German Central Bank Explores Blockchain Potential

Blockchain, FinTech | September 25, 2017 By:

Deutsche Bundesbank, Germany’s central bank, has published a new report centered on distributed ledger technology (DLT).

The Bundesbank’s researchers investigate whether DLT offers any potential for the financial sector. Their analysis focuses chiefly on what DLT might mean for payments and securities settlement.

“Potentially, DLT offers a number of benefits on account of the distributed storage of data, which can eliminate reconciliation processes associated with complex work-sharing value added chains,” the bank’s payment specialists wrote, adding that DLT might also improve transparency and potentially offer superior protection against cyber attacks.

However, the bank’s payment specialists also see a number of challenges. These include confidentiality issues, the need to establish the identity of users (which is especially important for tackling money laundering), and the question of how the assets transferred via the blockchain can be reliably matched with “real world” assets and by whom. The experts note that points of reference in the real world are irrelevant for bitcoin, which is still the best-known DL network, given that bitcoins are merely virtual and do not exist outside the blockchain.

The Bundesbank’s experts see little prospect of DLT being put to widespread use in the field of individual and retail payments given the current state of the art. Particularly for payments within the euro area, they argue, the systems in operation have already been optimized for fast transfers and require a minimum of reconciliation, besides being able to process millions of transactions with ease every day.

The bank’s experts do see more potential for DLT outside the Eurozone, where it could streamline correspondent banking systems. However, the fact that payments need to be settled with immediate finality means that decentralized systems would need to be adapted.

The report also investigates whether DLT has any potential uses in the settlement of securities. Having carried out work on DLT-based securities settlement with Deutsche Bourse, the bank said that given the complexity, arduous reconciliation and error-prone nature of manual processes, this is an area where DLT could offer some benefits, as it has the technical capability to reduce securities settlement to just a few process steps.

On central bank-issued digital currencies, the report says that the implications for monetary policy and financial stability and for the structure and business models of banks are “hard to fathom…which is why there is currently no realistic prospect of central bank-issued digital currency being rolled out in the foreseeable future.”