Three Methods for On-Chain Central Bank Money

Key Points of This Article

• The European Central Bank is considering the tokenization of reserve deposits.
• Launch of "Pontes" to connect DLT and the Eurosystem

Three Approaches to Tokenized Finance

The European Central Bank (ECB) is exploring three methods for on-chaining central bank money. Isabel Schnabel, a member of the ECB's Executive Board, revealed this at the "Future of Money" conference hosted by the Bank of England on the 1st.

Schnabel argued that central bank money should continue to serve as the foundation for settlements in a financial market where tokenization is advancing, and outlined three methods.

Source: ECB

The first model is "direct issuance." This involves the central bank directly issuing reserve deposits (deposits that banks hold at the central bank) on a programmable platform. The reserve deposits will exist as tokens from the outset.

The second model is a "bridge" type. This maintains the existing Real-Time Gross Settlement (RTGS) system of the ECB while connecting to a decentralized ledger technology (DLT) platform through an interoperability layer. In this case, the reserve deposits themselves are not tokenized, and both systems are linked by hash values.

The third model involves private intermediaries. The reserve deposits remain off-chain, deposited with the central bank, while intermediaries tokenize these deposits and issue settlement tokens fully backed by the reserve deposits. The tokens represent claims against the private intermediaries, and holders will request payments from the intermediaries.

Central Bank Money Maintains Its Role as an "Anchor"

Schnabel stated that if central bank money becomes available on-chain, the current two-tier structure, where central bank money serves as the foundation and private bank money systems are built on top, could function within a tokenized financial system.

The ECB aims to maintain the "anchor role" of central bank money while allowing private payment assets such as tokenized deposits and stablecoins to function alongside it.

On September 21, the ECB launched the "Pontes" platform, connecting market DLT platforms to the Eurosystem infrastructure (TARGET services) and providing a "dual payment model" that supports both DLT-based payments and TARGET service payments.

The method closest to the second approach mentioned by Schnabel has been operationalized. However, she did not specifically disclose which of the three methods is optimal.

Schnabel also discussed a project called "Appia," which examines various architectures of a tokenized financial ecosystem. This includes evaluating single ledgers, interconnected networks, and multiple shared ledgers.

Schnabel highlighted the advantages of tokenization, stating that it enables "faster, safer, and smarter" payments. In particular, she mentioned programmability, which allows payments to be conditioned based on rules that can be executed automatically, and the atomicity of "asset transfer" and "payment," which can be completed simultaneously.

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