Earlier this year, Citi published a paper entitled “The Regulated Internet of Value” (the “Citi Paper”). In it, Tony McLaughlin, Head of Emerging Payments and Business Development at Citi’s Treasury and Trade Solutions, tackles the topic of tokenization and the ongoing tug-of-war between proponents of stablecoins and those who favor central bank digital currency (CBDC). He suggests that a third way might be found in a Regulated Liabilities Networks (RLN). As McLaughlin (2021: 2) explains: “Tomorrow’s money needs to be global, so we may envision a constellation of interoperable Regulated Liability Networks each founded on national currencies and supervised by local regulators.”
Immediately, my interest was piqued. At M10, we spend a huge amount of time thinking about digital money and exploring how technology can modernize payments while preserving—and improving upon—what still works within our current two-tier monetary system.
The Citi Paper suggests that, if tokenization really is the best way to store and transfer digital value, it’s important for the regulated finance sector to approach tokenization in a unified way to avoid fragmentation, promote functionality, and prevent transactions from migrating to the unregulated sector. If pursued in a coherent way, central banks can expand beyond CBDC projects, to include tokenization of all regulated liabilities. McLaughlin (2021: 9) believes this would effectively “overcome a potential downside, which is the disintermediation of private regulated entities”. He suggests that this broader focus on regulated liabilities “brings the benefits of tokenization without the adverse consequences. It upgrades regulated money, which today only exists in account-based format. The regulated sector must consider the consequences of a potential paradigm shift to tokens.”
I couldn’t agree more.
Several central banks (think: China and the Bahamas) are already pursuing issuing digital currency on their own, while others may be exploring alternative ways to achieve the transactional value of tokenization without actually issuing digital currency to residents. After all, if a central bank can avoid opening Pandora’s Box and still deliver the benefits of CBDC, it will truly have located the Holy Grail.
This is where an RLN comes in. As the Citi Paper explains (2021: 2), maintaining a stable economic environment with sound monetary policies requires safe digital money that must be: “(a) regulated, (b) redeemable at par value on demand, (c) denominated in national currency units and, (d) an unambiguous legal claim on the regulated issuer.”
Unlike cryptocurrencies such as Bitcoin, regulated liabilities include central bank money, commercial bank money, and electronic money since they all live on the balance sheet of the relevant regulated financial institution. An RLN would also allow stablecoins to be incorporated into the current financial system as regulated liabilities. By design, the transfer of money in a network of regulated liabilities will be in favor of verified legal persons, reducing the risk of financial crimes, and would be conducted through the transfer of tokens. These transfers are done through entries on a ledger, and not using bearer instruments. 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 its location of the wallet in which it resides. When a token is at rest in a wallet controlled by an institution, then it is on the balance sheet of that institution as a liability in favour of the token holder.” By contrast, Bitcoin payments are conducted as a digital form of a bearer instrument.
At M10, we believe that blockchain technology is foundational to the creation of an RLN and has the potential to express these tokenized liabilities on the same shared ledger. This shared ledger delivers the Holy Grail to banks, creating digital money that is ‘always on’, instant and programmable, global in scope, but regulated by a sound banking system.
Our conception of this shared ledger enables both central bank money and commercial bank money to be tokenized. Furthermore, it allows transactions to settle instantly since banks on the system are transacting using tokenized central bank balances on shared ledgers. To address data sovereignty, there would be one ledger for each currency and it would host multiple types of liabilities for that currency. Banks can have positions on multiple ledgers. The ability for a bank to debit a position on one ledger and credit the balance on a different ledger enables cross-border payments.
The Citi Paper represents an essential contribution to payments literature, as it is the first articulation of the role that an RLN can play in addressing the very real complexities of creating a global network of regulated digital liabilities. However, we disagree with McLaughlin on one key point. While he states that the creation of such a network may seem like a “pipe dream,” at M10 Networks we are already working with central banks and commercial banks around the world to make it a reality.
You can read the Citi Paper ‘The Regulated Internet of Value’ here: https://www.citibank.com/tts/insights/articles/article191.html