Can banks and other financial institutions better manage their risks and offer faster settlements by tokenizing their liabilities on blockchain networks?
Banks and Distributed Ledger Technology (DLT) companies are together exploring ways to integrate regulated liabilities – commercial bank money, central bank money and electronic money – on a blockchain network that could ultimately provide a settlement of instant, programmable and “always on” transaction. to replace the old payment infrastructure.
“As DLT has the potential to represent multiple forms of digital value, we could take this a step further and consider creating networks that symbolize regulated liabilities and assets on the same chain,” wrote Tony McLaughlin, Head of Emerging Payments and Development. commercial at Citibanks. trade solutions business, in a recent article. “Such a network would be very different from today’s siled financial architecture – a regulated internet of value.”
The financial architecture – Regulated Liability Networks (RLNs) – that McLaughlin and others have proposed envisions the transfer of tokens between banks on the network, which will mint, burn and transfer tokens in a single coordinated operation to obtain a real-time settlement between clients of any regulated institution. This plan, however, is in its early stages, with RLNs still firmly in the sandbox phase.
“With the RLN, it sounds good when you read the paper,” says Alisa DiCaprio, chief economist at R3, a technology and enterprise services firm in New York that hosts one of the sandbox projects. “It sounds simple, but when you actually try to map it to technology, you see – oh wait, it doesn’t. [The sandbox] forces everyone to think in a new way.
Regulated liability networks would enable the transfer of tokens between banks on the network, which will mint, burn and transfer tokens in a single coordinated operation to achieve real-time settlement between customers of any regulated institution.
This process will give central banks and commercial banks the opportunity to see the difference between an RLN and a central bank digital currency (CBDC) and when they could use them, and how a CBDC could best be designed to enable this RLN, if that’s what the banks want to do, says DiCaprio. “Central banks are interested in it.”
Additionally, RLNs could offer risk management gains by eliminating settlement time and reducing counterparty risk, as well as creating shared “golden copies” of transactions instead of siled ledgers, says McLaughlin of Citibanks. . Digital golden copies of on-chain transactions and assets would provide long-sought balance sheet transparency, giving companies greater clarity about the risks they hold.
Network users would also benefit from the ability to use smart contracts on tokenized assets and even implement tokenized compliance – where certain digitally expressed regulatory rules are associated with an asset. For example, an asset token could be programmed to be sold to eligible customers. Tokenized compliance could ultimately automate other post-trade compliance tasks, such as trade and transaction reporting.
Tokenized Liabilities vs Stable Coins
Currently, RLNs are being tested in sandbox environments to bring token regulated liabilities (such as digital currency) and possibly assets such as stocks, bonds, or any financial instrument or liability onto the blockchain. It is an alternative to building a payment network based solely on CBDCs or unregulated cryptocurrencies and stablecoins.
The integration of multiple regulated liabilities on a blockchain across the financial services system for payments is intended, in part, to allay banks’ anxiety about CBDCs dominating payments. Some central bankers and lawmakers do not support the idea that governments, in fact, are not getting into the payments business any more than they already are. “Central banks are considering issuing central bank digital currency, and honestly, part of that [work] It’s the commercial banks that are reacting to this, because they’re a bit panicked,” DiCaprio observes. “Central banks have been good enough to be very clear that commercial banks will still be involved, they won’t be disintermediated, but commercial banks are nervous, and RLN is a response.”
Token regulated liabilities are simply representations of existing deposits held in a wallet instead of an account. They are redeemable at par in national currency units, unlike cryptocurrencies, which are not backed by anything and fluctuate in value. Stablecoins could enter an RLN if they gain regulatory approval and are guaranteed redeemable at par.
The idea for an RLN emerged last year from work initiated by Citi, OCBC Bank, Goldman Sachs, Barclays, BondEvalue, Bank of America, Bank of New York, Payoneer, PayPal, Wells Fargo, SETL and Linklaters. . And DiCaprio’s R3 runs an RLN test in a sandbox environment on its Corda blockchain, taking inspiration from the European Central Bank’s TARGET platform, where EU central banks write their liabilities to a shared ledger. (not on DLT). The R3 RLN on Corda aims to allow commercial banks and e-money institutions to write their debts to a ledger in the same way – blockchain in this case, but it could be another electronic platform .
“We have a CBDC sandbox which is a user interface where central banks or commercial banks – anyone really – could come in, create an identity and figure out what it means to have different design features of central bank digital currency,” Di told Caprio. These design features can be direct or indirect emission or models at different levels. The sandbox allows banks to see what happens as they make different design decisions using this new concept. Currently, the sandbox is designed with two nodes to allow two central banks to interact with each other. “But with RLN, we would need three nodes, which we’ve actually built before for different clients,” says Di Caprio. “We are now building this feature for everyone.”