The Regulated Liability Network (RLN) is a contribution to the global debate on the future of money offered by a group of industry participants. It explores the technical, legal and business characteristics necessary to provide on-chain, 24*7 programmable, final settlement in sovereign currencies, consisting of the liabilities of both public and private regulated financial institutions. These activities could enable a more functionally rich financial system that is compliant with all existing laws and regulations.
While the concept is currently theoretical, the whitepaper published in November 2022 seeks to enrich the policy debate — often polarized between extremes: digital money exclusively issued by central banks, or by non-regulated issuers — and demonstrates that shared ledger technology may be applied to all regulated monies on a common platform.
The RLN whitepaper is written in support of sovereign currencies. It does not present RLN as "the" answer, but as a contribution to the debate to fill in the space between CBDC and stablecoin proposals. Indeed, the RLN construct can incorporate these instruments and make them interoperable with other aspects of the sovereign currency system.
What challenges could RLN solve?
At this stage, traditional players operate with proprietary databases in their own data centers. Shared ledger technology might provide a common platform, but that is not enough. The legal wrapper is as important as the technology. RLN considers the potential to create a new Financial Market Infrastructure that could achieve legal finality of settlement between the participants by leveraging many of the benefits commonly attributed to Blockchains — always on, multi-asset and programmable.
Industry Contributors
(Alphabetical Order)
Nick Kerigan, Managing Director, Head of Innovation at SWIFT
Vivek Kohli, Head of Emerging Technology & Digital Assets at BNY Mellon Treasury Services
Vincent Lau, Regional Head of International Payments, Asia Pacific at HSBC Global Payments Solutions
Peter Left, Head of Prudential Liquidity Management at Lloyds Bank
Melvyn Low, Head of Transaction Banking at OCBC
Luke Marriott, Head eFICC at ANZ
Tony McLaughlin, Managing Director, Emerging Payments & Business Development at Citi Treasury & Trade Solutions
Jon Prendergast, Head of Payment Strategy at TD Bank
Matt Shepherd, Leads Digital Currency and Asset Tokenization Product Management at Wells Fargo
Chris Swanson, Senior Vice President and Product Innovation Director at U.S. Bank
J. Christopher Ward, Head of Wholesale Payments at Truist Financial Corporation
Executive Summary
Blockchain technology has created a wave of innovation at the edge of the regulatory perimeter. Despite the hype, the adoption of distributed ledger technology (DLT) by the regulated financial system has yet to lead to large-scale transformation of market infrastructures. This paper presents one potential avenue for upgrading sovereign currency systems with shared ledger technology.
Digital Money Alternatives
As physical methods of payment decline, several digital money alternatives are in contention. Society is faced with an important question: What type of digital money do we want to use in the future?
Central bank money, commercial bank money, and e-money issued by regulated non-banks make up the family of sovereign money as defined in this paper. Sovereign money is issued by public and regulated private institutions (banks and non-banks) under authorization by the nation state.
Sovereign versus Non-sovereign Money
People may take it for granted that money is an integral part of the nation state, like the legal system and law enforcement. However, there is a counter-thesis. Computer code may enable digital money that operates outside national jurisdictions in the form of cryptocurrencies.
Cryptocurrencies such as Bitcoin attempt to de-couple money from the nation state. Novel instruments like “stablecoins” are yet to be incorporated within the regulatory perimeter.
If allowed to develop outside of regulation, cryptocurrencies and stablecoins may substitute for sovereign money. They may diminish an important instrument of national self-determination and negatively affect financial stability.
The Database of Money: Proprietary Islands versus Shared Ledger
Sovereign currencies currently operate across proprietary databases run within each regulated institution. Every institution is its own island of data, representing its books and records of customers and their deposits.
Traditional payment systems require messaging between these islands of data and involve convoluted reconciliation and settlement processes, leading to frictions and delays.
Cryptocurrencies and stablecoins operate on shared ledger technology that can be “Turing complete” or programmable. Proponents of blockchain technology consider it a superior computational substrate for the future of financial services.
The Technological Neutrality of Legal Instruments
If shared ledger technology has advantages over traditional financial technologies, then sovereign currencies can be represented on them without changing their legal nature.
We argue that legal instruments are independent from the arbitrary technology used to represent them. In other words, a deposit recorded on a paper ledger is the same as one recorded on a traditional database or a blockchain. Legal code comes before computer code.
Regulated Liabilities: Facets of the Sovereign Currency System
Sovereign currencies are “regulated liabilities,” meaning they are promises made by regulated institutions to pay the customer on demand at par value in national currency units. The purpose of financial regulation is to maximize the user’s probability of redemption.
Central bank digital currencies (CBDCs) focus on upgrading one facet of the sovereign currency system: the central bank liability. The development of CBDC may set up a contest between public money and regulated private money, even though they belong to the same family of sovereign currency.
