Deutsche Bundesbank pilots a DLT-based securities settlement interface

Written by: Jinia Shawdagor
March 24, 2021
  • Bundesbank partnered with Deutsche Börse and Germany’s Finance Agency to develop this solution.
  • The solution was tested by leading banks, including Barclays, Citibank, and Goldman Sachs.
  • Reportedly, this solution offers central banks a simple alternative to developing CBDCs.

Germany’s federal bank, Deutsche Bundesbank, has successfully tested a DLT-powered settlement interface for electronic securities. The bank unveiled this news on March 23 through a press release, noting that it had joined hands with Deutsche Börse and Germany’s Finance Agency to develop and pilot this interface. Apart from these two agencies, Deutsche Bundesbank also worked with other market participants, such as Barclays, Citibank, Commerzbank, DZ Bank, Goldman Sachs, and Société Générale to reach this feat.

According to the news release, this initiative helped the participants discover that it is possible to create a link between the blockchain and legacy payment systems to settle securities using central bank money. To this end, the participants determined that central banks don’t have to create central bank-issued digital currencies (CBDCs) for settlement purposes. 

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Explaining how the system works, the publication said that it serves as an interface between conventional payment systems and DLT-based securities platforms. It has two software modules, a trigger chain from Deutsche Bundesbank and a transaction coordinator, which is a combination of TARGET2 and a DLT Securities system, from Deutsche Börse. 

Allegedly, this solution ensures securities and central bank money do not change hands until the transfer has been successfully confirmed by all parties. As such, it minimizes the counterparty risk for both the buyer and seller. 

While DLT-based settlement systems tokenize money and securities, this solution does not require tokenized money to run. This is because it essentially acts as an interface that connects a DLT platform to a conventional system and triggers payments when deals are completed.

Creating hybrid finance systems

In the trial, Germany’s Finance Agency issued a 10-year federal bond through the DLT system. The test saw the primary and secondary market transaction settled through the blockchain. However, the transactions were not legally binding.

Stephen Leithner, a member of Deutsche Börse’s Executive Board said that new technologies are vital when it comes to developing futureproof infrastructures that can handle market needs. According to him, this project is a significant step toward improving the efficiency of securities settlement and digitizing securities, seeing as it combines existing infrastructure and new disruptive technologies smartly.

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