In an interview with Delano, Thilo Derenbach, Clearstream’s head of business development and commercialisation for digital securities services, provided insights into Clearstream’s role as one of six distributed ledger technology (DLT) operators in the European Central Bank’s initial wave of exploratory work. This involves testing DLT for settling wholesale transactions in central bank money, highlighting the advantages of tokenisation and blockchain technology. Last week, Luxembourg Central Bank (BCL) governor, 
Kangkan Halder: Could you elaborate on the motivation and expectations behind Clearstream’s participation in the first wave of wholesale settlements in central bank money overseen by the ECB and other central banks, including BCL?
Thilo Derenbach: With its next-generation digital post-trade platform D7, Clearstream aims to digitise the entire post-trade value chain. D7 is already scaling with over 30,000 digital issuances and Clearstream’s participation in the ECB trials further to explore a digital euro positions D7 as the leading digital financial market infrastructure for the post-trade business.
We embarked on the joint journey with the ECB and the national central banks, including the BCL, to accelerate the adoption of blockchain solutions, on experimenting with and experiencing wholesale central bank digital currency (wCBDC).
Cash is, next to the security itself the key ingredient for a successfully functioning financial market operation. Therefore, not only offering tokenised securities but also the cash in digital form, is an essential component. The goal is to provide seamless processing of digital assets and high-quality cash to ensure appropriate delivery versus payment (DvP) settlement, i.e. the simultaneous exchange of securities and cash after a trade, also in a digital world. For that purpose, we have deployed our own D7 blockchain solution, delivered in collaboration with our partners at Google. This adds the tokenisation element to the existing and scaling digitisation capabilities.
The ECB trials give us—and more importantly also our clients--the possibility to extensively experience such processes with us and to derive their own takeaways for future on-chain propositions. By driving digitisation of financial markets, Clearstream looks to ultimately increase the efficiency of markets and enable faster access to liquidity and investment opportunities to the market.
In the first wave of the ECB trials, Clearstream is the only CSD to participate.
Could you provide some insights into the experimental setup of the ECB trials?
The ECB trials are split between two types of participation: trials, which are legally binding transactions with real money, and experiments, which are only technical tests.
Clearstream’s use cases within the framework of the ECB trials and are strictly legally binding transactions, involving the settlement of real central bank money and are conducted in full production environments. Clearstream contributes to this transformative endeavour as DLT market operator with its leading digital post-trade platform D7 and all three central securities depositories (CSDs): its German CSD, LuxCSD in Luxembourg and the international CSD, also based in Luxembourg.
In the first wave of the ECB trials, Clearstream is the only CSD to participate. In collaboration with our domestic and international clients, we have developed a wide range of very different use-cases within the trials, covering a vast range of roles in the lifecycle of a security as well extending the use-cases beyond issuance, reaching into collateral management solutions as well as financing transactions.
Clearstream plays a crucial role in mitigating settlement risk and in enhancing the efficiency and security of asset transfers.
What role did Clearstream play during the experiment, and how satisfied are you with the outcome?
[Clearstream did not participate in the trials on 14 May 2024, but] will execute its first of many transactions in the coming months for wave one. As part of this, the D7 platform takes the role of a ‘Market DLT Operator’. This includes connecting D7 to the solutions provided by the national central banks of Bundesbank (‘Trigger Solution’), Banca d’Italia (‘TIPS Hash-Link’) and Banque de France (‘Full DLT Interoperability’). This function as DLT market operator includes providing the blockchain (asset chain) where market participants can connect to, for the seamless exchange of securities, ensuring that the asset transfer only occurs if the payment was successful. The D7 platform in the ECB trials also enables market participants to issue and distribute securities on the platform against wholesale digital payments and where issuance, primary distribution and redemption of securities will be processed. D7 is also providing additional services including comprehensive reporting services for its clients and is offering transparency and detailed information regarding their transactions and holdings.
As a result, Clearstream plays a crucial role in mitigating settlement risk and in enhancing the efficiency and security of asset transfers. While the current outcome and effects of the trials is still to be reflected upon, Clearstream is already heavily satisfied with the progress, active engagement and collaboration with the variety of market participants, regulators and national central banks involved.
Clearstream Banking AG, headquartered in Frankfurt, Germany, was also involved. Are you comparing notes or sharing the same platform with Clearstream Banking AG?
Clearstream is participating with all 3 CSDs (CBL, CBF and LuxCSD), thereby expanding and sharing knowledge across all entities, both in Luxembourg and in Germany and leveraging the same technological build to participate in the trials. The platform will, after the trials, offer services across different jurisdictions.
Speaking of platforms, Clearstream’s D7 digital issuance platform is based on a mix of different technologies, including DLT. [The DLT component was freshly added for the ECB trials].
