ECB’s Schnabel backs putting central bank money on blockchain

Isabel Schnabel, a member of the European Central Bank’s Executive Board, supports issuing central bank money directly on distributed ledger technology to support tokenized markets, preserve financial stability and keep monetary policy operations on-chain.

In her presentation, “Central Banks On-Chain,” Schnabel examined several technical models for providing central bank reserves on distributed ledgers. They include programmable reserves, interoperability bridges and tokenized reserve backing. Direct issuance on a distributed ledger would allow monetary policy operations to remain on-chain, according to the presentation.

Schnabel outlined three potential changes to wholesale financial markets from tokenization. Atomic transactions could shorten settlement times, while shared networks could allow markets to operate continuously across borders. Settlement in central bank money could reduce principal and counterparty risks because the asset is issued by the central bank.

Smart contracts could automate settlement, payments and collateral management. Collateral could be adjusted when market conditions change, reducing manual processing, the presentation said.

Schnabel described tokenized financial infrastructure as a way to reduce fragmentation in the euro area. Placing wholesale assets and central bank money on shared or interoperable networks could limit the effect of national market boundaries and support the European Savings and Investments Union.

The current monetary system has two tiers, Schnabel noted. Central banks provide the monetary base, while private financial institutions provide services to households and businesses. Tokenized markets could retain that structure if central bank money were available on distributed ledgers.

She also addressed liquidity management in a digital financial system. Central banks would continue to adjust liquidity in response to market demand, while digital central bank money could maintain its role as the monetary anchor when private institutions issue tokenized deposits and other assets.

Schnabel described Project Pontes as a unified dual-settlement architecture rather than a link that only synchronizes separate systems. She also referred to Project Appia, a Eurosystem initiative examining designs for tokenized financial markets and settlement systems.

Her presentation comes as European institutions examine the use of tokenization in capital markets. The work includes technical and regulatory questions about the interaction between central bank reserves, private financial assets and distributed ledgers.