Home Blockchain German authorities champion blockchain-based securities settlement

German authorities champion blockchain-based securities settlement

Frankfurt: Deutsche Bundesbank, Deutsche Finanzagentur and Deutsche Börse – all located in Germany’s financial capital – say the technology could be implemented at a European level in a relatively short space of time | Credit: moritz320; Pixabay

German financial authorities have successfully tested the use of distributed-ledger technology (DLT) to settle electronic securities in a trial involving six major international banks.

Deutsche Bundesbank (central bank), Deutsche Finanzagentur (finance agency) and Deutsche Börse (stock exchange) developed and trialled a new settlement interface for electronic securities in an experiment that illustrates how state financial entities are intensifying their interest in digital technologies.

Their research has demonstrated that it is possible to establish a ‘technological bridge’ between blockchain technology and traditional payment systems to settle securities in central bank money without creating central bank digital currency (CBDC), according to a statement issued jointly by the Frankfurt-based institutions.

The testing’s conclusion is announced as the Bundesbank continues to radiate a cautious attitude towards CBDCs, despite momentum building worldwide towards their introduction. Just last week the Bundesbank’s president, Jens Weidmann, described “no rush or urgency to introduce CBDC”, describing the topic as “something that we should reflect on quite carefully”.

More than a token experiment

Most central banks worldwide are researching or experimenting with CBDCs for both wholesale and retail (general purpose) use but few have committed to introduce them. Weidmann was speaking at the Bank for International Settlements (BIS) Innovation Summit when he urged against rushing the potential adoption of CBDCs. US Federal Reserve chairman Jerome Powell and BIS’s own general manager, Agustín Carstens, took a similar line.

The Bundesbank is part of the Eurosystem, along with the other central banks of European Union (EU) countries that have adopted the euro. A European Central Bank (ECB) consultation on a potential digital euro received more responses than any previous ECB public consultation and a ‘detailed analysis’ is set to be published in the coming weeks.

Weidmann spoke last week about the Bundesbank’s explorations of what he referred to as a “so-called trigger solution” with private blockchain triggering payments “in our TARGET2 system in central bank money”. TARGET2 is the Eurosystem’s real-time gross settlement (RTGS) system.

In DLT-based settlement, assets and money are typically represented as digital tokens but the German institutions’ newly trialled solution does not require tokenised money. Instead, the technology involves an interface that connects the DLT platform with conventional payment systems and initiates (‘triggers’) payment. Two software modules – a ‘trigger chain’ from the Bundesbank and a transaction co-ordinator from Deutsche Börse – connected TARGET2 with a DLT securities system.

In the publicised example, a ten-year government bond was issued by the Finanzagentur on the blockchain, with primary and secondary market trades also settled on the blockchain. The securities and central bank money did not change hands until the transfer was confirmed by all parties.

‘Major advance for the further use of DLT’

Bundesbank and Deutsche Börse have been working together on blockchain-based settlement technology research since 2016, giving their explorations the name ‘Blockbaster’ (BLOCKchain BAsed Settlement TEchnology Research). The functionality of blockchain technology for securities settlement and the cash leg settlement of transactions was successfully demonstrated in previous project phases.

The institutions say that the solution tested in this latest stage of their research can be adopted by a variety of DLT-based settlement systems, so represents a ‘major advance for the further use of DLT in the financial sector and real economy’. 

“Following successful testing, the Eurosystem should be able to implement such a solution in a relatively short space of time – at least in far less time than it would take to issue central bank digital currency, for instance,” said Burkhard Balz, the member of the Bundesbank’s executive board responsible for the central bank’s payments and settlement systems directorate-general.

“New technologies are a key component in creating infrastructures of tomorrow that meet the markets’ needs. This project marks a major step towards more efficient securities settlement and securities digitalisation by combining new technologies with existing infrastructures in a smart way,” said Deutsche Börse executive board member Stephan Leithner.

The banks involved in the experiment were Barclays, Citibank, Commerzbank, DZ Bank, Goldman Sachs and Société Générale. The transactions carried out during the testing were not legally binding.

*** Bank of Jamaica has announced that it has selected an Ireland-headquartered company, eCurrency Mint, as technology provider for its CBDC pilot project and national rollout. Global Government Fintech reported last week that a pilot digital currency will be tested in the central bank’s fintech regulatory sandbox from May to December, with the aim of launching a CBDC in early 2022

ATTEND ‘Delivering Central Bank Digital Currencies (CBDCs): Exploring the Technology Challenge’ upcoming Global Government Fintech webinar, supported by our knowledge partner Amazon Web Services, on 22 April 2021