ECB Distributed Settlement Technology system for central bank money: from Exploration to Expansion

On 20 February the Eurosystem announced the decision of the Governing Council of the European Central Bank (ECB) to expand its initiative to settle transactions recorded on distributed ledger technology (DLT) in central bank money. This expansion initiative builds on the previous extensive exploratory work which was conducted between May and November 2024.

The ECB’s announcement comes at a time when the adoption of blockchain technology is accelerating worldwide. The Eurosystem initiative will play a crucial role in creating a harmonised and integrated European market for digital assets, aligning with the ECB’s Governing Council’s call for promoting and establishing a digital capital markets union..

In this blog we will go into more detail in the expansion initiative, what it will bring for the financial industry in terms of benefits. And what are the implications for global financial markets.

Start of the exploratory phase

But first we will start with the pervious exploratory work, what it involved, how it was arranged and the lessons learned.

Already in April 2023 the Eurosystem announced that it would embark on a Eurosystem-level exploration of how wholesale financial transactions recorded on DLT platforms could be settled in central bank money. In December 2023 the Eurosystem launched a call for expression of interest in exploratory work based on the three Central Bank interoperability solutions proposed by the Eurosystem

This call gave market participants the opportunity to express their interest in participating in this exploratory work which was scheduled for the period from May to November 2024. Market participants had the opportunity to participate in the exploratory work for the entire period from May to November 2024 (Wave 1) or for a shorter period from July to November 2024 (wave 2).

The high number of participants shows that there was strong interest in how TARGET Services and DLT platforms could interact and in the benefits that such technologies could bring to the wholesale financial market.

Aim of the experiment

This exploratory phase was intended to provide additional practical insights into DLT’s interaction with traditional payment systems and its potential to improve transaction efficiency. The initiative was designed to test the viability and explore the benefits of actual central bank money settlement of wholesale financial transactions using DLT technologies, along with market participants via various trials and experiments.

Aim was getting a deeper insight into the interaction between Eurosystem traditional payment infrastructures (TARGET) and market DLT platforms and its potential to improve transaction efficiency. But before all gain further insights into the merits of these solutions in terms of their ability to allow users to reap the envisaged benefits of DLTs and to support various wholesale use cases.

The exploratory work: how it was arranged

The exploratory work was a collaboration of the Eurosystem with representatives from central banks, financial market players, and operators of DLT platforms.

It comprised various trials and settlement experiments to assess various use cases for wholesale transactions recorded on DLT platforms to conduct wholesale settlement in central bank money. These trials and experiments aimed to demonstrate the possibility of a technological bridge between blockchain technology and traditional payment systems. While the trials included actual settlement in central bank money, denoting production transactions using real securities and cash, the exploratory work included experiments involving mock transactions settled in a simulated test environment.

Key use cases

The trials and experiments were focusing on key use cases proposed by the market participants involving transactions, notably in securities, mainly exploring the securities settlement cycle, between banks using central bank money.

These uses cases included delivery-versus-payment settlement in both primary and secondary markets, securities lifecycle management, coupon payments, automated wholesale payments and payment-versus-payment transactions. As well as real-time collateral management and margining.

Interoperability type solutions

Exploration in this phase focused exclusively on interoperability solutions, i.e. where assets and liquidity are located on different technical platforms.

Trials and experiments were conducted over the six months period on the three Eurosystem interoperability-type solutions proposed for central bank money settlement of wholesale financial transactions recorded on DLT platforms, too push the boundaries of digital asset technology.

These conceptual solutions were provided by the Bundesbank, Banca d’Italia and the Banque de France. They included The Bundesbank's trigger solution, the TIPS Hash Link solution of Banca d’Italia and the full DLT interoperability solution from Banque de France.

In the Trigger solution euro central bank money settlement would take place in the existing TARGET Services, specifically in T2.

In the TIPS Hash-Link solution settlement would take place in an infrastructure based on TIPS, which is currently used for settling instant retail payments (that is, payments between individuals and non-financial institutions).

Finally, in the full-DLT solutions developed by the Banque de France, euro central bank money settlement would take place on a DLT platform, operated by the central bank or jointly with other parties.

