Speech by Piero Cipollone ECB board member on field of DLT technology

A keynote speech that has divided many economist and IT professional in field of DLT technology that ECB promotes, develop, test and support to create a digital asset. Without doubts financial markets are highly complex and sophisticated. That’s why the cost in advanced economies are increasing. In the Symposium 7 October 2024 in Frankfurt on the Future of Payments event Piero Cipollone said.

„There is one crucial dimension that has often been overlooked, and that is technology. My aim today is not to discuss how to create a capital markets union for traditional assets, but to discuss how to create one for digital assets from the outset.

Although technology has undeniably helped facilitate the provision of financial services through electronic bookkeeping, for example, digital technology has so far failed to deliver financial integration in Europe. In fact, non-interoperable technological ecosystems in each country – shaped by diverging national regulatory regimes – have created soloed pools of asset liquidity, further entrenching fragmentation. “

This statement loudly says that the system as we know should be the same for all member’s state in EU and that our electronic bookkeeping for example and all regulation should be the same. To accomplish such financial service ECB will have to impose one financial integration who need to be accepted by each country member state. That means that new member state will have to accept such regulation to be member of EU. But let’s read more about the new technology and its future.

„However, recent advancements in digital technology offer an opportunity to create an integrated European capital market for digital assets – in other words, a digital capital markets union. Financial institutions are increasingly exploring the potential of tokenization, which is the process of using new technologies, such as distributed ledger technology (DLT), to issue or represent assets in digital form, known as tokens.
In the eye of the ECB central banks can effectively support DLT technological transition and use the transformative potential of tokenization in capital markets. This so called transition in DLT transformation is not just theoretical it is happening now. More than 60% of EU banks are exploring and experimenting DLT technology, for now only 22% have started using DLT applications. That’s why leading global financial market infrastructures such as DTCC, Clearstream and Euroclear are aiming to set standards to facilitate the adoption of tokenization across the financial sector.
„The public sector is also contributing to this movement. Since having a solution for settling transactions in central bank money makes DLT-based solutions more attractive and less risky, there is strong demand from market participants to be able to use central bank money to settle digital asset transactions. As a result, the Eurosystem is conducting exploratory work to test DLT for the settlement of wholesale transactions in central bank money. Similarly, the Bank for International Settlements’ Innovation Hub has launched several projects exploring this theme. “

The risk is high and the challenges of DLT development and it use in financial system must be pointed out. Regarding to Piero Cipollone there are three primary risks.

In first risk financial institutions are scared of DLT but they want to use its potential. The second fact is that ECB is apprehensive because several new DLT platform could emerge presenting their solution and they will jeopardize the objective of establishing a digital capital markets union for Europe

Second risk is that central bank money could lose its status as the safest and most liquid settlement asset. Risk of offer private money alternatives in this case is great. That’s why ECB as central bank should not allow a shift from central bank money to commercial bank money in DLT transaction. This would contradict the principles agreed at international level.

Third the key issue will be the choice of settlement assets, which could amplify liquidity risk or other vulnerabilities, but other risks could also emerge if new entities fall outside the scope of regulation or there are operational weaknesses.

„To deal with these risks, central banks and regulators must act early and work with market participants from the outset. If we drag our feet while other jurisdictions move faster and produce better solutions, we could see financial activities migrating elsewhere and private entities from outside the EU assuming a dominant position in European capital markets. Moreover, European market participants may then adopt uncoordinated approaches and invest in their own infrastructures. They could then resist any efforts by central banks to introduce enhanced settlement solutions, particularly if these threatened the viability of their new business models. If we don’t act soon, it may be impossible to achieve a genuine digital capital markets union with efficient wholesale payment and settlement services using risk-free central bank money.

One risk of the unified ledger is that it entails choosing one technological solution over all others. As all market players will use it, they will be less inclined to explore and promote alternative innovative technical solutions to provide the same services. Another option would therefore be to allow the coordinated development of an ecosystem of fully interoperable technical solutions. This flexibility would be beneficial, as it would better serve specific use cases and the coexistence of legacy and new solutions.

We need to reflect on this trade-off. “

This article is the basis of ECB thinking and as such, it divides the opinions of experts.