Bundesbank processes federal bonds via DLT

Together with the Federal Finance Agency and Deutsche Börse, the German Central Bank has tested a new solution that is supposed to bring DLT and the traditional financial system together – and that without digital central bank money (CBDC).

The Bundesbank has successfully completed a new DLT pilot project completed, which could pose a threat to central bank digital money (CBDC). Together with the Federal Finance Agency and other market participants, the central bank has developed a processing interface for electronic securities that is intended to bridge the gap between traditional payment transactions and DLT-based securities. In a test, the Federal Finance Agency issued a federal bond with a ten-year term, which was successfully processed using the new DLT solution.

In addition to the Bundesbank, the Federal Finance Agency and the German Stock Exchange, representatives from the private sector were also involved in the project. Including: Goldman Sachs, Citibank and Commerzbank – none of them newbies to blockchain.

Bridge solution: Direct line to TARGET2 instead of CBDC

Two software modules are used in the system. One of these is the so-called “trigger chain” that the Bundesbank manages. The trigger chain connects TARGET2, the payment system of the central banks, with a DLT-based securities system and triggers transactions. It is based on the blockchain platform Hyperledger Fabric. The second module is a “transaction coordinator” operated by Deutsche Börse. The transaction coordinator synchronizes the trigger chain with the DLT securities system and ensures that the transaction is carried out.

With the direct connection to TARGET2, a transaction can be processed directly in central bank money without the need for a digital euro in the form of a CBDC. As a result, the system can be integrated into the conventional payment infrastructure comparatively easily, believes Burkhard Balz, board member of the Bundesbank for the areas of payment transactions and processing systems:

After the successful test, the implementation of a corresponding solution by the Eurosystem should be possible in a relatively short time, at least significantly faster than the issue of digital central bank money, for example.

Trigger solution as a supplement to the e-euro

Does that mean the end of the European CBDC ambitions? The Bundesbank’s press officer told BTC-ECHO that the trigger solution should be understood as a supplement to any digital euro – not as a replacement.

The Bundesbank sees the trigger solution as a complementary option. Above all, this could support the use of DLT in so-called wholesale business (capital market transactions by financial institutions and larger transactions by companies) and could be implemented relatively quickly. In contrast, with digital central bank money, there is still a need for further clarification with regard to opportunities and risks as well as possible design options. The digital euro currently being discussed in the Eurosystem is also designed more as an offer for everyone (i.e. retail customers),

Philipp Sandner from the Frankfurt School Blockchain Center welcomes the move:

Blockchain technology will revolutionize the financial market in the long term and will also be used extensively for electronic securities in the future. Since the legal framework for electronic securities in Germany is now becoming increasingly clear, it is gratifying that the processing of payments in central bank money has now also been given a higher priority. Only when smart contracts can automatically trigger payments in central bank money will the technology develop its full potential,

explains Sandner to BTC-ECHO. CBDC researcher Jonas Groß from the Digital Euro Association is in the same direction. Groß explains to BTC-ECHO:

The joint DLT initiative by Deutsche Börse and the Deutsche Bundesbank makes it clear how electronic, DLT-based securities can already be processed in central bank money. The bridge solution developed between the DLT and the Target 2 system is particularly relevant because a digital central bank currency of the ECB for the capital market (wholesale CBDC) is not expected in the short term.

Electronic securities are getting closer

Jutta Dönges, Managing Director of the Federal Finance Agency, also draws a positive conclusion for the Bundesbank’s DLT field test:

We are happy to support the development of this innovative technology with our know-how. The transactions between us and our business partners have been very successful.

Deutsche Börse confirmed to BTC-ECHO that the DLT securities system is the forerunner of a central register for electronic securities, as provided by the law on the issue of electronic securities (eWpG).

One component of the solution, the DLT securities system, is in fact a prototype for a central register for electronic securities in accordance with the eWpG. The other components of the solution, i.e. the trigger chain and the transaction coordinator, have no direct reference to the eWpG, but in the future they can be important building blocks for mapping step-by-step processes in connection with DLT solutions and digital securities,

explains Deutsche Börse in via email to BTC-ECHO.

“Tragic”: Federal bloc criticizes Bundesbank initiative

The Federal Blockchain Association is not very impressed with the trigger solution. It is generally welcomed that the Bundesbank is daring DLT experiments. But:

… the procedure used [ist] no substitute for a blockchain-based euro stablecoin. Of course, with the help of so-called oracles, a classic deposit payment can be “triggered” through a blockchain transaction. Here, however, various trust intermediaries come into play, which are currently thwarting a real gain in efficiency,

explains Federal Bloc President Florian Glatz to BTC-ECHO. Glatz advocates a Europe with many different euro stablecoins in order to be able to meet “the different needs of the market”. The federal bloc president refers to the progress of stablecoin regulation in the USA, where banks are already allowed to process transactions with private stablecoins.

The dollarization of the blockchain space is advancing rapidly, while attempts are being made in Europe to save bank money. That’s pretty tragic,

thinks Glatz.

In his current comment, BTC-ECHO editor-in-chief Sven Wagenknecht also shares the view that Europe is increasingly falling behind the USA and China when it comes to blockchain regulation.

Update: The article was updated on April 12th to include the statements of Philipp Sandner and Jonas Groß.