Exploratory work: Two phased approach

The exploration work  was divided into two phases, each with a distinct focus and objectives. The first wave was from May to November and the second wave from July to November.

The first wave (May – November 2024)

The Eurosystem started the first wave of its exploratory work on new technologies for settlement of wholesale transactions in central bank money in May 2024.

Three central banks – Bundesbank, Banca d’Italia, and Banque de France – worked alongside a coalition of financial institutions and fintech firms to simulate live transactions. The first wave focused on the initial testing and feasibility of DLT for issuing and settling tokenised securities. Participants worked on integrating DLT platforms with existing systems, testing basic functionality, and assessing the viability of various digital cash mechanisms, including commercial bank money, and tokenised money. Initially, 16 private companies conducted live trials involving actual settlement in central bank money. They also experiment with mock settlement in test environments

Second Wave (July – November 2024)

A second wave of trials and experiments that was started in July 2024 in parallel with the first wave, was initiated between July and November 2024.

Further trials and experiments covered a variety of advanced use cases and interoperability solutions, including DvP transactions in primary and secondary markets, securities lifecycle management with both real and mock settlement, and automated wholesale payments and payment-versus-payment transactions within the euro area with other central banks with mock settlement.

This exploratory work gave 64 participants – comprising/including central banks, financial market participants and DLT platform operators –the opportunity to conduct more than 50 trials and experiments, testing various aspects of DLT settlement in central bank money processing over 200 transactions and a total value of €1.60 billion.

Offered insights

This ambitious DLT experimentation programme that was completed on 29 November 2024, offered participants valuable insight into DLT’s interaction with traditional payment systems and into the potential benefits of DLT integration in wholesale financial transactions.

Lessons learned

In January 2025, participants involved in the exploratory work were invited by the Eurosystem. to discuss lessons learned from the trials and experiments of the exploratory work. And further analyse the outcome of these explorations in terms of opportunities and challenges of DLT for financial markets. This included considering how to facilitate the provision of central bank money settlement for wholesale transactions of assets on DLT platforms.

The exploratory work results are  helpful for determining how (that is, in which way and form) central bank money settlement could be usefully offered in a scenario where DLT is widely adopted by the financial industry.

The outcomes of the analysis would inform the Eurosystem’s decision on its next steps and would form the basis for the Eurosystem’s future considerations/vision about wholesale payment infrastructure

Positive outcomes

They showed very positive outcomes of the use cases, primarily in the sense of speed and efficiencies. The ECB DLT trials and experiments turned out to be “really significant” in terms of size and scale.

One of the most critical outcomes of the exploratory work was the confirmation that Europe’s three digital cash mechanisms — central bank money, commercial bank money, and tokenised money — are all ready for large-scale implementation.

The results however reflect not just the scale of the project, but its transformative potential for European financial infrastructure. They also ensured that a new DLT settlement system would not only be innovative but also robust enough to handle the complexities of modern financial transactions.

ECB expansion initiative

On 20 February The European Central Bank (ECB) announced its plan to develop a settlement system for wholesale transactions recorded on distributed ledger technology (DLT) using central bank money. The Eurosystem’s expansion initiative aims  to  develop and implement a safe and efficient platform.

The introduction of a DLT-based clearing platform should be seen as the natural next step that will complete the package, where everything can be managed in a single unified environment.

This platform will be built on  the insights they got from earlier tests with the combination of the three interoperability payment solutions provided by the Deutsche Bundesbank, the Banca d’Italia and the Banque de France and tested during the exploratory work in 2024. 

“We are embracing innovation without compromising on safety and stability,” “This is an important contribution to enhancing European financial market efficiency through innovation. Our approach will pay due attention to the Eurosystem’s goal of achieving a more harmonised and integrated European financial ecosystem.” ECB Executive Board member Piero Cipollone, who oversees the initiative

Scenarios

To assess several use scenarios the three Central Bank interoperability-based solutions that were used during the exploratory work including the German Trigger solution, the Italian TIPS Hashlink solution and the French full-DLT solution were configured and scaled for testing purposes.

The Eurosystem envisages two options for future DLT-based infrastructures for settlement in central bank money. One option is a European unified ledger approach, or alternatively a shared ledger which bridges money and assets from other ledgers.

