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Season 1, Episode 30

Host: Deepesh Patel, Editor, Trade Finance Global

Featuring: Dirk Bullmann, Innovation Team Leader, ECB

DLT is not just a buzzword but a trend which is about to transform the financial industry. The European Central Bank also has a stake in the innovation game. We met Dirk Bullmann, ECB’s Innovation Lab Leader, during Sibos 2019 in London. We learned more about ECB’s work on distributed ledger technology, cryptoassets and stablecoin. How innovative are stablecoins solutions? To what extent can stablecoins minimize volatility? How are they used today and how could they be used tomorrow? We got all this covered.

Deepesh Patel: Welcome to Trade Finance Talks. My name is Deepesh Patel, Editor at Trade Finance Global and today I’m delighted to be joined by Dirk Bullmann from the ECB here at SIBOS in London. Dirk, we’re so excited to hear you speaking tomorrow about the latest in SEPA. But just to start off with, what’s your elevator pitch, so tell us who you are. And what you do at the ECB.

Dirk Bullmann: Elevator pitch: Central bank is no different from the other market participants, we have to be informed about what’s going on in the field of innovation. We have to assess new developments and we have to embrace change when necessary. And this is what we do. And this is why we have an innovation team inside the European Central Bank. I work in the field of market infrastructure and payments and a lot is happening in the field of payments and we need to make sure that whatever service we provide as a Central Bank and we offer many services in the field of payments, that they comply with user needs and also that they are in line with the technological advancements and in particular with a new developments and new technologies which other market players may wish to use in the future?

The Objectives of the ECB’s Innovation Lab

DP:  So Dirk, what are the main initiatives and research projects coming out of the ECB Innovation Lab? So perhaps also touch upon the Euro Chain Research Network?

DB: We have a Euro Chain Research Network, what’s that? It’s a cooperation between central banks in Europe; it’s a voluntary network, where we come together, where we explore new technologies with a particular focus on distributed ledger technologies.

Since you operate large systems, which are the backbone of the financial sector, since we run some projects, which will in two or three years go live, we always confronted with questions like, why don’t you use blockchain? Why don’t you use AI? Why don’t you use cloud? We already use these technologies but not DLT to take this very example. We don’t. But at a very early stage, we were confronted with this question because we are working on so many projects and market participants, in particular, ask us:

“Hey, if you do something new, why don’t you use the DLT?” 

And that was a couple of years ago, we didn’t have the answer. So we created an innovation lab. In the European Central Bank community, it is something quite unique. Because we’ve decided not only to do desktop research, we decided to roll up our sleeves and to try to understand the technology. So we have a team composed of IT experts and business experts, and they are really looking into the matter; they are exploring DLT protocols like Hyperledger, Corda, we are also working together with R3 and IBM for example, to better understand to what extent this technology could potentially one day be used for our own services.

Does DLT have a real use case for central banking?

DP: So you’re in the exploratory phase of looking at some of these technologies. But I guess you just said you were looking at the technologies because people were asking you to explore them, do you see a real use case? Or rather, do you see real customer pain points that such technologies can help address?

DB: From today’s perspective, no. To be frank; to be honest, the answer is no! Why is it no? And I don’t want to be negative, I’m very positive about DLT, I think I’m one of the enthusiasts in this field. But we have to, we have to realise that what we offer as a service to the market is really, of systemic importance. If liquidity doesn’t flow from one country in the area to another, we in trouble. So we have to use technology which is well proven, which is well tested, which we scale. And when we started exploring DLT a couple of years ago, we realised.  That it’s not really fit for purpose. It’s not really as stable as we thought maybe not as efficient as we thought. But we see a lot is happening in this field. And there are enormous developments and the improvements are substantial. So I personally think that’s only a matter of time before DLT could be better than existing technologies. We just don’t see it at this stage. We see maybe, to some extent, the DLT is as good as existing technology. But I think this is not a sufficient reason for us to move to the DLT, if it’s better, that’s a different story. And this is why we are exploring it and we want to be close to these developments. Because we want to understand when is the right moment in time. When is the technology fit for our purpose? I’m not saying it’s not fit for purpose in general. But for our purposes, when you look at large-value payments, retail payments, and our specific role and mandates as a central bank, At this stage, it’s unfortunately not yet possible to use it.

Fiat currencies and stable coins in the payments infrastructure

DP: That’s very interesting. And we see lots of central banks, Bank of England for example, even looking at the use cases for fiat currencies and stable coins within that wider remit of maintaining liquidity, do you see this?

DB: Yeah. So, I think we clearly distinguish the infrastructure from the assets. So, infrastructure is the road and the asset, you can see it as this car running on the road. The infrastructure, I already covered and I think it holds potential and we as a Central Bank we are positive. And then we have the other side the assets, they were okay 10 years ago, we started with Bitcoin a lot has been said by central bankers about the high volatility of Bitcoin; that it is risky to invest into Bitcoin and that this is not money, it is not a currency. And why is it not money? Why it can not be used as the money?  As a great of accounts, as a store of value, as a mean of payment; these are the three functions of money and it cannot because of the volatility. And we have explored this phenomenon over the last years, if you find this on the website, we have published reports, the first one already in 2012.

Where we said: “Well, crypto assets, and here I mean, the first generation – Bitcoin – a type of crypto asset. They cannot really affect the functioning of our financial ecosystem, the traditional financial ecosystem, because the market capitalization is still relatively low. And also there are no connections to the real economy. Let’s put it like this. So that was what we said already six, seven years ago. I think it’s still true. So, market capitalization is still relatively low and links to the real economy. They are developing, but there are not that many. That was the conclusion at the time. And there’s still the conclusion for crypto assets today, but then we have stable coins. So we always said, Yeah, the problem with crypto assets it is the volatility, and now we see new types of crypto assets or coins, which are precisely targeting this weakness of the first generation. And so, again, we have to understand this; and this is what we do we have published a paperback in August this year. When you speak about stable coins, maybe you and I have different understandings of what is a stable coin. Today everyone speaks about Libra, for example, is Libra a stable coming? That’s a question to what extent it can be stable potentially. So we tried to come up with a taxonomy to understand the different types of stable coins, the ones backed by fiat currency, once backed by other assets like like oil or gold, once backed by other crypto assets or maybe even just backed by an algorithm, which matches supply and demand, these are things we have to understand as a central bank because we have to understand what are the potential implications for us and for the financial sector in general.

DP: Dirk, thank you very much. I think it’s very interesting to have a real honest, truthful debate about how early we are in the adoption of some distributed ledger technologies, particularly within the wider and very, very important remit of the ECB. However, it’s important to note that there are other types of technologies stable coin being one of them that could actually help add value to the markets. Dirk, thank you very much for joining us on Trade Finance Talks, here at SIBOS. It has been a pleasure and we look forward to hearing your talk tomorrow. Thank you.

DB: Thank you.