In a speech at the Symposium on “Payments and Securities Settlement in Europe – today and tomorrow,” ECB board member Fabio Panetta confirmed the central bank was evaluating whether to enable a wholesale CBDC for the settlement of DLT-based securities transactions amongst institutions. During the Symposium hosted by the German central bank Deutsche Bundesbank, Panetta delineated the concept of ECB’s wholesale CBDC, saying that it could strengthen confidence in the efficient functioning of the financial system.
What Wholesale CBDC Is and Is NOT
In his speech, Panetta demystified the concept of wholesale CBDC, clarifying some common misconceptions surrounding the term. According to the ECB Executive Board member, “wholesale CBDC” does not refer to large payments in central bank money. Instead, he said it refers to the “settlement of interbank transfers and related wholesale transactions in central bank reserves.”
Another major misconception is that wholesale CBDC is something newborn after the emergence of blockchain and distributed ledger technology (DLT). Panetta delineates this by saying: “Wholesale CBDC has existed for years. Central bank money has been available in digital form for wholesale transactions between banks for decades.”
It is a common assumption that wholesale CBDCs require DLT to operate. This is like saying DTL is synonymous with wholesale CBDC, which is not. According to Paneta, CBDCs can be based on any digital technology. “In the euro area, the Eurosystem offers banks the possibility of settling wholesale digital transactions through its TARGET Services using a centralized ledger.”
Wholesale CBDC is often confused with retail CBDC. ECB gives apparent differences between these two types of CBDCs, saying:
“On the wholesale side, central banks supply the ultimate means of payment for financial institutions, which helps to reduce risks in the financial system. On the retail side, providing the public with highly convenient and secure means of payment helps to underpin confidence in money by enabling private forms of money to be converted, at par, into risk-free central bank money.”
Panetta also notes that wholesale and retail CBDCs differ in terms of the forms through which they are made available to the public and banks and the types of stakeholders involved. “Retail CBDC projects involve a wide range of stakeholders: legislators, the retail payments ecosystem and the broader public” while wholesale CBDCs involve “…. a narrower set of stakeholders …such as banks or central securities depositories”, said Panetta in his speech.
The Need For ECB’s Wholesale CBDC
In the past, ECB’s work on CBDC was primarily focused on retail CBDC. Penetta’s speech confirmed that the central bank had seen the need for a wholesale CBDC to aid in settlement of DLT-based securities transactions amongst financial institutions.
In discussing the emerging need to adapt the wholesale infrastructure to serve evolving user demands, the executive said these payment systems should be modernized and integrated. This is to ensure instant retail payments are settled in real time between banks across the EU, as made possible by the current TARGET Instant Payment Settlement (TIPS).
While banks like Deutsche Bundesbank have previously tried using Europe’s TARGET 2 to settle DLT-based transactions, it is widely believed that a cashon ledger is needed to benefit from the efficiencies of DLT fully.
As such, ECB is “assessing the potential of DLT and the extent to which it could improve our services,” said Panetta.
“The Eurosystem could, for instance, launch its own DLT platform for settlement in central bank money. Alternatively, we could make central bank money available on DLT platforms operated by market stakeholders, allowing cash and assets to be transferred there.”
According to Ledger Insights, a blockchain news platform, the DLT approach was used in Switzerland’s Project Helvetia when the Swiss National Bank issued wholesale Swiss Francs onto the SIX Digital Exchange platform.
One of the main driving forces behind the ECB’s wholesale CBDC is the need to make sure that central bank money continues to play a vital role. Panneta said stablecoins magnify risks associated with inefficient and unsafe payments and securities settlement, “which would undermine financial stability.” A digital currency fully backed by central bank money “would effectively outsource the provision of central bank money to private entities, endangering monetary sovereignty,” added Panetta.
Panetta is also not entirely convinced about DLT at all. “Experiments conducted by private firms and central banks must still prove that DLT can offer more benefits than existing technologies,” he said.