A senior executive at the European Central Bank has spoken out about the potential damage to financial market integration from the haphazard uptake of distributed ledger technologies by the Bloc’s banks.
Speaking at the annual Sibos event in Geneva, Yves Mersch, a member of the executive board of the ECB, acknowledged the potential of distributed ledgers to fundamentally change securities and payments business.
However, as a technology that is still in its infancy, Mersch says there are substantial functional, operational, governance and legal aspects which need to be carefully looked at before thinking about possible mass adoption.
“Hence, the Eurosystem cannot, at this stage, consider using DLT in the market infrastructure,” he says.
While the central bank remains open to exploring whether its possible future use could bring benefits, Mersch cautions against private sector initiatives.
“A multitude of different DLT approaches and models could jeopardise financial market integration by increasing fragmentation,” he says. “Undue periods of market consolidation and standardization could hamper the smooth functioning of a Single Payments Area. We could be in a situation similar to the one that lead to the establishment of the pan-European T2S settlement platform.”
The ECB has moved to address the dangers by setting up a DLT Task Force under the T2S Governance. Its main objective is to assess the potential impact of DLT on T2S as well as on the wider post-trade harmonisation agenda. The work of the task force will be complete by the end of 2017, says Mersch.
In other key focus areas, the ECB is pushing ahead with programmes to support the consolidation of the Target2 real-time gross settlement system with T2S, provide settlement services for instant payments, and deliver a Europe-wide colletral management system.
“These strategic reflections have entered into the next phase,” says Mersch. “Last week, the Eurosystem decided to launch the investigation phase into these three components. The aim is to ascertain whether there is a business case for each, to agree with the users on the scope of services and to prepare a cost-benefit analysis.”
On instant payments, he says that the Bank is investigating the necessity of extending settlement operating hours to allow for real-time settlement, supported by the delivery of an enhanced Target2 functionality for the Bloc’s automated clearing houses. A decision will be forthcoming by Q1 2017, he says, so as not to delay the go live of a number of domestic market initiatives.