A group of banks under the umbrella of the Associazione Bancaria Italiana (ABI) are participating in a central bank digital currency (CBDC) pilot in collaboration with the Bank of Italy.
Dubbed Project Leonidas, the wholesale CBDC study has 18 commercial banks, leveraging blockchain technology. The CBDC initiative is one of several attempts by the Bank of Italy to explore new blockchain use cases “for financial stability and consumer protection.”
The latest scheme will see commercial banks use a shared ledger for interbank payments, with pundits predicting the use of private ledgers over publicly distributed versions. Participants are keen on reducing the bottlenecks associated with interbank queries by conducting daily reconciliations.
The study bears similarity to Spunta, a blockchain-based study involving scores of Italian financial institutions seeking to eliminate monthly reconciliations. It appears that Italian regulators are leaning on atomic settlement or a delivery versus payment (DvP) in the issuance of a wholesale CBDC over trigger payments.
“So, when we talk about DvP—because that is what a wholesale CBDC is all about—we are talking about two legs: the asset leg and the cash leg must be one single leg, not two legs tied very strictly to each other,” said Silvia Attanasio, ABI Head of Innovation. “We want a single leg—atomic DvP.”
Italy’s stance has drawn the ire of critics as they claim a DvP has the potential to fragment liquidity, while proponents point to the “waterfall feature” in the European Union’s digital euro design. The waterfall feature or overflow approach is outlined to automatically move excess funds into accounts, a feature that can be applied to wholesale ledgers.
Despite the Bank of Italy’s preference, the central bank said it remains open to exploring other alternatives. The Bank of Italy had previously relied on blockchain to eliminate fake bank guarantees and sureties, onboarding 30 banks to participate in the pilot program.
A growing preference for wholesale CBDCs
Wholesale CBDCs are growing in popularity among central banks, given the relative ease of application over retail versions with several moving parts.
U.S. Federal Reserve Board Governor Michelle Bowman stated that while a wholesale CBDC has great promise, a retail iteration “is difficult to imagine.” Commercial banks are also voicing their dissent to retail CBDCs over bank disintermediation concerns, affecting their ability to issue loans.
The general public continues to view retail CBDCs skeptically, following privacy and government surveillance concerns. Experts say that retail versions face the arduous task of competing with existing payment systems, citing the poor adoption of Nigeria and Jamaican CBDCs.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
Watch: Blockchain can make governments look good to their citizens
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