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Central Banks Say Blockchain Could Shake Up Securities Settlement

A newly published report from the European Central Bank and the Bank of Japan argues that distributed ledger tech (DLT) could be used to create novel securities settlement mechanisms, including “cross-chain atomic swaps” between unconnected ledgers.

The findings are the result of the central banks’ joint DLT research initiative, dubbed Project Stella, which was launched in December of 2016.

While intended to “contribute to the broader debate around the usability of DLT,” this particular phase of the project examined “how the delivery of securities against cash could be conceptually designed and operated in a DLT environment.”

The report focuses on the delivery versus payment (DvP) securities settlement method, in which assets are linked such that the transfer of one asset is executed if and only if the transfer of the other asset also occurs – this is also referred to as “atomicity.”

Researchers designed three prototypes using three platforms: Corda, Elements and Hyperledger Fabric. According to the report, they found that DvP could be executed in a DLT system with cash and securities on both a single ledger and between separate ledgers.

“Conceptual analysis and experiments have proven that cross-ledger DvP could function even without any connection between individual ledgers – a novelty which does not exist in today’s set-up,” the report states, going on to explain:

“Functionalities such as ‘cross-chain’ atomic swaps have the potential to help ensure the interoperability between ledgers (of either the same or different DLT platforms) without necessarily requiring connections and institutional arrangements between them.”

However, the report also cautions that cross-ledger DvP systems could add complexity and operational challenges to settlements. For example, DvP transactions between unconnected ledgers would necessitate “several process steps and interactions between the seller and the buyer,” it says.

Likewise, such a system could affect transaction speed and “require the temporary blockage of liquidity.” The lack of system synchronization could also “expose participants to principal risk if one of the two counterparties does not complete the necessary process steps,” the researchers added.

Indeed, the conclusion that the technology isn’t ready to replace settlement systems was highlighted in last September’s report on Project Stella.

As such, the report concludes, “further analysis on the safety and efficiency of individual approaches [to applying DLT to DvP arrangements] is warranted,” in addition to a full legal analysis, which is beyond the scope of the existing project.

Connected chains image via Shutterstock

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Regulate Bitcoin? 'Not The ECB's Responsibility,' Says Mario Draghi

Mario Draghi, president of the European Central Bank, has said it’s not his institution’s job to regulate cryptocurrencies.

As part of the ECB’s #AskDraghi video series, the former Italian central banker said he has seen many users on Twitter ask if the ECB would regulate or even ban bitcoin.

In response, he said:

“It’s not the ECB’s responsibility to do that.”

Draghi also discussed whether he would recommend purchasing bitcoin in response to a question from a college student.

He indicated he would think “carefully” about buying bitcoin, explaining that he does not see it as a currency. While the euro’s value is stable, he added, “the value of a bitcoin oscillates wildly.”

Also hitting out at cryptocurrencies’ decentralized nature, he continued: “The euro is backed by the European Central Bank. The dollar is backed by the Federal Reserve. Currencies are backed by the central banks or their governments. Nobody backs bitcoin.”

This is not the first time Draghi has made such comments on cryptocurrencies and their regulation. The ECB chief said in September 2017, that the ECB itself has “no power” to regulate bitcoin, and, in November, he said that cryptocurrencies have a limited impact on the world economy.

At the same time as it published the video, the ECB released an explainer on bitcoin that goes into deeper detail on how the institution sees bitcoin.

In addition to echoing Draghi’s comments on price volatility and the lack of institutional or government backing, the explainer notes that bitcoin is not accepted widely and “transactions are slow and expensive.”

Furthermore, it adds that there are no legal protections for users who lose their bitcoins to theft if their wallet were to be hacked.

Mario Draghi image via ECB/YouTube

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The ECB Wants to Hear Your Cryptocurrency Questions

The European Central Bank (ECB) is soliciting questions from the general public on cryptocurrencies, among other topics, for their third Youth Dialogue.

In an announcement Thursday, the ECB invited Twitter and Facebook users to ask the bank’s president, Mario Draghi, questions about a possible global economic crisis, Europe’s economy, as well as cryptocurrencies and blockchain.

Notably, the ECB repeatedly listed some example questions about cryptocurrencies on its announcement page.

Similarly, in a tweet, the ECB highlighted bitcoin as a potential topic, specifically honing in on whether it could displace traditional, government-issued currencies.

People interested in asking questions have until Jan. 23 to ask them using Twitter or Facebook. Draghi is set to respond to the questions in a series of videos next month on Feb. 12.

While the ECB is notably highlighting this topic area, Draghi himself has weighed in on the issue several times in the past, stating in November that they have a limited impact on the European economy.

