ECB Envisions Three Paths to Blockchain-Based Settlement

European Central Bank (ECB) Executive Board member Isabel Schnabel discussed how tokenized financial instruments can be settled in central bank money at a recent conference.

The question of how to settle tokenized financial instruments in central bank money is becoming increasingly important as banks and financial service providers move traditional securities onto blockchain-based platforms.

The goal, according to Schnabel, is for settlement and delivery to occur simultaneously when a tokenized security changes hands, eliminating the risk that one party may pay but not receive the asset.

The ECB has outlined three possible models for how central bank money can be transferred onto blockchain-based platforms:

In the first model, central bank money would directly enter a DLT-based system, with tokenized securities and settlement payments moving on the same digital infrastructure. This approach is technologically straightforward but requires the ECB to take a larger role in maintaining and supervising the new system.

The second model involves keeping existing payment systems in place while creating a technical interface layer connecting them to blockchain-based platforms.

In the third model, commercial banks and other financial intermediaries would issue digital tokens backed by central bank reserves held at the ECB.

The ECB is not seeking to replace traditional banking systems but rather integrate tokenized securities into existing infrastructure. The goal is for tokenization to enhance efficiency without sacrificing stability or oversight.