Most economic actors transact in non-public facets of the sovereign currency system: commercial bank and e-money liabilities. Regulated private money on bank balance sheets is the raw material for lending in the economy and plays a vital role in economic growth and entrepreneurship.
The Regulated Liability Network Concept
This paper explores the concept of an RLN, the potential for a regulated Financial Market Infrastructure (FMI) that could deliver an interoperable network of all facets of the sovereign currency system: central bank money, commercial bank money, and e-money (and in the future, regulated stablecoins).
The RLN concept explores the conjunction of shared ledger technology and the sovereign currency system. If blockchain has the potential to upgrade financial services, then it should be applied to regulated financial services.
RLN is a design for digital sovereign currency that is not limited to central bank liabilities.
Potential RLN Benefits
The RLN scheme may offer potential for a new global settlement infrastructure based on regulated issuers and instruments.
Such a network might ensure that tokenized, programmable money is interoperable across different regulated issuers.
The wider scope of RLN that includes all aspects of sovereign currency might enable it to address a broader range of use- cases than narrower proposals, while maintaining the two-tier structure of public and regulated private balance sheets.
The scheme may be extensible in potentially interesting directions: (1) including stablecoins when they are within the regulatory perimeter, (2) incorporating multiple currencies to solve for cross-border payment efficiency, and (3) representing multiple asset types.
Financial messaging has largely been solved through structured ISO20022 messages flowing at the speed of light. The missing piece of the puzzle is a global solution for settlement.
Contribution to Policy Debate and Industry Outcomes
An exploration of the technical, legal, and business characteristics of RLN might enrich the global debate on the future of digital money and lead to more coordinated industry outcomes.
A positive contribution can be made to industry thinking whether or not the RLN thesis is supported in the course of further community investigations.
Disclaimer
This communication is provided for informational and discussion purposes only and is intended for an institutional audience and not as a solicitation by the contributors or any organization for any products or services. All views or opinions expressed in this communication are solely those of the named contributors and (1) may change without notice, and (2) may not represent those views or opinions of individuals, organizations, or other entities that the contributors represent or may be associated with in a professional or personal capacity.
The information contained herein does not constitute and shall not be construed to constitute legal, investment, tax, and/or accounting advice. The authors and contributors make no representation as to the accuracy, completeness, or timeliness of such information. This communication should not be used or relied upon by any person/entity for the purpose of making regulatory decisions or to provide regulatory advice to another person/entity based on matter(s) discussed herein. Recipients of this communication should obtain guidance and/or advice, based on their own circumstances, from their own legal, investment, tax, or accounting advisor. Any terms set forth herein are intended for discussion purposes only. This communication is not a commitment or firm offer and does not obligate us to enter any commitment, nor are we acting as a fiduciary to you.
The physical form of money has changed over time and as we ponder the leap into digital money, we must make sure that the medium of exchange in our economies continues to be an extension of the sovereign. The development of blockchain technology might technically make it possible for unregulated entities to create their own money, but that does not and should not make it legally permissible. CBDC may have a role to play, and we should not stifle innovations built on blockchain unnecessarily, but the money in our digital pockets is intrinsically linked to credit creation through the regulated banking system. The RLN proposal argues for an upgrade to sovereign currencies in a way that includes public and regulated private money on a shared ledger. This may prove an interesting alternative to instruments based exclusively on the central bank balance sheet.
- Lord King, Baron of Lothbury, KG, GBE, DL, FBA
The two-tier financial system is vital to the economic health of every free market society. We may not often reflect on the fact that the dominant form of money is a promise to pay by regulated private-sector financial institutions. The entire edifice of financial regulation exists to make sure that those promises are likely to be kept. When our money is on the balance sheet of risk-taking institutions, we are funding mortgages, capital spending, supply chains and the next entrepreneur. The nation state needs to defend sovereign currency from unregulated alternatives, but not necessarily by centralizing payments and deposits at the central bank. The RLN design demonstrates one potential avenue to upgrade sovereign currency while maintaining the two-tier banking system that is so vital to our continued prosperity.
- Paul Ryan, Senior Advisor, Digital Asset
It is unavoidable to move towards a certain degree of currency digitalization, but awkward that the policy debate today is focused on two extremes: CBDC for retail payments, and non-regulated tokens like stablecoins. It is critical to look towards models of currency digitalization that are based on the tokenization of regulated money. There is no reason why DLT should be a tool only wielded by unregulated finance. In this regard, the RLN is a solution that warrants close attention, and could provide an answer that unites the regulated community.
- Christian Noyer, Honorary Governor, Banque de France. SETL Director Assistant Secretary of the Treasury for Financial Stability
The RLN concept deserves attention from everyone who thinks about the future of money. It broadens the parameters of the debate about how to modernize payments, what to do about stablecoins, and whether to create CBDCs. It offers a different way of thinking about distributed ledger technology, as a shared platform for the transfer of multiple financial assets. In short, the concept represents a new option worthy of consideration.
