The European Central Bank (ECB) is planning to leverage distributed ledger technology (DLT) to improve the efficiency of interbank settlements.
According to statements by Fabio Panetta, member of the executive committee of the ECB, the entity is studying harness the potential of DLT technology, applied to the existing infrastructure of the ECB and improve the efficiency of wholesale interbank settlements.
ECB already uses DLT technology to settle wholesale digital transactions, Through the TARGET system, which uses the ECB's decentralized ledger.
Panetta's comments point to the use of DLT for the creation of one's own CBDC, focused on retail and also wholesale use.
Advantages and disadvantages of DLT for the European Central Bank
Panetta believes that DLT can allow Instant settlement of transactions on a wider range of assets 24 hours a day “with a broader spectrum of participants, potentially including non-financial companies.” He has also explained that DLT could be more secure than current systems.
The committee member has also pointed out some disadvantages, such as possible comparisons with Bitcoin. In this sense, the criticisms about energy consumption of cryptocurrency could affect the adoption of these technologies.
Moreover, The ECB shows concern about decentralization, as DLT technologies are often dominated by anonymous actors, often outside Europe, which raises some concerns about strategic autonomy.
However, the ECB must be prepared to face a scenario in which the main market agents adopt this technology for wholesale payments, as well as for the settlement of securities.
In this sense, Panetta observes that the implementation of DLT on the current TARGET service would be more efficient than creating a new system.
What is Distributed Ledger Technology?
It is a set of technologies that allow designing a system infrastructure that works as a decentralized database. This database is maintained and updated by individual network participants, as it does not depend on a central computer or entity.
The DLT also uses cryptography to keep data secure. To access it, cryptographic keys and signatures are required. The distributed nature makes them very resistant to cybercrime, since all stored copies should be attacked at the same time for the attack to be successful.
Finally, simultaneously sharing and updating records makes the whole process much more faster, more efficient and cheaper.
Is DLT the same as blockchain?
In short, DLT is the largest category of blockchain. That is, all blockchain networks are a DLT, but not all DLTs are considered blockchains.
The main difference between DLT and blockchain is that the former does not always resort to a block data structure. A DLT is, simply, a database distributed in several spaces, regions or among several participants.
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