Further, Draghi has said that he doesn’t believe cryptocurrencies are mature enough to regulate.

Mario Draghi image via Shutterstock

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ECB Official Calls for Tax on Bitcoin Transactions

Bitcoin should be regulated and even taxed, according to a European Central Bank (ECB) governing council member.

Ewald Nowotny, head of the Oesterreichische Nationalbank, Austria’s central bank, said in an interview with German paper Sueddeutsche Zeitung that anyone who participates in a financial transaction should be clearly identified, on top of paying value-added tax (VAT).

According to the Daily Mail, the banker also expressed concerns about potential uses in money laundering, saying:

“It can’t be allowed that we’ve just decided to stop printing 500-euro notes to fight money laundering, that we’ve slapped strict rules on every tiny savings club, and then have to watch people blithely laundering money around the globe with bitcoin.”

Nowotny’s comments come just days after ECB executive board member Benoît Cœuré told Caixin Global that bitcoin is in a bubble. Like his Austrian peer, Cœuré said one of the main concerns surrounding bitcoin relates to tax evasion and money laundering.

Cœuré continued to say that bitcoin was supported mainly by speculation and “there is a risk of large capital losses which investors should be aware of.”

Both bankers declared that bitcoin is not a currency, with Cœuré adding that investors would not be able to use it as a means of payment.

However, he did say that distributed ledger technology (DLT) in general shows promise for wholesale and retail applications, noting the ECB’s recent joint venture with the Bank of Japan to research use cases for the tech.

While central banks worldwide are looking into how to use DLT to update or replace existing financial systems, the technology is still too young for any meaningful implementation, he said.

Ewald Nowotny image via Franz Johann Morgenbesser/Flickr

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ECB's Yves Mersch: Banks Need Faster Payments to Counter Bitcoin

Commercial banks need to develop faster payment systems to counter the rise of cryptocurrencies, according to one European Central Bank executive.

Yves Mersch, who sits on the ECB’s executive board, made the argument even while dismissing the impact of cryptocurrencies during an event in Rome, according to a Reuters report.

Speaking this morning, Mersch said:

“Banks need to implement instant payments as soon as possible and provide an alternative narrative to the ongoing public debate on the alleged innovation brought by virtual currency schemes.”

Mersch reportedly added that the ECB would experiment with cash “on different digital technologies,” while more “adventurous applications” do not warrant attention.

The statements come a month after another ECB executive board member, Benoît Cœuré, indicated that the bank is not ignoring cryptocurrencies, but rather is monitoring their use.

At the same time, Cœuré maintained the bank’s long-held position that digital currencies are not a threat to the euro, saying “the amounts involved are marginal.”

Despite these claims, a 2015 report by the ECB noted that cryptocurrencies could impact monetary policy and financial stability in the Eurozone. At the time, the bank said bitcoin was more attractive than traditional financial institutions in certain areas, including remittances.

The ECB’s president, Mario Draghi, also recently said it cannot regulate bitcoin, although he did declare that EU member nations cannot launch their own cryptocurrencies.

Yves Mersch image via CoinDesk archives

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ECB President Draghi: Cryptocurrency Impact Still 'Limited'

The head of Europe’s central bank thinks cryptocurrencies are too low-impact to regulate.

Speaking to the European Parliament on Monday, Mario Draghi said digital currencies are not a threat to the ECB’s control over the euro due to a lack of adoption within the 27-member economic bloc. As a result, cryptocurrencies’ impact on the economy would be limited, according to Reuters.

He was quoted as telling lawmakers:

“We think that all this is pretty limited. So it’s not yet something that could constitute a risk for central banks.”

Draghi’s remarks come just days after an ECB governing council member said central banks are trying to decide whether to regulate digital currencies. National Bank of Austria president Ewald Nowotny said lawmakers are asking themselves whether they should get involved in regulating cryptocurrencies, citing China’s recent shutdown of bitcoin exchanges.

Indeed, this week’s statements are the latest in which Draghi, who previously serves as head of Italy’s central bank, has opined on the subject of cryptocurrencies – while also demurring on the question of whether the institution will ultimately pursue some form of regulation.

Draghi said the ECB would not regulate the space last month, telling the press that he saw bitcoin as being too immature to regulate.

He followed up by noting that people should “cherish” innovations in the financial sector, including cryptocurrencies, while still being wary of any potential risks.

Draghi also does not think the ECB can regulate bitcoin, telling the parliament’s Committee on Economic and Monetary Affairs in September that regulating cryptocurrencies falls outside the scope of the bank’s powers.

Draghi image via Matthi / Shutterstock

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ECB Council Member: Central Banks Considering Crypto Regulation

A European Central Bank (ECB) governing council member has said that lawmakers and central banks are examining whether they should regulate cryptocurrencies.

