Ali Raza
Fabio Panetta, a member of the executive board of the European Central Bank, has said that a wholesale central bank digital currency (CBDC) could provide the efficient infrastructure needed to support transaction settlements between banks.
ECB’s plan to launch a wholesale CBDC
Panetta was speaking at a European symposium organized by the Deutsche Bundesbank, where he addressed the importance of payments in the monetary system. He said that the digitization of the finance sector had increased the available payment options as fintech startups and big techs entered the market.
According to the executive, the digital euro project would be created to ensure the stability of monetary and payment systems. The project would guarantee that central bank money was used to support daily transactions in physical and digital forms.
Panetta added that while the discussion of a wholesale CBDC was new, this asset had existed for many years and offered the digital infrastructures needed to settle bank transactions. Therefore, a European wholesale CBDC needed to focus on how the existing infrastructures could be used as technologies amid a growing need to evolve.
Panetta added,
Central bank money has been digital for wholesale transactions between banks for decades. This misconception is fuelled by the assumption that wholesale CBDC needs to be operated using DLT. But wholesale CBDC is not synonymous with DLT, as it can be based on any digital technology.
The executive also said that a wholesale CBDC complements a retail CBDC. With wholesale CBDCs, central banks supply the payment method used by financial institutions, which lowers the risks to the financial sector. On the other hand, a retail CBDC gives the public a convenient and secure payment method.
Nevertheless, there were distinct differences between a retail and a wholesale CBDC. A retail CBDC aims to create a digital version of central bank money that everyone can use. Wholesale CBDCs supported interbank transactions by making cross-currency and securities payments secure and efficient.
Integrating new technologies to wholesale CBDCs
Panetta said that the current focus of the ECB was looking into whether new technologies would improve the efficiency and security of wholesale CBDCs. One of the technologies under consideration is distributed ledger technology, which is the backbone of crypto banks.
He admitted that DLT was already being tested by banks and financial market infrastructures that were active in settling payments and securities. ECB’s engagement with these institutions showed that most expect a notable adoption of the technology in the financial sector.
The supporters of DLT have pointed to its wide range of benefits, including fast transaction settlement. Moreover, those using DLT can customize transactions to be settled instantly, depending on pre-determined conditions.
DLT adoption is expected to be at the highest in securities post-trade processes, where it will help lower costs, processing time and remove the need for reconciliation. DLT could also be used in wholesale payments where the technology has the potential to boost cross-border and cross-currency transactions.
However, more research was needed by central banks and private firms to prove that DLT technology offered superior benefits compared to the existing technologies. This will help prove whether these technologies are worth being implemented.
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This article was written for Business 2 Community by Ali Raza.
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