ECB should have DLT wholesale settlements when the market wants it, official says

Executive board member Fabio Panetta says it would undermine financial stability if the ECB were unprepared to use distributed ledge technology, but that’s the best he can say for it.

The European Central Bank (ECB) needs a wholesale central bank digital currency (CBDC) because market players expect it, ECB executive board member Fabio Panetta told a banking symposium in Germany on Monday. Two options for wholesale CBDCs are currently under consideration. 

Wholesale CBDC is not a new concept, Panetta said. Eurosystem’s Target2 uses a centralized CBDC, strictly speaking. Target2 is a real-time gross settlement system in use since 2017 that also provides a securities settlement platform and an instant payment settlement service. Despite this, banks and financial market institutions continue to explore distributed ledger technology (DLT), Panetta said.

The digitalisation of finance has broadened payment options, with emerging fintechs, big techs and cryptos causing disruptions, says Executive Board member Fabio Panetta at the @bundesbank. We need to preserve an anchor of stability for the monetary and payments systems.

1/4 pic.twitter.com/Fo9xQtHLZo

— European Central Bank (@ecb) September 26, 2022

If Target2 is difficult to use, market players will turn to commercial bank money and stablecoins, Panetta continued. That would undermine financial stability by fragmenting trading and liquidity and removing central bank money from the process. Besides, stablecoins “are stable in name only.”

Related: European Central Bank bets on CBDCs over BTC for cross-border payments

While he saw the potential for DLT to improve pieces of the settlement system, Panetta considered CBDC’s advantages over existing technologies unproven. Cost optimization may be possible at times too, Panetta said, but he still had concerns:

“Importantly, the governance of major DLT technologies and networks is dominated by actors who are either unknown or based outside Europe, which raises concerns about strategic autonomy.”

Panetta acknowledged the need for an ECB CBDC with little enthusiasm:

“Despite the uncertainties surrounding DLT’s potential, we want to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement.”

The ECB is considering two options for integrating DLT and Target services. The first is to create a bridge between DLT platforms and central bank infrastructures. That course of action would probably be faster to implement than the option of creating “DLT-based wholesale settlement service with DLT-based central bank money.”

Market conditions would be the deciding factor, Panetta said.

The ECB has weighed the virtues of CBDC v. Target2 before. Target2 is broadly comparable with the proposed FedNow system that has been under consideration in the United States since 2019.