FRANKFURT - The European Central Bank is studying ways of settling transactions between banks on a blockchain in a bid to keep control of money even if lenders switch to distributed ledgers, ECB board member Fabio Panetta said on Monday.
The ECB is among a number of central banks around the world working on digital versions of their currency in response to the popularity of digital tokens such as Bitcoin and the blockchain technology that powers them.
This Distributed Ledger Technology (DLT) is predicated on market participants verifying transactions and keeping a copy of them rather than relying on a trusted party, such as a central bank.
On top of a digital euro for consumers, the ECB is looking at how it could let banks settle wholesale transactions between them on a distributed ledger, rather than the central bank's own.
"Despite the uncertainties surrounding DLT's potential, we want to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement," Panetta said.
He added letting banks settle among themselves or use stablecoins, which are crypto tokens pegged to a conventional currency, would result in "trading and liquidity becoming fragmented".
Meanwhile, giving stablecoins the ECB's backing would "outsource the provision of central bank money to private entities, endangering monetary sovereignty", Panetta said.
As a possible solution, Panetta said the ECB might build a bridge between the private sector's blockchain platforms and its own Target 2 settlement system.
Alternatively, it could make central bank money - the claim against the ECB in which wholesale transactions are settled - available on those platforms or create its own, he added.
(Reporting By Francesco Canepa; Editing by Alex Richardson)