The Eurosystem, compromising the European Central Bank and national central banks, has tested using distributed ledger technology for wholesale settlement in central bank money.

The European Central Bank said in a statement that the Eurosystem completed over 40 trials and experiments and processed over 200 transactions with a total value of €1.59bn between May and November this year. There were 64 participants including central banks, financial market participants and DLT operators.

For example, HQLAx, Clearstream and Eurex Repo facilitated intraday delivery versus payment for repos. HQLAx was formed by a consortium of financial institutions to improve collateral mobility. In April this year HQLAx  closed a Series C strategic investment round led by HSBC, with contributions from existing shareholders including BNP Paribas, BNY Mellon, Citigroup, Deutsche Börse Group, Goldman Sachs and JP Morgan.

The ECB transactions marked the first delivery-versus-payment (DvP) repo trades to settle in production using HQLAx’s DLT platform. Erica De Rosa, solutions architect at HQLAx, told Markets Media that the ECB trials were a “significant” milestone as real cash was exchanged in the production transactions.

“Participating in the trials gives us real experience to think about how we scale our product as we continue working with our partners in this space,” she added.

Goldman Sachs borrowed cash from Clearstream, Deutsche Börse’s central securities depository, through the German exchange’s Eurex Repo F7 trading system, and delivered collateral on HQLAᵡ. Clearstream used its DLT platform, D7, to process settlement using the money from the German central bank, the Bundesbank. The trades were submitted same-day, and securities and cash were settled and returned intraday.

In traditional finance, the shortest tenor possible is overnight, so cash is borrowed overnight to meet intraday liquidity requirements. De Rosa said  DvP transactions are another piece in the securities finance puzzle, and it is essential to connect different types of cash in order to facilitate those transactions.

The Eurosystem programme explored three payment solutions – full DLT interoperability solution from Banque de France, Trigger Solution from Deutsche Bundesbank and TIPS Hash-Link from Banca d’Italia.

“Our platform can facilitate intraday trades, with specific times down to the minute, enabling this new intraday market to be developed,” she added. “Interoperability is key so we can use the types of cash that clients want to transact in.”

For example, HQLAx has also tested intraday repo settlement with  Fnality, the firm developing regulated DLT-based wholesale payment systems.

Amar Amlani, head of EMEA digital assets at Goldman Sachs said in a statement that Intraday markets are a valuable tool for institutions to optimize their liquidity and collateral more efficiently, while also managing risk and creating new revenue streams.

The European Central Bank said it will draw lessons from the exploratory work and further analyse the opportunities and challenges of DLT for financial markets, including how to facilitate the provision of central bank money settlement for wholesale transactions of assets. In January 2025 participants will be invited to discuss lessons learned from the trials and experiments.

De Rosa continued that HQLAX’s focus is shifting into the scalability phase for intraday DvP repo, as its technology is ready for widespread market adoption.

On 10 December this year HQLAx said in a statement it had completed a feasibility initiative to address pain points in triparty collateral mobility.  HQLAX‘s platform was used to transfer securities collateral between multiple triparty agents, who are chosen by the two counterparties in a transaction as their collateral agent and custodian.

Guido Stroemer, chief executive of HQLAx, said in a statement that industry has been trying to solve for triparty interoperability for over 20 years.

The initiative allows banks to fulfill collateral obligations in triparty without needing to deliver securities out of their home custodian’s accounts as DLT  validates the ownership of the securities at any given point in time. This is not currently possible and represents a significant step forward in settlement speed and efficiency according to HQLAx.

BNP Paribas

The French bank said in a statement that it took part in the Eurosystem trials by engaging in real and test transactions with three central banks – Banque de France, Deutsche Bundesbank, and Banca d’Italia. BNP Paribas used Neobonds, its private tokenization platform on the Canton blockchain; AssetFoundry, its platform built on the Ethereum chain; and also performed tests with external DLT platforms.

For example, as part of the programme BNP Paribas arranged and placed the first Eurozone sovereign digital bond for the Republic of Slovenia on the Neobonds platform. The €30m issue was followed by secondary market activity with investors AXA IM – on behalf of AXA France, Banque de France and the European Investment Bank.

Marjan Divjak, director general of the Treasury Directorate, Slovenia’s Ministry of Finance, described the trials with wholesale tokenized central bank money mark as a significant step in enhancing transparency and efficiency in financial markets.

“While the current value issued and traded remains modest, we anticipate distributed ledger technology will play an increasingly pivotal role in financial markets in the coming years,”said Divjak.

Outlook for tokenization

Bitwise Asset Management, the US crypto index fund manager, has predicted that tokenized real-world assets (RWAs) will reach $50bn in 2025.

2025 PREDICTION: Tokenized real-world assets (RWAs) will reach $50B.

Wall Street is starting to recognize that tokenization offers clear advantages. We suspect that a wave of big institutional money is about to pour in. 

Note: Predictions are not guarantees and are not… pic.twitter.com/tXnHBYpwKK

— Bitwise (@BitwiseInvest) December 13, 2024

In its report, The Year Ahead: 10 Crypto Predictions for 2025, Bitwise said tokenization offers instantaneous settlement, significantly lower costs than traditional securitization, and 24/7/365 liquidity, while bringing transparency and access to nearly every asset class.

“Wall Street is just starting to catch on, which means big institutional money could soon pour into tokenized real world assets,” added Bitwise. “The venture capital firm ParaFi recently predicted the tokenized RWA market could grow to $2 trillion by 2030, while the Global Financial Markets Association predicted $16 trillion.”

Asset manager VanEck also believes that 2025 will be the year that tokenized securities take off. The asset manager said in a blog that there are already $12bn of tokenized securities on blockchains, with $9.5bn from tokenized private credit securities listed on the Figure’s semi-permissioned blockchain called Provenance.

Prediction #3: Value of tokenized securities exceeds $50 billion. Tokenized securities grew 61% in 2024 to $12 billion, but most of that value is on permissioned chains. We think 2025 will be a breakthrough year for tokenized securities to launch on open-source blockchains as…

— VanEck (@vaneck_us) December 13, 2024

Van Eck continued there is enormous potential for tokenized securities to launch on public chains.

“In the next year, we project that entities like the DTCC will enable tokenized assets that seamlessly transition between public blockchains and private, closed infrastructure,” added VanEck.