According to a Reuters report, Ewald Nowotny, who is also the president of the National Bank of Austria, said:

“We’re asking ourselves if legislators or central banks should intervene.”

Speaking yesterday at a conference in Florence, Italy, Nowotny said the focus comes following China’s recent crackdown on bitcoin exchanges, saying the authorities there considered cryptocurrencies “fraudulent.”

The council member took a neutral stance on the potential risks of cryptocurrencies such as bitcoin, however, saying, “It is like buying shares on the bourse … people investing in this product can suffer losses.”

In September, China’s cryptocurrency exchanges received instructions from the country’s regulators, asking them to stop trading due to the fact that they are operating domestically without a formal license.

Ewald Nowotny image via Franz J. Morgenbesser/Flickr

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European Central Bank Member: We Aren't Ignoring Cryptocurrency

Long active in evaluating blockchain technology broadly, a European Central Bank (ECB) official took steps this week to stress the institution is closely watching cryptocurrency.

In an interview published on Oct. 29, Benoît Cœuré, one of the central bank’s executive board members, elaborated briefly on the bank’s views on the subject, telling Le Journal du Dimanche it is following their development and spread.

The ECB is not “ignoring” the spread of cryptocurrencies, he said. Yet, at present, he does not consider them a risk to the bank or the euro.

Cœuré told the organization:

“At the moment cryptocurrencies don’t pose any monetary risk because the amounts involved are marginal. They are speculative financial instruments which create risks of a financial or even criminal nature.”

Some nations are moving away from physical bills and coins to their own cryptocurrencies, so central banks, in general, are monitoring them closely, he continued.

In September, the ECB’s president, Mario Draghi, said nations in the eurozone could not use their own cryptocurrencies, but instead every member state had to use the euro.

Draghi later said the ECB could not regulate cryptocurrencies.

Benoît Cœuré image via Wikimedia Commons

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ECB President: Bitcoin Not 'Mature' Enough to Be Regulated

Mario Draghi, president of the European Central Bank (ECB), has said that cryptocurrencies are not “mature” enough to be regulated.

Speaking at a press conference last week, CNBC reports, Draghi told reporters:

“With anything that’s new, people have great expectations and also great uncertainty. Right now, we think that – especially as far as bitcoins and cryptocurrencies are concerned – we don’t think the technology is mature for our consideration.”

Making the comments in response to a question on the potential of cryptocurrencies, Draghi further said that one of the lessons of the financial crisis is to “cherish” the benefits of fintech innovations like bitcoin, while still paying attention to their “potential risks.”

The comments follow his statement last month to the European Parliament’s Committee on Economic and Monetary Affairs, in which he said that ECB does not have powers to regulate or prohibit cryptocurrencies.

While it seems Draghi plans to wait as the technology matures, Christine Lagarde, managing director of the International Monetary Fund (IMF), recently said that cryptocurrencies must be taken seriously as they have the potential to cause “massive disruptions.”

Mario Draghi image via Shutterstock

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European Central Bank Calls for DLT Post-Trade Interoperability

Researchers at the European Central Bank (ECB) have published a new research report on the impact of distributed ledger technology (DLT) on the harmonization of post-trade settlement systems.

Released by the Advisory Group on Market Infrastructures for Securities and Collateral late last week, the 134-page report examines the technology’s possible effect on a variety of services that touch the securities settlement process. It further discusses the implications in the areas of collateral management, asset servicing and data reporting.

Perhaps most notably, the ECB – echoing sentiments expressed previously by the Bank of England – suggested that in a future market where distributed ledgers operate alongside legacy software, both systems will need to be able to communicate as necessary.

The report states:

“If DLT and non-DLT solutions are to coexist, interoperability between the two approaches needs to be ensured. There may be a need to provide ad hoc matching fields where a participant holds both a DLT and non-DLT account.”

That preference for interoperability was showcased in April when the Bank of England revealed that, while it wouldn’t yet use the tech as the basis for its next Real-Time Gross Settlement (RTGS) system, it nonetheless plans to make it compatible for future developments.

Beyond the interoperability push, the ECB report suggests that in the event that smart contracts – self-executing pieces of code tied to conditions on a blockchain – are more widely used, financial data standards such as ISO 20022 may need adjusting to account for their particular features

“The potential use of DLTs might have considerable implications for EU financial market integration. In particular, the market may want to consider ISO 20022 extension into smart contract initiation and coding, as well as DLT-specific concepts,” the report states.

The study notably comes on the heels of a joint release from the ECB and the Bank of Japan early last month, when the two central banks said that they would (at least for now) pass on using the technology for some of their production services.

ECB sign image via Shutterstock

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