The Central Banks of Italy and Germany recently participated in a joint workshop, where they discussed a settlement system for central bank money based on Distributed Ledger Technology (DLT).
The focus of the discussion was settlement via a “programmable trigger mechanism”. This trigger mechanism would essentially act as a bridge between tokenized securities (securities represented by tokens on a DLT, like a blockchain) and the cash to be settled.
It is envisioned that this would complement, rather than replace, the existing payment systems, e.g. TARGET2 or TIPS (TARGET Instant Payment Settlement System).
Jens Weidmann, of the German Bundesbank, said: “If market participants want to reap the benefits of new technologies like DLT for the settlement of tokenized assets, central banks should support that by enabling the settlement of the responding cash leg in secure central bank money. The tested trigger solution could well serve the market’s need and keep central bank money in the systems run by central banks. In comparison to creating wholesale central bank digital currency, a trigger solution could be operational in a much shorter time frame.”
The DLT-based mechanism was successfully tested earlier in 2021 by Deutsche Börse, Deutsche Bundesbank, and Germany’s Finance Agency. The banks simulated a securities settlement using DLT, which triggered the cash settlement in the Eurosystem’s TARGET2 payment system.