The Merkle

ECB’s Yves Mersch Labels Blockchain an Inferior Payment System

There is a genuine global interest in blockchain technology right now. That is only normal, as distributed ledgers will transform many businesses in the coming years. European Central Bank executive board member Yves Mersch is not too impressed by this technology. In fact, he claims the new euro settlement technology will outclass blockchain as a payment system. It’s an interesting statement, but only time will tell if he is right or not.

The Euro Settlement System Gets an Update

In the world of traditional finance, legacy systems are often slow and outdated. This is no different in the European Union at this stage. More specifically, the European Central Bank acknowledges a different system needs to be implemented sooner rather than later. To do so, they will introduce a new settlement system known as TIPS. According to the latest information, this new system will go live in November of 2018. Not too many specifics are known at this time, other than that it provides real-time settlement.

One could easily argue such a system could be built using blockchain technology as well. For some reason, the ECB decided to take a very different approach in this regard. A distributed ledger – which is not the same as a blockchain – has a lot more merit when it comes to instant payments and settlement. Conducting transactions in real time has not been possible within the European Union on a large scale until now.

Yves Mersch described the new euro settlement system as follows:

TIPS is 10 seconds, 0.2 cents. DLT transactions are at best 30 euros and take at least one hour. We have a mandate for efficient payment systems, and we go for efficiency. We are not bound to a technology, we are bound to results. There are so many unsolved questions in terms of governance and legal certainty in DLT. We are looking to what extent we could overcome these legal barriers, but we are at a very early stage.

While it is commendable to see the European Central Bank focus on real-time settlement, it remains to be seen if this concept will actually work. The blockchain has gotten a lot more popular thanks to cryptocurrencies, even though none of them provide real-time settlement. It’s possible to process zero-confirmation transactions, but most people prefer to wait for official confirmations. In the case of Bitcoin, a fully confirmed transaction takes 60 minutes or longer to settle. It is still faster than the 12-72 hours most bank transfers take to settle, but there is still plenty of room for improvement.

For the time being, not too much is known about the ECB’s new euro settlement system. It does provide a real-time settlement solution, which means recipients can spend their money as soon as they receive it. The current system takes around 24 hours for a transaction to settle, even though the value is transferred in digital format. There is no reason why this should take so long in this day and age, since virtually all of the money in the world exists only in digital form.

Whether or not the new system will prove to be better than blockchain technology remains to be determined. The blockchain may not make the most sense for payment services, but until proven otherwise, it is still a very strong contender. The new euro settlement system will certainly attract a lot of attention as we get closer to its release. For the time being, the jury is still out on whether or not this system is a positive change as a whole.