ongoing debate about the efficiency and scalability the Bitcoin network powered via the proof of work consensus mechanism and the environmental consequences of large amounts of energy required to power it. Panetta said that Bitcoin’s distributed ledger can be accessed by anyone, which may make it less favorable than centralized infrastructures.
Panetta said that “Importantly the governance of major DLT networks and technologies is dominated by actors who either are unknown or based in Europe which raises concerns about strategic independence.”
Panetta said that despite these drawbacks the ECB should be ready for a scenario in which market players adopt DLT for wholesale payments and securities settlement. Panetta stated that a system that relies on the ECB’s existing TARGET Services may be more efficient than a system “based completely” on DLT.