Deutsche Bundesbank published an article in its recent monthly bulletin addressing this question.
Key observations:
1️⃣ The financial sector expects substantial efficiency gains from the combination of using a DLT and the tokenization of assets. Key efficiency drivers are that the asset and cash leg could be recorded on the same infrastructure (or bridges between the infrastructures could be built), which would reduce frictions and challenges around dispute resolution and data formats, and that the settlement can happen in a highly automated (i.e. simplified) way via smart contracts. For this, it is necessary that it is possible to have the euro (thus, the cash leg) “on chain”. Different options are shown in the (German) figure below.
2️⃣ Key use cases are related to the settlement of digital assets (delivery-vs-payments) and the automated settlement of payments in different currencies (payment-vs-payments).
3️⃣ The authors doubt that stablecoins, e.g., due to its governance structure and the quality of the reserves, will reach brought adoption in the financial sector.
4️⃣ Instead, they see potential in tokenized deposits for the settlement. However, it also stressed regulatory and practical questions around tokenized deposits need to be further clarified. Further, tokenized deposits require a connection to an inter banking-clearing and settlement system, undermining potential efficiency gains.
5️⃣ Besides tokenized deposits and stablecoins, the existing payment functionalities could also be extended. While existing systems are working sequentially and cannot execute smart contracts, these systems could be upgraded. For years, the Bundesbank has been working on a “trigger solution” connecting DLT use cases and smart contracts with conventional RTGS systems, thereby providing interoperability. Natural limitations are e.g. related to the operating ours of the RTGS systems, which could harm 24/7 availability.
6️⃣Another option would be using central bank money as a “euro on chain”. Such a wholesale CBDC is currently explored by a dedicated working group of the ECB. Here, as one option, tokenized assets could be integrated in a central bank DLT. Disadvantages could emerge due to the liquidity management of banks.
7️⃣ According to the authors, it requires constant monitoring of the market. It seems to be too early to decide on which option is most promising.
For me personally, I share the key conclusions, but would vote for a more nuanced approach towards stablecoins. In recent publications by various national central banks and the BIS, they are more and more connoted negatively. In Europe, we do have the MiCAR regulation in place now. Now, the regulatory environment for stablecoins is given, providing tremendous benefits to the industry.
