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Luxembourg explores DLT wholesale transactions: Governor Reinesch, interview donnée à Delano, le 25 juin 2024


The governor of the Luxembourg Central Bank, Gaston Reinesch, in an exclusive interview with Delano, elaborated on Luxembourg’s journey with DLT, emphasising its transformative potential in streamlining post-trading activities and enhancing market efficiencies.

Gaston Reinesch, governor of the Luxembourg Central Bank (BCL), spoke with Delano on Tuesday 25 June about the proactive stance euro area central banks are taking on distributed ledger technologies. Their aim is to enhance efficiency and security in wholesale financial transactions and explore tokenisation of central bank money. Several Luxembourg entities, including BCL, are currently participating in the first exploratory wave, which runs from May to November 2024. 

Could you provide a brief background on what 'wholesale transactions' are and why central banks are investigating settlements using DLT? 

Wholesale transactions refer to the settlement of inter-bank transfers, in opposition to retail transactions between persons and/or between companies. Eurosystem National Central Banks already offer digital settlement of wholesale transactions in central bank money on TARGET services for decades (the first generation of TARGET System was launched in 1999). Moreover in 2015, the deployment of TARGET2Securities (T2S) allowed the Central Securities Depositories (CSDs) to conduct integrated settlement of securities in central bank money on TARGET2. 

For the last 5 years, several countries developed new legal frameworks to allow for the issuance and settlement of securities in a tokenised form on Distributed Ledger Technologies (DLTs), such as the Blockchain Laws in Luxembourg, and similar laws in France or Germany, followed by an EU framework, the “DLT Pilot Regime” deployed in 2023. Thus, new DLT ecosystems emerged in Europe without access to TARGET Services, i.e. no access to central bank money as a safe settlement asset. 

Central bank money as monetary anchor is key to financial markets, as it brings stability and limits the counterparty risk in financial transactions. In case new DLT ecosystems would establish themselves in financial markets, they would need an access to central bank money to function safely. This is why Eurosystem Central Banks are now investigating if and how they could leverage new technologies, such as DLT, for the settlement of wholesale financial transactions in central bank money. 

Does the ‘Eurosystem’s exploratory work on new technologies solely aim at improving operational efficiency, or are there additional enhancements--such as security, reliability or innovation--to the current system? 

The TARGET Services today operate smoothly on traditional non-DLT platforms. T2S meets very high standards in terms of securities settlement efficiency, T2 is a reference real time gross settlement system for wholesale payments and TIPS successfully provides a 24/7 instant retail payment solution. Furthermore, no security issue has been reported so far on Eurosystem market infrastructures whose objective it to provide a safe, reliable and efficient service. TARGET Services are still attractive for new markets: Sweden started using TIPS in February, Denmark (already using T2S) will join T2 and TIPS in 2025 and several Balkan countries show interest in using TIPS. 

The appetite for the usage of new technologies such as DLTs is primarily found on the financial markets side, especially for post-trading activities (clearing, settlement, custody, reporting) where the market operators see room for improved efficiency. One may point to a series of usually invoked benefits, such as an increased automation made possible by smart contracts, the possible shorter chain of operators needed for a transaction, the faster or instant settlement cycle, and in addition offered 24/7. 

The Eurosystem’s exploratory work on new technologies is however not restricted to the provision of central bank money on DLTs. As part of the exploration of new technologies for wholesale financial transactions, the Eurosystem envisages three interoperability-type solutions for central bank money, one using a DLT with an exploratory euro central bank token, while the two other solutions leverage the existing TARGET Services without a tokenisation of central bank money. The outcome of the Eurosystem’s exploratory work by no means implies a potential implementation of a new technology or a change of its current TARGET Services.  

Could you elaborate on the factors that sparked BCL's interest in joining the exploratory project on wholesale transactions using DLT? 

The financial sector in Luxembourg has shown active interest in the DLT topic over the last years, with a dynamic ecosystem and a pioneer legal framework (Blockchain Law). In this context, the BCL started investigating DLTs in 2019, with several participations in Eurochain Hackathons and a promising proof of concept detailed in a BCL technical paper. This work was continued with the Banque de France and the European Investment Bank through the VENUS project concluded in 2022. On June 25th, the BCL co-published the VENUS report with the Banque de France. 

Based on this experience, the BCL joined the Eurosystem’s initiative to analyse and explore new technologies for wholesale purposes. 

Besides wholesale transactions, will other use cases be explored during this exercise? Could you elaborate?

The scope of the exploratory work encompasses Delivery-versus-payment (DvP), -Payment-versus-payment (PvP) (including cross-currency and cross-border payments) and automated wholesale payment transactions. All three use cases are for wholesale explorations only. The use cases in Luxembourg focus mainly on DvP transactions resulting in the delivery of securities against a payment in central bank money. Regarding the PvP use cases that require international collaboration to ensure a link between a euro area NCB and a non-euro area NCB, several cross-borders initiatives are coordinated at the level of the Basel located BIS (Bank for International Settlements), through the BIS Innovation Hub Eurosystem Centers with offices in Paris and in Frankfurt. 

Is BCL actively exploring DLT itself or engaging with third-party providers in this regard? 

The BCL worked on a prototype of central bank services on a DLT in 2020 when participating to the Eurochain Hackathon with several central banks. Elements of this prototype were leveraged by Banque de France to develop one of the three interoperable solutions currently in scope of the Eurosystem’s exploratory work. The two other solutions were developed by Deutsche Bundesbank and Banca d’Italia.

The BCL, and more generally the Luxembourg market participants, rely on these three technical solutions for the exploratory phase. 

With several financial institutions from Luxembourg participating in this exploratory phase, will BCL report on 'lessons learned' based on local participants’ use cases?

The purpose of the 2024 Eurosystem’s exploratory work on new technologies is to improve the Eurosystem’s knowledge and understanding of the different potential solutions, by gaining structured market feedback on the proposed solutions. A dedicated KPIs (key performance indicators) framework has been designed at the Eurosystem level whereby the market participants will get the possibility to directly provide their assessment on the solutions for their use cases.  Those KPIs will feed into a consolidated lessons learnt report, prepared in a coordinated fashion at the level of the Eurosystem and to which the BCL will contribute. 

The participants to the second wave have just been announced could you provide insights into how it differs from the first wave, which is currently underway? 

The Governing council approved the list of participants authorized to join the two waves of the Eurosystem exploratory phase. In the first wave “Clearstream Banking S.A., Luxembourg” and “LuxCSD S.A., Luxembourg” participate as market DLT operators; while the “European Investment Bank” and “Spuerkeess” participate as market participants. In the second wave “HSBC Continental Europe, Luxembourg” participates as market DLT operator while “Clearstream Banking S.A., Luxembourg” participates as market participant. 

Wave 1 and Wave 2 have the same scope, involve the same three technical solutions and both end in November 2024. The sole difference is about the date at which the explorations may start. 

As the schedule of the explorations was discussed with the market in 2023, it planned for a beginning of the exploration work in May 2024, provided that all interested market participants could send a registration form before end of January.  It then appeared that not all interested stakeholders could adhere to the January deadline. For those, a second wave was organised, whereby they could express their interest to participate by the end of April 2024 and join the exploratory work in July.