German central bank flags DLT weaknesses

Deutsche Bundesbank has dampened the blockchain hype, dismissing distributed ledger technology’s prospects in retail payments, at least in the eurozone, and pouring cold water on central bank-issued digital currencies.

In a research paper, the German central bank offers up some encouragement for DLT enthusiasts, highlighting the technology’s ability to eliminate reconciliation processes, boost transparency and protect against cyber attacks.

However, when it comes to the big three areas covered in the research – payments, securities settlement, and central bank-issued digital currency – the Bundesbank experts are wary.

The authors “see little prospect of DLT being put to widespread use in the field of individual and retail payments given the current state of the art”. This is particularly true within the euro area, which already boasts fast transfers and systems that require a minimum of reconciliation and can process millions of transactions with ease every day.

The paper does see more potential for DLT outside the eurozone, where it could streamline correspondent banking systems. However, the fact that payments need to be settled with immediate finality means that decentralised systems would need to be adapted.

On central bank-issued digital currencies, the paper says that the implications for monetary policy and financial stability and for the structure and business models of banks are “hard to fathom…which is why there is currently no realistic prospect of central bank-issued digital currency being rolled out in the foreseeable future.”

Having carried out work on DLT-based securities settlement with Deutsche Bourse, the bank says: “Given the complexity, arduous reconciliation and error-prone nature of manual processes, this is an area where DLT could offer some benefits, as it has the technical capability to reduce securities settlement to just a few process steps.”

Yet even here, the authors concede that “it is still unclear whether DLT also has the edge over today’s technology in terms of security, efficiency, costs and speed”.