Researchers from the Frankfurt School Blockchain Centre have published their views on a number of ways blockchain and distributed ledger technology (DLT) could be beneficially integrated into the current financial system and the competition existing fiat currency providers will face from the private sector.

The report provides insights into the existing non-DLT fiat system, the advantages DLT can offer, the role of cryptocurrencies and fiat-backed stablecoins, as well as central bank digital currencies (CBDC).

Interest in DLT by European financial and governmental institutions has been expressed on multiple occasions this year. The European CommissionsFinal Report on Study on Blockchains (Legal, governance and interoperability aspects) recently came into print and the European Central Bank (ECB) published a working paper in January looking at Tiered CBDC and the Financial System.

Shortly after taking office, ECB President Christine Lagarde voiced her intent to accelerate research into a European CBDC and provide answers to the questions surrounding what it would mean for the individual participating nations and the technical challenges involved.

The Frankfurt School Blockchain Centre suggest a convenient way for central banks to trial a CBDC is to introduce the concept on a wholesale, rather than retail, basis. Such a scheme would only involve central and commercial banks and possibly other financial institutions, excluding access to all members of the public and most corporations.

It is reasoned that while a CBDC could counteract private crypto assets such as Bitcoin only if central banks used DLT in the retail market its use in the wholesale environment could bring to an end to the current tiered-banking system, in which smaller banks must hold accounts at bigger banks which then hold accounts at the central banks.

Such a move, according to the authors, would provide higher efficiency, resilience, competition and less credit risk in the payment sector since all participants could settle their transactions and hold customer deposits in risk-free central bank money.

Although a risk-free fiat currency is a misnomer to most of those active in the independent blockchain community, the Frankfurt School Blockchain Centre assert that now is time for central banks to participate in the process of innovating and digitising the money and payment system.

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