On Friday Intesa Sanpaolo issued €10 million in commercial paper using Clearstream’s D7 tokenization platform. The transaction which the bank was also the investor, used the Bank of Italy’s TIPS Hashlink solution for settlement, one of three payment options that are part of the European Central Bank’s (ECB’s) wholesale DLT settlement trials in central bank money.
In other words, rather than using cash on-chain, it used the Hashlink interoperability mechanism (a time of hashed time lock contract or HTLC) to settle the transaction using the TIPS payment system, Europe’s main instant payment solution.
The ECB’s trials have been running since May and finish at the end of this month. We believe this is only the second transaction to use the TIPS Hashlink option. The other involved the July €25 million digital bond issuance by Italy’s Cassa Depositi e Prestiti (CDP). Intesa Sanpaolo was the underwriter and sole investor.
DLT settlement options
Stepping back, one of the attractions of using DLT for securities transactions is atomic settlement or delivery versus payment. This can happen immediately or at a scheduled future time. The key benefit is the transfer of securities and exchange of cash takes place simultaneously. This can reduce the need for a central counterparty because it minimizes risk.
To ensure settlement in central bank money, a wholesale central bank digital currency (wCBDC) is one option. However, that requires central banks to create a new system when some are not convinced that tokenization will take off. Plus, they have concerns it might fragment central bank money holdings into separate pockets of liquidity.
Hence, the Bank of Italy introduced the TIPS Hashlink protocol and the Deutsche Bundesbank developed the Trigger solution that settles transactions on the TARGET2 payment system. The Banque de France went the wCBDC route with its DL3S solution.
Given there are far more German institutions taking part in the ECB trials, the tests have been dominated by the Trigger solution. There have been a handful of CBDC transactions and just the two using TIPS Hashlink.
