ECB’s Mersch speaks of blockchain: “Who could access the central bank ledger?”

As blockchain technology, i.e. distributed ledger technology, attracts multimillion dollar funding for development purposes, and the Central Bank of Barbados backs a digitized version of the Barbadian Dollar launched by Bitcoin exchange Bitt, the European Central Bank found the time to present a statement on the subject.

ECB Executive Board Member Yves Mersch gave a speech highlighting the DLT’s disruptive potential in the financial market, and welcoming the industry’s efforts to work on standardization and interoperability both in the payments and in the post-trade domain.

Mersch admitted that the ECB has already launched some experimental work with DLT to figure out a hypothetic scenario in which Eurosystem market infrastructures, T2 and T2S, are run on DLT and its implications that go beyond the operational and technical sphere, since it raises the question of who could access the central bank ledger.

“Access to the ledger for payments and securities settlement could be restricted to banks, or to banks and market infrastructure providers such as central securities depositories (CSDs), maybe extended to central counterparties (CCPs) and automated clearing houses (ACHs). Consequently, these would be the only entities that have access to the central bank digital currency on the ledger. But why stop here?”, said ECB’s Mersch, willing to broaden the concept.

“What if PSP or even individuals could access the central bank digital currency on the ledger via their bank accounts? This scenario would preserve the current relationship model of banks with central banks and to some extent also the existing organizational structure of the financial ecosystem.”

The ECB official presented a third scenario, more far-reaching that the others, where the DLT network is open to all citizens, enabling them to hold commercial bank deposits with banks or digital currency at the central bank. Key questions arise, from what functions would be embedded in a central bank deposit account, to the monetary transmission mechanism work and the economy at large in a scenario where the basic business model of many banks could be impaired.

Beyond banks, DLTs would affect market participants’ investment strategies and business models, and potential implication on the integration of the European capital market, financial inclusion, and economic growth. Many other questions are valid, but ECB’s Mersch point was that such a small change in the Eurosystem’s market infrastructure for the settlement of payments and securities raises so many questions.

“We have a lot of more thinking to do. Within the ECB, I will steer an organizational structure for analytical work on technological innovation in the financial sector. It will range from practical aspects, such as the possible usage of DLT for our Eurosystem market infrastructure, to more research driven activities like the implications of the issuance of central bank digital money”, he continued, noting that there is big demand for research into the DLT related questions and policy implications.