European Central Bank and Blockchain: Innovations in Liquidity Matching and Multiparty Computation

Salar Khan
By Salar Khan Add a Comment
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European Central Bank and Blockchain: Innovations in Liquidity Matching and Multiparty Computation

A growing number of central banks worldwide are considering adopting blockchain technology, with the European Central Bank (ECB) being the most recent example. According to Nigel Smart, the chief academic officer of the company, the European Central Bank (ECB) has recently finished an experiment with KU Leuven that involved blockchain technology for its central bank digital currency (CBDC).

During a panel discussion that took place at the FHE Summit 2024, he stated:

“We did one with the European Central Bank on liquidity matching. And a number of applications on CBDCs have actually removed the central bank from the equation and replaced it with a blockchain.”

The term “liquidity matching” refers to the process by which financial institutions ensure that their assets and fund inflows are in harmony with their outflows and liabilities. This prevents the possibility of not having sufficient funds to fulfil their financial obligations.

Nevertheless, Zama’s Smart highlights that liquidity matching can still be a hurdle for various parties involved in transactions on the same blockchain network. He elaborated:

“Then the issue is if you have multiple entities on the blockchain and it’s all encrypted stuff, how do you do liquidity matching? That’s a really big issue.”

Smart, a well-known cryptographer, is developing fully homomorphic encryption (FHE) solutions for blockchain and artificial intelligence at Zama.

With FHE-based encryption, computations can be carried out on encrypted data without the need for decryption.

European Central Bank and Blockchain: Innovations in Liquidity Matching and Multiparty Computation
European Central Bank and Blockchain: Innovations in Liquidity Matching and Multiparty Computation

Zama recently closed a $73 million Series A funding round in early March. This funding will be used to enhance the firm’s FHE stack and provide developers with additional tools for creating data privacy solutions.

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Multiparty computation (MPC) has the potential to support the entire Finnish economy by allowing multiple parties to share data for computing without compromising the actual data.

KU Leuven’s Smart indicated that the MPC-based experiment with the ECB has yielded positive results, although it will still require some time to fully support the European economy. He stated:

“We did an experiment with the European Central Bank where we essentially ran the Finnish economy through an MPC engine, and we could keep track. We could actually keep up with Finland, which is good, but not on the European scale yet.”

He went on to say that the financial industry is increasingly investigating MPC technology, which has the potential to bring with it more use cases for huge financial institutions.

European Central Bank And Blockchain: What’s Next?

The growing interest in blockchain technology among central banks, exemplified by the European Central Bank’s recent experiments with KU Leuven, highlights the potential of this innovation to reshape the financial landscape. The ECB’s exploration into liquidity matching and the broader application of central bank digital currencies (CBDCs) demonstrates a keen interest in leveraging blockchain to enhance financial operations.

Despite the promise of blockchain, challenges remain, particularly in ensuring effective liquidity matching across multiple entities on an encrypted network. Nigel Smart’s work with fully homomorphic encryption (FHE) at KU Leuven is pivotal, enabling computations on encrypted data and potentially solving critical issues in blockchain transactions.

Zama’s recent $73 million funding round underscores the growing investment in developing advanced encryption technologies. The firm’s successful multiparty computation (MPC) experiment with the ECB, while still needing scalability for the entire European economy, suggests a promising future for blockchain and privacy-enhancing technologies in finance.

As the financial industry continues to explore and adopt these innovations, the potential for significant advancements in data privacy and financial operations is substantial. However, the journey toward fully integrating these technologies on a larger scale remains complex and requires continued collaboration and technological development.

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Salar Khan is a seasoned writer with over five years of experience, specializing in the dynamic disciplines of fintech and cryptocurrency. Salar is renowned for his insightful analyses and captivating content, which he employs to simplify intricate subjects into compelling narratives. He has established a reputation for reliability and expertise as a result of his work being featured in prominent industry publications. Salar is committed to producing high-quality, impactful writing that keeps readers informed and ahead of the curve, whether it is uncovering the most recent blockchain advancements or demystifying financial technologies.
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