ECB Outlines Three Methods for Central Bank Money in DLT Settlements

ECB's Isabel Schnabel outlined three methods for using central bank money in DLT-based settlements during a conference hosted by the Bank of England and the London School of Economics. The first method involves tokenizing central bank reserves directly on a programmable platform. The second method keeps reserves in existing RTGS systems while connecting them to DLT via a 'bridge' mechanism. The third method allows private entities to issue settlement tokens backed 1:1 by central bank reserves, with the tokens representing claims against the private issuers.

Schnabel emphasized the importance of maintaining the current two-tier system where commercial banks issue deposits and central bank money facilitates interbank settlements. She highlighted the role of central bank money as an anchor in the financial system, citing historical examples like the 1907 financial panic and the COVID-19 crisis to illustrate the need for liquidity provision.

The ECB executive also pointed to the benefits of tokenization, such as atomic settlement (where asset and fund transfers are either completed together or not at all) and programmable conditions for automatic execution. She noted that DLT could help integrate Europe's fragmented financial market infrastructure. The EuroSystem recently launched 'Pontes,' a system for settling tokenized assets with central bank money, with plans to add features like 24/7 operation and smart contract-enabled programmable settlements.

Looking ahead, the ECB is developing a long-term financial market infrastructure vision called 'Appia,' which explores three models: a unified ledger for financial assets and central bank money, connecting public and private DLTs, and using central bank money across multiple shared ledgers. The ECB aims to finalize Appia's design by 2028, separate from its work on a retail digital euro.