In the unified ledger solution euro central bank money and other assets, such as securities or foreign currency, would be recorded and settled on the same DLT platform. This could potentially be operated by the Eurosystem or jointly with other parties, subject to compliance with Eurosystem rules.

The second option for DLT-based infrastructures for settlement in central bank money is based on interoperability-type solutions. Such solutions are likely to be faster to develop and less costly, and they do not prevent us from continuing to assess unified ledger solutions.

Two-track approach

Following the research and outcomes of the exploratory work, the Governing Council formally announced its plans for a two track approach. This approach involves an interim option to be launched fairly soon while it works on a longer term, more integrated option.

The ECB’s two-phase approach, which gradually integrates DLT functionalities into an established system before expanding into new more complex areas, reflects a measured and cautious strategy. By leveraging this established framework, the ECB aims to ensure a smooth and secure transition, as it begins integrating DLT into existing settlement operations.

First track: Integration with the TARGET System

The first track aims to develop and implement a safe and efficient platform for such DLT settlements in central bank money by connecting it to TARGET Services. Such system that works in tandem with the current TARGET settlement system, should ensure the change to DLT does not compromise the stability and security of present systems. In doing so, the ECB can mitigate potential risks associated with adopting entirely new systems, all while maintaining the integrity and stability of financial transactions across the continent.

By introducing DLT-based functionalities into the pre-existing Target system, the ECB is not only safeguarding the reliability of its operations but also introducing mechanisms that can potentially expedite and secure the settlement process. A concrete time plan will be announced in due course.

“As soon as feasible, the Eurosystem will develop and implement a safe and efficient platform for such settlements in central bank money through an interoperability link with TARGET Services.” ECB Director Piero Cipollone

Second track: Long term integrated solution

Following the successful integration with TARGET, the Eurosystem intends to explore a more comprehensive all compassing and long-term solution for settling DLT-based transactions directly in central bank money.

This advanced phase is expected to encompass a wide range of financial transactions, including global operations elements like foreign exchange settlements, aiming to increase the spectrum of DLT applications.

Thereby the ECB is not only refining the digital infrastructure for domestic transactions but is also positioning itself to address the complexities of international finance.

Foreign exchange markets are notoriously complex, with transactions often involving multiple intermediaries and layers of processing. By incorporating FX into its DLT settlement framework, the ECB aims to streamline these transactions, making them more efficient and secure.

What may it bring: Benefits

DLT offers a number of potential benefits for financial institutions such as reduced reliance on intermediaries, and enhanced compliance through transparent, immutable transaction records. Blockchain’s inherent features —such as immutability, transparency, and decentralized control—can address many of the inefficiencies present in traditional financial systems. This DLT-based approach could simplify the settlement process by providing a single, unified ledger that records every transaction transparently and immutably.

With the help of DLT-based transactions in central bank money, the Eurosystem might improve transparency and efficiency. Such a system could significantly shorten settlement times from several days to within the same day. While next level automation through programmability, would significantly reduce operational costs and fragmentation.

More efficient securities settlement and post-trade processing may further enhance security features, enhance data integrity, reduce settlement fails and counterparty risks risk. And lower the risks associated with currency exchange volatility.

All of which contribute to a more efficient market environment. This may foster more confidence among market players.

Forward thinking: Implications for Global Financial Markets

The ECB’s announcement to develop a DLT settlement system for fiat-based transactions marks a pivotal moment in the evolution of financial markets. The successful implementation of a DLT settlement system for FX transactions would have far-reaching implications for the global financial system.

It could pave the way for more efficient international trade, reduce systemic risks, and foster greater trust between cross-border financial institutions, revolutionising the way financial transactions are processed in Europe and beyond.

The ECB’s move not only signals its commitment to modernization but also reinforces the growing influence of blockchain technology in mainstream finance. This initiative can be seen as part of this larger movement toward digital transformation, which is reshaping how financial transactions are executed and settled. This second phase represents a significant leap toward the full digitization of wholesale financial markets.

By taking a proactive stance on integrating blockchain technology into its core operations, the ECB is setting a precedent for other central banks and financial institutions