Bundesbank settles federal bond via DLT – CBDC now redundant?

The German central bank has joined forces with the German Federal Finance Agency and Deutsche Börse to trial a new solution that aims to bring DLT and the traditional financial system together – and without digital central bank money (CBDC).

The Bundesbank has successfully completed a new DLT pilot project that could pose a threat to digital central bank money (CBDC). Together with the Federal Finance Agency and other market participants, the Bitcoin Up central bank has developed a settlement interface for electronic securities that is intended to bridge the gap between traditional payment transactions and DLT-based securities. In a test, the Federal Finance Agency issued a federal bond with a ten-year term, as successfully settled via the new DLT solution.

Direct link to TARGET2 instead of CBDC

Two software modules are used in the system. One of them is the so-called “Trigger Chain”, which is managed by the Bundesbank. The Trigger Chain connects TARGET2, the central banks’ payment system, with a DLT-based securities system and triggers transactions. It is based on the blockchain platform Hyperledger Fabric. The second module is a “transaction coordinator” operated by Deutsche Börse. The transaction coordinator synchronises the trigger chain with the DLT securities system and ensures that the transaction is carried out.

Through the direct connection to TARGET2, a transaction can be settled directly in central bank money without the need for a digital euro in the form of a CBDC. This makes it comparatively easy to integrate the system into the conventional payment infrastructure, believes Burkhard Balz, Bundesbank Executive Board member responsible for payment transactions and settlement systems:

After the successful test, the implementation of a corresponding solution by the Eurosystem should be possible in a relatively short time, at least significantly faster than, for example, the issuance of digital central bank money,

Does this now mean the end of the European CBDC ambitions? The Bundesbank’s press officer explained to BTC-ECHO that the trigger solution should be understood as a supplement to a possible digital euro – not as a replacement.

The Bundesbank sees the trigger solution as a complementary option. This could primarily support the use of DLT in so-called wholesale business (capital market transactions by financial institutions and larger transactions by companies) and could be realised relatively quickly. In contrast, digital central bank money still requires further clarification with regard to opportunities and risks as well as possible design options. Moreover, the digital euro currently being discussed in the Eurosystem is designed more as an offer for everyone (i.e. retail customers),

Electronic securities are getting closer

Jutta Dönges, Managing Director of the German Finance Agency, is also positive about the Bundesbank’s DLT field trial:

We are happy to support the development of this innovative technology with our know-how. The transactions between us and our business partners have been very successful.

In addition to the Bundesbank, the Federal Finance Agency and Deutsche Börse, representatives from the private sector were also involved in the project. Among them: Goldman Sachs, Citibank and Commerzbank – all of which are not blockchain newcomers.

Deutsche Börse confirmed to BTC-ECHO that the DLT securities system is the precursor to a central register for electronic securities, as envisaged by the Electronic Securities Issuance Act (eWpG).

One component of the solution, the DLT Securities System, is in fact a prototype for a central register for electronic securities in accordance with the eWpG. The other components of the solution, i.e. the trigger chain and the transaction coordinator, are not directly related to the eWpG, but may be important building blocks for the mapping of move-by-move processes in connection with DLT solutions and digital securities in the future,

“Tragic”: Federal bloc criticises move

The Bundesverband Blockchain (German Blockchain Association), meanwhile, is not very enthusiastic about the trigger solution. While it welcomes in principle that the Bundesbank is daring to experiment with DLT. But:

…the method used [is] precisely not a substitute for a blockchain-based euro stablecoin. Of course, with the help of so-called oracles, a classic giro money payment can be “triggered” by a blockchain transaction. However, various trust intermediaries come into play, which thwart a real gain in efficiency,

explains Federal Block President Florian Glatz to BTC-ECHO. Glatz pleads for a Europe with many different euro stablecoins in order to be able to meet “the different needs of the market”. The Bundesblock president points to the progress of stablecoin regulation in the US, where banks are already allowed to process transactions with private stablecoins.