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Could you share some insights on your past experience and how you foresee Clearstream leveraging this experience during the ECB trial runs?
Accelerated by the strategic partnership between Deutsche Börse Group/Clearstream and Google, and state-of-the-art technology capabilities, we understand and have evidenced how to scale digital financial market infrastructure utilising modern technology stacks. This experience has been demonstrated through solving several key frictions that clients experience in the securities services process--which are typically characterised by high operational efforts and inefficiencies including slow speed, multiple different connectivity solutions and interfaces, intense resource requirements for managing securities, limited ability to address dynamic market situations, amongst others.
This experience has been and will continue to be leveraged when connecting established systems with new technologies such as DLT/blockchain whilst continuing to deliver tangible value to clients. This also includes servicing interoperability between traditional and distributed ecosystems and supporting mobility of assets across platforms. This helps us service market participants with the flexibility to choose between decentralised and centralised yet distributed technology stacks and enhance clients’ capacity to navigate between different infrastructures for primary and secondary market distribution.
And as mentioned before, in collaboration with our domestic and international clients, the proposed use-cases cover a vast range of roles in the lifecycle of a security as well extend for example also into collateral management solutions as well as financing transactions.
Could you provide an introduction to Digital Vaults Services and explain its role in the DLT value chain?
Digital Vault Services provides issuance and safekeeping of digital bank guarantees as well as sureties. Typically, such instruments are used by corporates, entering into such guarantees with their banking partners. DVS gives banks and corporates the possibility to centrally issue and store such instruments (bank guarantees, surety bonds and standby letters of credit) in a digital (paperless) form in a digital central register. This combination of central issuance with digital guarantees delivers efficiency and transparency to market participants including applicants, guarantors and beneficiaries across Europe.
Both Clearstream and DVS look to advance the digitisation of the financial industry across different products and asset classes in traditional securities as well as in trade finance space.
We are convinced that wholesale settlements can be automated.
Regarding the ECB trials, do you think wholesale settlements could be automated? What would be the pros and cons of such automation?
Yes, we are convinced that wholesale settlements can be automated. With the ECB trials, we are looking precisely to facilitate instant settlement. We see a variety of benefits that automated wholesale settlements bring, including the possibility of real-time or near real-time processing, and reduced operational costs related to post-trade processing, particularly in areas of automated lifecycle management. In addition, automation can increase the efficiency by reducing the need for multiple reconciliations across the middle- to back-office processes, and where data can be more streamlined.
However, we recognise the diversity of client demand. Therefore, as a trusted market infrastructure, we cater to a variety of different market participants which may come with different demands with both decentral and distributed offerings. For the ECB trials, we remain excited to see what the assessment and results the euro system provides on its settlement infrastructure.
With automation comes the possibility of 24/7 settlements. Is this being explored as a potential use case?
As the leading financial market infrastructure in Europe, accelerating transformation and innovation, including that of settlement is a clear focus point and this has already been demonstrated in our digital initiatives to date. Our participation in the ECB trials reinforces our ambition to work with key stakeholders in accelerating and improving operational processes in settlement. However, the possibility of 24/7 settlements at least in the near to mid-term is a significant task, that would require significant system changes in the industry, as well as a shift in opening and closing hours of established institutions. We focus instead on catering to diverse settlement cycles but also fulfilling demand for clients who may not wish to pre-fund and allow for netting. In the meantime, Clearstream will continuously monitor industry trends and changes to market demand around 24/7 settlements, whilst servicing the market with high settlement efficiency rates.
The trials extend the market focus beyond digital issuance into the entire lifecycle of the security using DLT, such as digital payment, settlement or asset servicing.
In addition to reliability, safety and integrity, would cost optimisation also be a parameter to monitor during the trials?
Yes. The trials extend the market focus beyond digital issuance into the entire lifecycle of the security using DLT, such as digital payment, settlement or asset servicing. This means shortening the time to market for issuance and making DvP processes more seamless utilizing on-chain innovations. An example of this includes the use of hash time-lock contracts (HTLC) for the locking and resulting release of securities simultaneously. We believe that integrating innovative interoperability mechanisms on a DLT infrastructure has the potential to reduce costs for issuers, investors, dealers, and other market participants. At the same time the mentioned effects will create additional business opportunities.
The second wave of the ECB’s trials was just announced, taking place between July and November 2024. Assuming Clearstream will participate, what additional themes would Clearstream explore?
By participating in the ECB trials, Clearstream aims to assess the feasibility of using DLT for wholesale transaction processing, using tokenised securities. This includes conducting euro-denominated issuances and DvP transactions across different use-cases and payment models.
