First findings from the payment traffic project - still no viable solution
On the tenth floor of its new building in the eastern end of Frankfurt, the European Central Bank (ECB) is investigating the possibilities of blockchain technology. A key driver of this is the feverish desire of many financial market actors to develop applications for new de-centralized database technologies, also known as Distributed Ledger Technologies (DLTs). Banks and payment service providers are hoping to make transaction processing much more efficient and secure.
Together with the Bank of Japan, the ECB has now investigated whether DLT can do what the European payment system Target2 and the Japanese BOJ-NET Funds Transfer System which everyday process, 1.8 billion Euro and 1.1 billion Euro respectivelt.
Dirk Bullmann, who heads the project team on the ECB side, talks with the Börsen-Zeitung of a "cautious optimism". The Hyperledger fabric software used in the project showed that large-scale payment transactions can be handled with the volumes as on Target2. As an "encouraging", the ECB states that certain standard liquidity-saving mechanisms could be implemented using so-called smart contracts, ie, pre-defined intelligent software routines.
However, the larger the data network is stretched and the distances between the databases, it was also noted that the processing time increases. The findings of the project does not mean that the ECB systems will eventually be replaced by DLT: "We are careful because our systems are the backbone of the financial market," says Bullmann. The aim of the research work in the field of DLT is to analyse "to what extent the efficiency and safety of our systems can be improved by new technologies". Several issuing banks are currently working on DLT projects.
On the securities side, too, DLTs could generate change. This is the opinion of the Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo), in which European major banks, issuing banks and securities processors and clearing houses are represented. The use of DLT could lead to a fragmentation of the rules on settlement continuity across different systems and "have significant implications for financial market integration in the EU".
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