In a statement released on February 20, the European Central Bank (ECB) announced its development of a blockchain-based payment system designed to enable banks to settle transactions using central bank liquidity.
Some believe this might hasten the widespread use of blockchain technology in international banking and pave the way for the creation of a central bank digital currency (CBDC) for wholesale transactions.
The ECB said in a press release that the Governing Council has broadened the scope of its effort to include distributed ledger technology (DLT) in monetary transactions settled with funds from the central bank.
To ease this change, the bank is taking a dual strategy, focussing on both short-term fixes and more extensive infrastructure upgrades in the future.
“This is an important contribution to enhancing European financial market efficiency through innovation,” said Piero Cipollone, a member of the ECB Executive Board.
To guarantee secure and rapid settlements utilizing central bank money, the first phase of the plan entails building an interoperability link between blockchain-based transactions and the current TARGET Services platform. A comprehensive schedule for this rollout will soon be announced by the ECB.
The second phase is all about making a long-term answer that is more integrated and will work with a bigger range of DLT-based transactions, such as international money transfers and settlements.
The European Central Bank emphasized that maintaining the security and effectiveness of the financial system will always take precedence, even as it maintains its dedication to investigating new technology.
The possible effects of blockchain and other technologies will be studied by the bank in collaboration with both public and private entities.
“We are embracing innovation without compromising on safety and stability. Our approach will pay due attention to the Eurosystem’s goal of achieving a more harmonized and integrated European financial ecosystem,” started Cipollone.
As Europe looks into these digital asset options, stablecoins backed by the dollar will be a threat.
The European Central Bank (ECB) stressed the importance of blockchain-based payment innovations, including a digital euro, in January. The European Central Bank is still wary of widespread cryptocurrency use, even though it has adopted blockchain technology for payments.
President Christine Lagarde has rejected Bitcoin as a treasury asset due to its instability and associations with criminal financial activity. This initiative is in line with the ECB’s efforts to foster a more cohesive digital asset market across Europe.
Beginning in May 2024 and continuing until November 2024, 64 participants including blockchain platform operators, financial institutions, and central banks participated in the study.
The expansion was made possible by these trials, which included actual settlements from central banks.
The Governing Council of the ECB has also called for a digital capital markets union to help the growth of digital assets in Europe.
Lagarde stated during a news conference that she is still against the European Central Bank using Bitcoin as a reserve asset:
In response to Ales Michl’s remark that Bitcoin was being studied as a diversification tool but had not yet been officially considered, her remarks followed.
No European central bank under ECB regulation will keep Bitcoin in reserves, according to Lagarde.
On the other hand, this goes against the position of Federal Reserve Chair Jerome Powell. Powell recently said that U.S. banks could work with crypto clients if risks are handled properly. He also called for clearer crypto laws, which shows that the U.S. will take a more open-minded approach than Europe.
Although Bitcoin’s official acceptance in Europe is still up in the air, this new blockchain-based payment system may help them see its technological limitations and ultimately lead to its adoption.
Already, several European nations are gaining prominence; eventually, they may want to compete with their American counterparts.