The European Union should consider using blockchain for capital markets when developing an integrated market for digital assets. Piero Cipollone, an European Commercial Bank (ECB) official, recently suggested that the move would be a step in the right direction when creating an integrated market for digital assets.
Cipollone, who gave a keynote address during the Bundesbank Symposium, said developing a European ledger would become a game changer in the capital market for digital asset space. He emphasized the role of blockchain technology in improving the region’s financial structures.
Banks Already Testing Blockchain
In his address, Cipollone proposed that creating a European Ledger, the European Union’s version of the Unified Ledger, would play a significant role in tokenizing the EU’s capital markets. He took extraordinary cognizance of the region’s challenges in creating a conventional Capital Markets Union, with a greater desire for legal harmonization. While appreciating that there would be some risks associated with moving on with plans for digital assets and blockchain for capital markets, the director urged the union to look at the bigger picture and embrace the benefits of tokenization.
Cipollone observed that over 60% of banks within the EU were already experimenting with blockchain technology, while another 22% had already implemented distributed ledger technology (DLT). He added that while blockchain was mainly used in issuing assets, the technology had more significant potential and could be used in negotiation, settlement, and custody. It could also reduce costs while facilitating 24/7 operations.
He said digitization was the future of the European financial markets, and embracing blockchain for capital markets could streamline the process. The European Central Bank official opined that tokenization could help untangle assets from centralized systems and make transactions more transparent and efficient. He added that such a move would help the European Union create a single market for the said digital assets.
A Common European Ledger
Cipollone further warned of the danger of the EU failing to embrace blockchain for capital markets, saying it could lead to the fragmentation of digital markets. He advised central banks to put systems in place to settle transactions using safe and risk-free central bank digital currencies.
The ECB official further urged the national central banks to foster cooperation with regulators and financial institutions during the early stages. He emphasized that establishing a common European Ledger would create a digital environment where participants could engage with others. Cipollone stated that Europe had the chance to make a genuine digital capital markets union, reiterating the responsibility of central banks to enable the shift by embracing blockchain for capital markets while maintaining the stability of financial systems.
Potential Disadvantages
The plan to create a unified European ledger may also have disadvantages. The most significant drawback associated with creating one standardized platform could be the stifling of innovation, especially on excellent applications that could be better off when deployed by a specialized blockchain platform. The outcome of a unified system could quickly narrow down available options for financial institutions in situations where competing alternatives could create variety and flexibility. Cipollone observed that to avoid such a scenario, the European Central Bank needed to find a balanced approach to facilitate experimentation and co-existence while working towards a unified, interoperable blockchain for the capital markets system.
Conclusion
The proposals by Cipollone come at a time when there’s growing interest in blockchain technology and digital currencies among central banks globally. The Bank of International Settlements (BIS) has been at the forefront of efforts to create a unified ledger and has gone further to outline the potential benefits of such a system. Moreover, JPMorgan and SWIFT are also developing their own blockchain solutions in an attempt to enhance their asset settlement and cross-border payment systems.
Within the EU, the European Central Bank is already planning to test a digital euro, a form of a central bank digital currency (CBDC) that could complement cash and other payment systems within the Eurozone. Should such efforts bear fruit, the proposed European ledger would become the backbone of the proposed digital Euro and provide the infrastructure for a CBDC.
