Central Bank Digital Currency on the Blockchain: European Central Bank Takes the Lead

The European Central Bank (ECB) has proposed using central bank digital currency (CBDC) as a settlement asset within the tokenized financial market. The ECB believes that CBDCs can provide greater stability for wholesale financial settlements compared to private stablecoins.

Isabel Schnabel, an Executive Board Member of the ECB, stated during her speech at the Jackson Hole Economic Policy Symposium on the 29th (Korean time) that "central banks must embrace distributed ledger technology and move on-chain themselves." She explained that bringing CBDCs on-chain would not only maintain the payment infrastructure but also modernize the execution of monetary policy, collateral management, and liquidity provision.

Schnabel highlighted the key advantages of tokenized finance as simultaneous settlement and programmability. Simultaneous settlement refers to a structure where the conditions of both sides of a transaction are fulfilled or canceled together. Programmability means that processes such as collateral substitution, margin management, and repayment can be automated through smart contracts.

This structure is particularly significant in the wholesale financial market. In cross-border transactions and those with time differences, there is a burden of having to pre-position collateral. A programmable payment structure can reduce such friction and enhance collateral mobility.

Schnabel clarified that stablecoins are unlikely to replace CBDCs. While they can be seen as complementary to CBDCs, she emphasized that a payment asset without credit and liquidity risks is necessary for the stable expansion of the financial market. She also stressed that central banks can flexibly provide liquidity in times of stress.

Tokenized finance represents financial assets and currencies in the form of digital tokens and processes transactions and settlements on a distributed ledger technology (DLT) based platform. Until now, experiments in asset issuance and trading have progressed, but the core issue of what to use as a settlement asset remains unresolved. Schnabel's remarks suggest a strong inclination towards integrating CBDCs directly into this payment layer.

The ECB's discussions lead to the Pontes and Appia projects. Pontes is a short-term project that connects the market's distributed ledger platform with the TARGET service, the real-time gross settlement system of the Eurosystem, to support CBDC payments. Schnabel noted that while the legal finality of cash payments will remain with TARGET2 at the launch of Pontes, ultimately, the finality of payments will be realized within the Eurosystem's distributed ledger platform itself.

As the name suggests, Pontes starts as a bridge but is not limited to a simple connection device, according to the ECB. It aims to process CBDC payments on the distributed ledger platform operated by the Eurosystem and gradually add features such as smart contracts and 24/7 operation after the initial launch.

Appia is a longer-term project. The ECB is examining various structures through Appia, including a single ledger, a central bank operating ledger, and multiple interoperable ledgers. The Eurosystem aims to prepare a long-term solution blueprint for Appia by 2028.

Schnabel believes that a single ledger can reduce interoperability and fragmentation issues. However, she noted that challenges arise in terms of resilience, governance, and innovation. She also pointed out that a single ledger could become a bottleneck in market infrastructure or increase technological dependency.

A notable point for Korean readers is the reference to the Korean case. Schnabel mentioned that Korea's Project Hangang is an example of implementing and testing a single ledger structure. It was presented as a case that shows how handling CBDCs, commercial bank currencies, and financial assets within the same infrastructure can replicate a two-tier monetary system.

The two-tier monetary system is structured such that the central bank provides the final settlement asset, while commercial banks supply private means of payment such as deposits. Schnabel's argument is that even if technology changes, this institutional distinction will not disappear. She explained that in a tokenized environment, CBDCs must remain the ultimate benchmark for settlement.

Industry interests may diverge. For market infrastructure companies and banks, a CBDC payment network can serve as a foundation that enhances the credibility of tokenized transactions. Conversely, for private stablecoin providers or businesses promoting proprietary payment tokens, this could mean that the center of wholesale financial settlements may shift towards public payment assets.

This statement is more about payment infrastructure and regulatory design than the price movements of cryptocurrencies. ECB documents describe Pontes and Appia not as separate projects but as a single strategy. Pontes is responsible for short-term connection solutions, while Appia addresses long-term structures for interoperability, standards, collateral management, and monetary policy execution.

The Eurosystem plans to launch the initial product of Pontes in the third quarter of 2026 and present a long-term solution blueprint through Appia by 2028. Schnabel's recent speech clearly articulated the ECB's direction that CBDCs should not remain outside tokenized finance but must be integrated into the payment infrastructure.

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