NEWS Release - Distributed Ledger Technology: role and relevance of the ECB - Speech by Yves Mersch, Member of the Executive Board of the ECB, 22nd Handelsblatt Annual Conference Banken-Technologie, 6 December 2016
Introduction
Today’s discussions have revolved around digitalisation and new technologies and how they might change the banking business of tomorrow.
Roy Charles Amara, a researcher and scientist, once said that “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run”. The internet is a case in point. Some of the wilder predictions during the “hype” phase never came to pass. That said, no one can deny how powerfully it has insinuated itself into our daily lives, fundamentally changing how we communicate and process information, and no one can know where it will take us next.
Whether or not we will overestimate distributed ledger technology (DLT) in the short run and underestimate it in the long run remains to be seen. However, I am sure we can agree that DLT currently stands in the limelight. A lot has been said about the potential impact of DLT on the roles and services of central banks. In particular, questions related to whether or not central banks should move central bank money to DLT and whether there is a need for issuing central bank digital currency. Consequently, I think it’s time to frame the discussion. This speech will:
outline the ECB’s position on DLT;
discuss possible scenarios for adoption; and
shed light on the global interaction between central banks in the field of DLT.
Financial innovation transforming market infrastructure services
The internet, mobile phones and tablets have changed the way we communicate, the way we shop, the way we store information – frankly, the way we live. The financial industry is experiencing similar change. We refer to it as FinTech – innovations that could result in new business models or products with disruptive potential in the financial sector. DLT is a focal point in FinTech as its perceived opportunities are the key motivation for market participants, infrastructure providers and central banks to explore the technology.
In our reflections around DLT, we need to bear in mind that the possible impact of DLT depends on how market players ultimately decide to embrace it. In the abstract, three scenarios can be imagined: (i) individual market players try to use DLT mainly to improve their internal efficiency. This would not have large effects on the financial ecosystem; (ii) a group of core market players adopt DLT and gain a critical mass enabling whole market segments to shift to DLT; or (iii) a more revolutionary scenario of a peer-to-peer world without intermediaries emerges. Many discussions around the benefits of DLT had the third scenario in mind, but from what we observe, real use cases on DLT seem to focus mainly on the first and second scenarios.
There is not the shadow of a doubt that the journey has started, but from today’s perspective, it is difficult to assess the magnitude of the impact DLT could have on the financial sector and what the time frame for implementation could be. Some see DLT having substantial impact on the financial ecosystem within the next five to ten years. While I don’t want to join the club of crystal ball gazers, allow me nevertheless to stress that the implementation of a DLT environment may be a multifaceted endeavour. From the experience gained with the implementation of TARGET2-Securities, we are aware that functional, business, harmonisation, governance, legal and regulatory aspects are of key relevance and need to be thoroughly considered.
Embracing change in the financial market infrastructure
Let me start by saying that the exploration of technological innovation is high on the ECB’s strategic agenda. The ECB is always on the lookout for ways to improve the efficiency and lower the costs of its market infrastructure. It considers how best to respond to and take advantage of technical innovation and meet new user needs, while staying ahead of evolving risks such as cyber risk. Work is conducted in close cooperation with the market and revolves around making liquidity management, within the fields of payment transfers, securities settlement and collateral management, more efficient.
Let me illustrate with two examples of how the ECB embraces change. Last year the Eurosystem, which comprises the ECB and the national central banks of the euro area, launched a central bank service called TARGET2-Securities (T2S). Just like DLT, it was called “a game changer”. T2S is changing the European post-trade landscape not only by offering an integrated settlement service in central bank money for securities transactions, but also because it has brought post-trade harmonisation beyond what has been seen before. Together with TARGET2, the Eurosystem’s cash transfer system, T2S forms the cornerstone of financial markets in Europe.
My second example is the strategic reflections on the future of the Eurosystem market infrastructure. Investigative work has started in three key areas: (i) the consolidation of TARGET2 and T2S; (ii) settlement services to support instant payments; and (iii) a Eurosystem collateral management system. Work in those three areas is closely interconnected. It revolves around making liquidity management within the fields of payment transfers, securities settlement and Eurosystem collateral management more efficient. Efficiency and innovation are the drivers for the future market infrastructure.
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