Innovations based on distributed ledger technologies
Payments and market infrastructures have benefited in recent years from various technical innovations and new technologies. For example, ever-increasing computing power and network access have encouraged the wide adoption of instant payments, and the ubiquity of smartphones, combined with biometric authentication, is revolutionising electronic payments. Artificial intelligence is also being used to combat fraud by detecting anomalies and flagging scams in real-time. The ECB has taken these technological developments into consideration when shaping its retail payments strategy.
In this section we will take a closer look at distributed ledger technologies, crypto-assets and stablecoins.
Distributed ledger technology
Payments and securities settlement systems are generally based on centralised infrastructures where market participants connect to a central database to settle transactions. Distributed ledger technology is a new technological development where a database is shared across a network and its data is accessible to the network’s members. There are different types of assets that can be transferred using distributed ledger technology.
What is distributed ledger technology?
A distributed ledger is a record of information, or database, that is shared across a network.
The best-known type of distributed ledger is a blockchain, so named because it stores individual transactions in groups, or blocks, attached to each other in chronological order to form a chain.
Distributed ledger technology has been used to transfer different types of assets between buyer and seller. These include new types of assets, such as crypto-assets and stablecoins, as well as long-established financial assets, such as securities.
The ECB is currently exploring the potential of these emerging technologies, monitoring market developments in this area and analysing the possible interactions between its own infrastructures – TARGET Services – and market distributed ledger technology platforms.
Eurosystem exploratory work on new technologies for wholesale central bank money settlementDifferent types of assets have emerged alongside the new technologies and are being researched, monitored and assessed at the European and international level.
Crypto-assets and stablecoins
In recent years, we have seen many new types of assets popping up that are recorded on blockchains or other distributed ledgers. This started with bitcoin and similar crypto-assets. Later, stablecoins were introduced in an attempt to address the high volatility of other crypto-assets.
What are crypto-assets?
Crypto-assets are recorded in digital form, enabled by the use of cryptography and distributed ledger technology. They are also known as cryptocurrencies, though this name is misleading, as they don’t fulfil the three functions of money: a reliable medium of exchange, a store of value and a unit of account.
Unlike euro banknotes or money held on a payment account, crypto-assets typically do not represent a financial claim on, or a liability towards, any identifiable entity.
Moreover, crypto-assets are typically not backed or managed by any central institution. You have no guarantee that you will be able to exchange them for money when you need to. The specific risk profile and high volatility of crypto-assets results from this absence of any underlying fundamental value.
What is bitcoin?
Bitcoin is one of the many private crypto-assets available on the market. Essentially, it is a digital token that can be exchanged electronically and that does not exist in a physical form.
What are stablecoins?
Like bitcoin and similar crypto-assets, stablecoins are recorded on a distributed ledger. Stablecoins are designed to try to maintain a stable value by being pegged to a reference asset. Stablecoins that are backed by a reserve in an official currency are called e-money tokens: electronic money recorded on a distributed ledger. Stablecoins that are backed by other assets, such as gold, are called asset-referenced tokens. There are also crypto-assets that rely on algorithms to minimise fluctuations in their prices, called algorithmic stablecoins, but these have proven to be unsuccessful in maintaining a stable value.
What is being done at the international and European levels?
A significant amount of work on distributed ledger technology and crypto-assets has been undertaken in Europe and at the international level.
A uniform legal framework for the crypto-asset market in Europe has been adopted. Markets in Crypto-Assets (MiCA) covers crypto-assets that are not regulated by existing financial services legislation. Key provisions for those issuing and trading crypto-assets (including asset-referenced tokens and e-money tokens) cover the transparency, disclosure, authorisation and supervision of transactions. The new legal framework supports market integrity and financial stability by regulating public offers of crypto-assets.
Press release: Digital finance: Council adopts new rules on markets in crypto-assets (MiCA)International initiatives
Standard-setting bodies and international institutions are undertaking analytical and policy work on crypto-assets, stablecoins and decentralised finance in the areas of their respective mandates.
The Bank for International Settlement’s Committee on Payments and Market Infrastructures (CPMI) is conducting work on the applications of distributed ledger technology and is also analysing and monitoring other payment innovations.
Other initiatives
The CPMI and the International Organization of Securities Commissions (IOSCO) are assessing the application of the Principles for Financial Market Infrastructures to different stablecoin arrangements. In addition, the CPMI are studying how stablecoin arrangements could potentially improve cross-border payments.
Building block 18: Fostering the soundness of global stablecoin arrangements for cross-border paymentsBIS Innovation Hub
The Bank for International Settlements and the central banks of the euro area are working together at the BIS Innovation Hub Eurosystem Centre to develop Project Atlas. This project will create an open-source data platform that can shed light on the macroeconomic relevance of crypto-asset markets, combining different data sources to offer regulators and policymakers reliable insights. In the first phase, Project Atlas will visualise cross-border flows by mapping the geographic locations of blockchain transactions between crypto exchanges.
Publications on crypto-assets and stablecoins
- ECB blog: ETF approval for bitcoin – the naked emperor’s new clothes
- ECB blog: Bitcoin’s last stand
- Occasional Paper Series: Stablecoins: Implications for monetary policy, financial stability, market infrastructure and payments, and banking supervision in the euro area
- Occasional paper series: Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures