The ECB trials: Continuing to drive the digital asset evolution
28 May 2024
Clearstream’s Thilo Derenbach, head of business development and commercialisation for Digital Securities Services, speaks to Carmella Haswell on the firm’s mission to create the digital financial market infrastructure of the future
Image: stock.adobe.com/Attasit
The digital asset evolution in the financial industry is progressing, especially at the institutional level, among financial intermediaries. With plenty of innovation taking place, and interesting application use cases being applied, Thilo Derenbach, head of business development and commercialisation for Digital Securities Services at Clearstream, believes the upcoming European Central Bank (ECB) trials on wholesale central bank digital currency (CBDC) will drive this accelerated evolution further.
Speaking to Securities Finance Times about this “very exciting development”, Derenbach says: “We are one of the first, and so far the only, market infrastructure that participates in the ECB trials. For wave one of the trials, we are participating with all three of our central securities depositories (CSDs) — the German CSD, our ICSD and LuxCSD in Luxembourg — to explore all three payment solutions that are being offered by the ECB.”
These payment solutions are the Deutsche Bundesbank’s Trigger Solution, the TIPS solution from the Banca d’Italia, and the distributed-ledger technology (DLT) solution of Banque de France. Through this, Clearstream says it is able to give its clients a maximum amount of trial options.
In April, it was announced that Deutsche Börse Group’s post-trade business, Clearstream, would join the ECB’s trials and experiments. The trials aim to explore the potential of DLT for wholesale central bank money settlement in the light of the development of a digital Euro. The ECB will conduct the trials from May to November 2024 in a productive environment, using real central bank money.
From a Clearstream perspective, the trials’ benefits are threefold. First, it allows the firm to experiment with digital cash generally, and digital central bank money specifically. Second, it provides the post-trade business with the possibility to add the cash element to a securities transaction on chain. Derenbach indicates that, so far, the industry has been focused on tokenising a security asset, but not tokenising the cash element, which is required to complete a real delivery-versus-payment transaction on chain, as seen in the traditional world.
Third, in the context of the trials, Derenbach says the firm is now deploying its own blockchain solution. He explains: “D7 is a digitisation engine, and with the trials we have now added DLT capabilities, delivered in collaboration with our partners at Google. From the moment we conduct the first transaction within the trial period, we deploy digitisation as well as tokenisation possibilities for real-world assets.”
As Derenbach emphasises the significance of these trials, and its necessary contribution to the wholesale banking market, he predicts that many participants will want to operate on chain only in the future, and for this, digital cash is needed to complement the digital securities transactions.
“As central bank money has extremely high quality, we welcome digital wholesale central bank money. But, as central bank money is not the only money quality used, the market will look to also leverage other forms of digital cash, such as stable coins, but possibly also cryptocurrencies,” he interjects.
The verdict is still out there on what will be dominating, but it seems that forms of commercial bank money, and a form of a digital euro, will be available going forward.
Entering the non-security space
Last month, Clearstream announced its plans to invest in Digital Vault Services (DVS), a fintech offering issuance and safekeeping services for digital bank guarantees and sureties in Europe. The mid-term plan will be to integrate DVS’s Guarantee Vault with D7, the digital post-trade platform of Deutsche Börse and its post-trade business Clearstream. This aims to allow D7 to expand its digital asset product portfolio for the first time.
“Our mission is to create the digital financial market infrastructure of the future, and to progress the financial market to leverage digitisation to improve processes and products,” Derenbach confirms.
By creating this digital ecosystem, the company looks to create efficiencies for the financial industry activity overall. It also provides an opportunity for the D7 platform offering to expand beyond the securities space and into the non-security financial instrument space in the medium term. The investment in DVS was the “natural extension” of Clearstream’s digital ecosystem proposition.
The bank guarantees space is “very much paper-based today”, Derenbach explains, with cumbersome processes, emails going back and forth, as it is in many other areas of the financial industry. He continues: “Speed, efficiency, effectiveness, and unit cost savings are equally relevant in the non-securities space as they are in our securities space. DVS delivers exactly these positive effects thanks to its digitisation proposition for these instrument types.”
Deutsche Börse Group has invested in a number of companies that foster digitisation and tokenisation, including HQLAX, FundsDLT, 360X, Crypto Finance, and now DVS.
Complexities facing the market
The digital market space is proving to exhibit interest from market participants, as they continue to incorporate the use of DLT, digital assets and tokenisation within their core processes or platforms. However, much like many pockets of the financial market, it faces a number of complexities.
The largest of which is the lack of interoperability within the overall tokenisation ecosystem. Derenbach highlights that currently, market participants cannot mobilise their assets on chain beyond the ecosystem they have been issued into. To coin a phrase, Derenbach says, ‘congratulations, you have a token, but you just created dead wood’.
He goes on to explain: “When a firm creates a token on chain, the value is locked in on chain, remaining immobile. There is lack of mobility, interoperability, and lack of fluidity of assets on chain due to this lock-in effect of island solutions. As long as these basic features used in the traditional world are not available on chain, this will continue to limit the development of DLT solutions.”
Once this is resolved, Derenbach believes the market will see increased liquidity, a mass migration from traditional to digital or blockchain solutions, as well as real value being created on chain.
The D7 platform allows Clearstream to digitise the first step in the lifecycle of a security — issuance — everything else remains traditional for the time being. Clearstream has taken this approach with the incentive to not disrupt the market. The digitisation process still allows the participant to “reap the benefits of a digital smart object”, without having to change their entire technology stack.
So how exactly does the firm intend on taking the next step to rectify these challenges and advance the digital space?
Clearstream, Euroclear, the Depository Trust and Clearing Corporation (DTCC) are issuing a white paper, in collaboration with Boston Consulting Group. It proposes principles for the use and necessities around DLT and emphasises that more alignment among all market players is needed to jointly develop standards that will support the resolution of the hurdles mentioned previously. On the basis of such standards, the market will ensure interoperability between platforms.
As for the next year or so, Derenbach says the market can expect the firm to build out the capabilities of digitisation and tokenisation solutions, expanding geographically, as well as expanding the asset scope that can be processed on the D7 platform, also beyond the securities space.
Derenbach concludes: “We are adding the cash element that we mentioned earlier, and are completing the solution offerings to a level that we know from the traditional world.”
Speaking to Securities Finance Times about this “very exciting development”, Derenbach says: “We are one of the first, and so far the only, market infrastructure that participates in the ECB trials. For wave one of the trials, we are participating with all three of our central securities depositories (CSDs) — the German CSD, our ICSD and LuxCSD in Luxembourg — to explore all three payment solutions that are being offered by the ECB.”
These payment solutions are the Deutsche Bundesbank’s Trigger Solution, the TIPS solution from the Banca d’Italia, and the distributed-ledger technology (DLT) solution of Banque de France. Through this, Clearstream says it is able to give its clients a maximum amount of trial options.
In April, it was announced that Deutsche Börse Group’s post-trade business, Clearstream, would join the ECB’s trials and experiments. The trials aim to explore the potential of DLT for wholesale central bank money settlement in the light of the development of a digital Euro. The ECB will conduct the trials from May to November 2024 in a productive environment, using real central bank money.
From a Clearstream perspective, the trials’ benefits are threefold. First, it allows the firm to experiment with digital cash generally, and digital central bank money specifically. Second, it provides the post-trade business with the possibility to add the cash element to a securities transaction on chain. Derenbach indicates that, so far, the industry has been focused on tokenising a security asset, but not tokenising the cash element, which is required to complete a real delivery-versus-payment transaction on chain, as seen in the traditional world.
Third, in the context of the trials, Derenbach says the firm is now deploying its own blockchain solution. He explains: “D7 is a digitisation engine, and with the trials we have now added DLT capabilities, delivered in collaboration with our partners at Google. From the moment we conduct the first transaction within the trial period, we deploy digitisation as well as tokenisation possibilities for real-world assets.”
As Derenbach emphasises the significance of these trials, and its necessary contribution to the wholesale banking market, he predicts that many participants will want to operate on chain only in the future, and for this, digital cash is needed to complement the digital securities transactions.
“As central bank money has extremely high quality, we welcome digital wholesale central bank money. But, as central bank money is not the only money quality used, the market will look to also leverage other forms of digital cash, such as stable coins, but possibly also cryptocurrencies,” he interjects.
The verdict is still out there on what will be dominating, but it seems that forms of commercial bank money, and a form of a digital euro, will be available going forward.
Entering the non-security space
Last month, Clearstream announced its plans to invest in Digital Vault Services (DVS), a fintech offering issuance and safekeeping services for digital bank guarantees and sureties in Europe. The mid-term plan will be to integrate DVS’s Guarantee Vault with D7, the digital post-trade platform of Deutsche Börse and its post-trade business Clearstream. This aims to allow D7 to expand its digital asset product portfolio for the first time.
“Our mission is to create the digital financial market infrastructure of the future, and to progress the financial market to leverage digitisation to improve processes and products,” Derenbach confirms.
By creating this digital ecosystem, the company looks to create efficiencies for the financial industry activity overall. It also provides an opportunity for the D7 platform offering to expand beyond the securities space and into the non-security financial instrument space in the medium term. The investment in DVS was the “natural extension” of Clearstream’s digital ecosystem proposition.
The bank guarantees space is “very much paper-based today”, Derenbach explains, with cumbersome processes, emails going back and forth, as it is in many other areas of the financial industry. He continues: “Speed, efficiency, effectiveness, and unit cost savings are equally relevant in the non-securities space as they are in our securities space. DVS delivers exactly these positive effects thanks to its digitisation proposition for these instrument types.”
Deutsche Börse Group has invested in a number of companies that foster digitisation and tokenisation, including HQLAX, FundsDLT, 360X, Crypto Finance, and now DVS.
Complexities facing the market
The digital market space is proving to exhibit interest from market participants, as they continue to incorporate the use of DLT, digital assets and tokenisation within their core processes or platforms. However, much like many pockets of the financial market, it faces a number of complexities.
The largest of which is the lack of interoperability within the overall tokenisation ecosystem. Derenbach highlights that currently, market participants cannot mobilise their assets on chain beyond the ecosystem they have been issued into. To coin a phrase, Derenbach says, ‘congratulations, you have a token, but you just created dead wood’.
He goes on to explain: “When a firm creates a token on chain, the value is locked in on chain, remaining immobile. There is lack of mobility, interoperability, and lack of fluidity of assets on chain due to this lock-in effect of island solutions. As long as these basic features used in the traditional world are not available on chain, this will continue to limit the development of DLT solutions.”
Once this is resolved, Derenbach believes the market will see increased liquidity, a mass migration from traditional to digital or blockchain solutions, as well as real value being created on chain.
The D7 platform allows Clearstream to digitise the first step in the lifecycle of a security — issuance — everything else remains traditional for the time being. Clearstream has taken this approach with the incentive to not disrupt the market. The digitisation process still allows the participant to “reap the benefits of a digital smart object”, without having to change their entire technology stack.
So how exactly does the firm intend on taking the next step to rectify these challenges and advance the digital space?
Clearstream, Euroclear, the Depository Trust and Clearing Corporation (DTCC) are issuing a white paper, in collaboration with Boston Consulting Group. It proposes principles for the use and necessities around DLT and emphasises that more alignment among all market players is needed to jointly develop standards that will support the resolution of the hurdles mentioned previously. On the basis of such standards, the market will ensure interoperability between platforms.
As for the next year or so, Derenbach says the market can expect the firm to build out the capabilities of digitisation and tokenisation solutions, expanding geographically, as well as expanding the asset scope that can be processed on the D7 platform, also beyond the securities space.
Derenbach concludes: “We are adding the cash element that we mentioned earlier, and are completing the solution offerings to a level that we know from the traditional world.”
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