ECB to create a blockchain-based payment system

The European Central Bank (ECB) is officially bringing blockchain into the European financial system, launching a new payment system to settle central bank money using distributed ledger technology (DLT). The decision, announced today by the Governing Council, will take a two-phase approach: first, a short-term fix that connects DLT platforms with TARGET Services, and second, a long-term integrated system for cross-border settlements and foreign exchange transactions.

The Eurosystem, which includes the ECB and national central banks, is behind the initiative in efforts to modernize financial market infrastructure while maintaining security and efficiency. ECB board member Piero Cipollone, who oversees the project, said:

“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.”

After that, “a more integrated, long-term solution” should be found. This would then also include foreign-exchange operations, according to the statement, which didn’t specify timeline.

Is the ECB pro-crypto now?

According to the ECB’s statement, between May and November 2024, the Eurosystem ran blockchain trials with 64 participants, including central banks, financial institutions, and DLT providers. More than 50 tests were done, ranging from mock settlements to real transactions in central bank money. Per the ECB, the results showed that blockchain-based wholesale settlement could be integrated into the existing financial system, but it requires some serious technical upgrades.

Piero says the ECB’s blockchain initiative aligns with the Governing Council’s call for a digital capital markets union, promising that a harmonized and integrated financial ecosystem is the ultimate goal.

The ECB claims it has spent years studying crypto and blockchain, but the launch of MiCA (Markets in Crypto-Assets Regulation) on December 30 changed things. It enacted strict oversight for crypto companies and required them to meet bank-like regulations.

Interestingly, the ECB’s December 2024 monetary policy minutes warned that U.S. crypto markets pose a financial stability risk to the EU.

Under MiCA, crypto companies must report all transactions, no matter the amount, to fight money laundering and illicit finance. The European Banking Authority (EBA) is also drafting capital rules for crypto asset exposures that will dictate how financial institutions account for their crypto holdings, affecting credit risk, counterparty risk, and market exposure.

With the U.S. backing stablecoins pegged to the dollar, the ECB said it sees a digital euro as necessary to maintain European financial independence.

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