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The European Central Bank has announced its plans to initiate an extensive exploration of distributed ledger technology (DLT) for financial market settlement, commencing in 2024. This groundbreaking move was revealed in the minutes published on Thursday, highlighting the ECB's commitment to embracing innovative solutions in the financial sector.
The central bank is actively exploring opportunities to revolutionize transaction settlement processes between financial institutions for securities or foreign exchange. Additionally, it is concurrently formulating strategies for the introduction of a retail central bank digital currency (CBDC), known as the digital euro, aimed at providing EU citizens with a digital payment option.
“The ECB clarified that the envisioned start of exploratory work is in 2024,” testing the use of central bank money in both real and mock wholesale transactions, the document said.
The document stated that the explorations will be conducted within specific limitations in terms of capacity and duration. These explorations will adhere to existing regulations, including a recent pilot regulation approved by the EU. This pilot regulation has temporarily eased the requirements for financial-market infrastructure in relation to securities trading using distributed ledger technology (DLT).
The announcement was made during the first meeting of a newly established industry association initiated by the ECB the previous week. This development comes as traditional financial institutions persist in their exploration of cryptocurrencies and the underlying blockchain technology. While the ECB's consultative board primarily comprises conventional finance players like Euroclear and Deutsche Bank, it also encompasses DLT-focused initiatives such as HQLAX and Fnality.
On Wednesday, the European Commission introduced a set of new regulations aimed at establishing a retail central bank digital currency (CBDC). These proposed laws encompass safeguards for consumer privacy and limitations on holdings to prevent a mass exodus of deposits from the banking system.
A recent survey conducted by the Global Financial Markets Association, an industry group, indicates that the adoption of crypto-style distributed ledger technology (DLT) in financial markets has the potential to yield significant cost savings. The survey suggests that implementing DLT could lead to annual savings of up to $100 billion by streamlining various processes, including the liberation of collateral and the automation of tasks such as mergers.
