Today, the Federal Reserve’s New York Innovation Center (NYIC) and ten financial institutions shared the results of proof of concept (PoC) of the Regulated Liability Network (RLN). The trial successfully tested commercial bank deposit tokens and a wholesale central bank digital currency (wCBDC) on a shared DLT infrastructure.
The focus of the tests included U.S. dollar payments domestically as well as cross border.
The big idea behind the Regulated Liability Network is for a single market infrastructure to potentially bring together thousands of banks worldwide and one or more central banks. It’s an idea recently echoed by the Bank for International Settlements’ (BIS) Unified Ledger concept which it described as a ‘game changer’.
Today payments are conducted through messaging, with the banks each updating their ledgers separately. Using distributed ledger technology, the messaging and the settlement are unified reducing the extensive reconciliation process.
Additionally, an RLN interbank payment could simultaneously update both the banks’ records and the movement of funds between the banks at the central bank.
The RLN aims to leverage the cost and speed savings of tokenization and the new business models enabled through programmable money. However, to date most bank tokenization initiatives have worked as islands and the RLN’s goal is to make them interoperable.
This PoC focused on payments in a single currency, but future trials might be expanded to tokenized assets and multiple currencies.
Key RLN PoC findings
While both use cases proved a success, the advantages for domestic payments over existing systems were harder to see. While smart contracts were used, the trial’s limited scope meant there wasn’t an opportunity to take full advantage of them.
In contrast the transparency, speed and 24/7 availability for cross border payments shone through.
“The prospect of a global, instant U.S. dollar payment system that could benefit cross- border settlements merits further serious study,” said Citi’s Tony Mclaughlin who first floated the RLN concept. “It is important for the regulated financial sector to strongly consider the latest technologies to help ensure that the global, digital economy can flourish in a responsible manner.”
“Our large US-based corporate clients have a global operations footprint, and USD is their main operating currency,” said Arushi Sood Joshi of Wells Fargo. “Trapped liquidity across hundreds of accounts is not just a matter of efficiency but also adds counterparty risk to treasury operations. Ability to freely move cash 24/7 across a company’s banking network will be a game changer.”
A legal workstream found that deposit tokens settled via a distributed ledger should be legally equivalent to conventional deposits. However, there was a caveat that the FDIC and other regulators will want to have a say in matters.
How the Regulated Liability Network works
The vision is to have a network with logical partitions. Each bank or other regulated entity has their own partition, as do one or more central banks. If a corporate Citi client pays a business that banks at Wells Fargo, the amount is deducted from the payer’s Citi deposit token balance. At the same time, on the Fed Reserve partition, the same amount is deducted from Citi’s wCBDC balance and added to Wells Fargo wCBDC balance. For the receiving corporate, additional Wells Fargo deposit tokens appear in its wallet. All of this happens simultaneously.
On the one hand, the RLN is such a big idea it won’t be easy to pull off. There are no formal plans to continue the PoC working group. Instead it’s a matter of seeing the response to the research published today.
The RLN also has competition from other DLT solutions that have similar ambitions, such as Fnality and Partior.
The New York Fed was cautious in stating that this is just research and does not reflect any policy direction. However, when the likes of the BIS starts talking along very similar lines, that’s the right friend to have in your corner.
