nelson martenco-founder and CEO of M10 networksexplores payment systems that would work offline, avoid bank runs, and be applied successfully in a DeFi world
What is the M10 for those who don’t know it yet?
M10 Networks is a digital currency platform for banks that offers speed, low cost, security and utility for transferring value. M10 partners include FIS, IBM, BPC and NIFT.
M10’s turnkey platform is delivered as a cloud-based service, is based on immutable hierarchical ledger technology, and is operated by a proprietary, permissioned blockchain. It tokenizes regulated liabilities such as central bank money, commercial bank money, and electronic money, and can be configured to meet the digital currency needs of central banks and commercial banks.
M10 prioritizes markets where traditional cross-border payments suffer from high cost, slow speed and poor access. Our go-to-market approach is to work with commercial and central banks in the Middle East, Africa and Asia, to address market inefficiencies in cross-border payments and emerging Central Bank digital currency opportunities (CBDC).
What is a Regulated Liability Network (RLN) as proposed by Citi in its article “The Regulated Internet of Value”? Let’s take it a step further by explaining what Tokenized Regulated Liabilities, or TRLs for short, are?
A network of regulated liabilities is a network of fungible liabilities from several types of regulated financial institutions. An interoperable network of regulated liabilities is based on national currencies and overseen by local regulators.
Unlike cryptocurrencies such as Bitcoin, regulated liabilities include central bank money, commercial bank money, and e-money, as they are all on the balance sheet of the relevant regulated financial institution.
An RLN would also allow regulated stablecoins to be integrated into the current financial system as regulated liabilities. By design, the transfer of money in a network of regulated liabilities would be in favor of verified legal persons, reducing the risk of financial crimes, and would be carried out by the transfer of tokens. These transfers are made by entries in a ledger, and not to bearer. Consider the following definitions from the Citi Paper (2021:3)
A token in a central bank wallet is a liability of the central bank
A token in a commercial bank wallet is a liability of the commercial bank
A token in an e-money wallet is a liability of the e-money issuer
The legal meaning of the token is given by the location of the wallet in which it resides. When a token is at rest in a wallet controlled by an institution, then it appears on that institution’s balance sheet as a liability to the holder of the token.
In contrast, Bitcoin payments are made in the digital form of a bearer instrument.
How can TRLs enable offline payments?
One of the biggest challenges with offline support is how to avoid double-spending. One way to achieve this is to have TRLs in separate online and offline wallets. Offline wallets can transact with each other, and account balances and transaction history are periodically reconciled with the online system.
If we assume that the regulated liability network would also support offline payments, we would now have a very robust retail payment system that could handle most, if not all, of the retail payment use cases. , including online, offline and programmable payments.
An RLN that supports offline payments can be the most efficient and least risky route to a cashless society.
Central bankers are also aiming to develop offline payment capabilities for their CBDCs. How can M10 be part of President Biden’s executive order on crypto that aims to develop a US CBDC (and more)?
M10’s turnkey CBDC platform meets all the needs of an American CBDC, namely:
Interoperability with commercial bank digital currency (RLN) initiatives
High throughput and low latency
Robust and resilient against cyber threats
Flexible privacy options
Open and secure APIs to foster a rich PSP ecosystem
Low carbon footprint
Commenting on the crypto industry, how do you see this space evolving over the next 5 years – how will traditional FIs join this space? How will stablecoins be perceived?
Over the next five years, we will see more and more banks offering crypto trading.
I also predict that stablecoins will become regulated. The very nature and design of stablecoins, not to mention their relationship to regulated reserve currency, make them a prime target for regulators. Add the support of big banks and central bank officials eager to minimize risk and you have the perfect conditions for government regulators to start acting.
As decentralized finance (DeFi) matures and challenges banks’ core lending business, I believe the adoption of token deposits will overtake stablecoins. Let me explain why. To create stablecoins, money is siphoned from the banking system into stablecoins, locking up cash that banks could use to extend credit. Since economies rely heavily on credit, this could have problematic consequences. However, this is a problem that can be solved by tokenized repositories. Just as stablecoins are issued on a blockchain, bank deposits can be tokenized and put on-chain.
This blockchain should be a high-performance, low-latency blockchain (settlement in less than a second). Additionally, it would be important for tokenized deposits (let’s call them “coins”) from different banks to be fungible because it would be difficult (and annoying!) if a customer could not accept tokenized deposits from bank A to bank B And the most obvious use case is to use tokenized deposits instead of stablecoins when buying and selling crypto, either in a crypto exchange environment or through an OTC desk.
Back in 2022, with crypto regulations still in need of clarity, how can we reap the benefits of crypto with today’s technology solutions?
With today’s technological solutions, we can enjoy the benefits of crypto while respecting the current monetary system.
I’m not a crypto fanatic, but I believe blockchain holds the answer to creating an RLN. Today, emerging models of digital currency have harnessed the power of blockchain technology to express token liabilities on the same shared ledger. This shared ledger represents the best of both worlds, creating a digital currency that is “always on”, instantaneous and programmable, global in reach but regulated by a strong banking system.
In fact, a shared ledger system allows both central bank currency and commercial bank currency to be tokenized, and transactions to settle instantly since the banks in the system transact using tokenized central bank balances. The platform would support multiple regulated liabilities. But the best part is that it all fits perfectly into the two-tier monetary system.
About Marten Nelson
Prior to launching M10, Marten co-founded Token, the industry leader in API platform solutions for banks and developers, and served as its CMO. He is a member of ITU’s Global Digital Currency Initiative and was a member of the Federal Reserve’s Faster Payments Task Force.