- Timothy Massad, Research Fellow, Harvard Kennedy School Mossavar-Rahmani Center for Business and Government and Director, M-RCBG Digital Assets Policy Project | Former Chairman of the Commodity Futures Trading Commission & former Assistant Secretary of the Treasury for Financial Stability
In the past, the financial system was improved by new forms of money when two factors coincided: new user needs and new technologies that enabled a functionally better form of money: Metal casting made coins possible. Letterpress printing allowed for printed banknotes. Computer technology was the precondition for digital commercial bank money. It’s time to do it again: upgrading sovereign currencies using new technology to meet the needs of a digitized world. There is no reason to leave the benefits of new technologies only with cryptocurrencies or stablecoins. The race is on to find the best new form of money. Central banks and regulated institutions have an opportunity to win it!
- Claus George, Head of Digitalization & Innovation TxB, DZ BANK - Manfred Richels, Managing Director, UniCredit Cash Management Products - Katharina Vogt, Senior DLT Expert, Commerzbank Group Technology Foundations
Technology is changing our concept of money, creating new possibilities for the way we pay while introducing new challenges to keeping the world’s financial system interconnected. Swift is an active participant in many innovation projects worldwide. Our focus on enabling interoperability across borders underpins our commitment to exploring new forms of money within a connected global financial ecosystem. We welcome the collaborative public-private approach taken in the RLN, and look forward to exploring this model with our community in pursuit of an inclusive, interoperable future.
- Nick Kerigan, Managing Director, Head of Innovation, Swift
The representation of digital assets on blockchain networks has introduced new capabilities that may allow capital markets to operate more efficiently. For instance, transactions requiring multiple steps and reconciliation across settlement systems in traditional finance can be completed with a single transaction on public blockchains. However, these networks, such as Bitcoin and Ethereum, were not designed to operate within the regulatory environment in which most financial instruments are owned and exchanged. RLN may provide a means for banks to tokenize deposits and other traditional liabilities, enabling improvements in operational efficiency while maintaining compliance with existing laws and regulations.
- Don Relyea, Chief Innovation Officer, U.S. Bank
If blockchains are to become venues for mainstream markets, then it probably makes sense to develop a method of payment that is native to these new networks. It is too early to discern which blockchains might attract mainstream commerce, and there may well be multiple competing venues for the foreseeable future. There should be competition between different kinds of digital money, but it should be conducted within the regulatory perimeter on a level playing field. This is not easy to achieve when technology moves so quickly, regulations are not yet developed, and the networks involved are global. The RLN proposal enriches the discussion as we contemplate what blockchain native digital money might become.
- Bengt Holmström, Paul A. Samuelson Professor of Economics Emeritus, MIT
The currency payments paradigm is based on messaging between thousands of different institutions that each manage their own books and records on proprietary and separate databases. This presents a huge reconciliation task for the industry, resulting in notorious speed, cost, and quality inefficiencies with payments. RLN proposes a shared ledger with tokenized assets and tokenized regulated liabilities on the same chain, operating within a regulated Financial Market Infrastructure (FMI). This dramatically advances the topology of the legacy payments system, combining the best features of the established, time-tested system with the smart agility of powerful new technologies. So, instead of coordinating payments across thousands of islands, they are orchestrated in a common, programmable substrate that provides a single source of truth, thereby delivering a quantum leap in regulated payment and settlement efficiencies.
The approach and emphasis of the RLN Whitepaper in distinguishing the private law aspects of digital assets from their regulatory characterization is a distinction that has been long recognized. Although many (but by no means all) crypto and DeFi tokens and activities are designed or structured without reference to legal or regulatory considerations, the private law has adapted to apply conventional legal principles to such tokens and activities while regulators and policymakers separately adapt and apply regulation to them. By contrast, very little adaptation of private law, and often no adaptation of regulation, is required where new technology is deployed to deliver existing regulated activities. As a rule, there is generally no difference in the legal characterization of a deposit at a bank whether it is recorded in a physical ledger, in an on-site hard drive, in the cloud, or on a distributed ledger.
- Michael Voisin, Partner, Linklaters
Caught up in the fervor surrounding stablecoins, market participants generally pay insufficient attention to the private law framework of these assets. Holders of reserve-backed centralized stablecoins may not realize that their right to redeem their coins for cash is typically subject to limitations and may be suspended without notice. Similarly, stablecoin holders might not appreciate that they would be treated as unsecured creditors in the event of bankruptcy, with proceedings that may well take place in a foreign jurisdiction. Going forward, stablecoin issuers should offer easily enforceable and unqualified redemption rights, as well as structure their reserves in such a way that holders of these coins would be protected in the event of issuer bankruptcy.
- Andrea Tosato, Associate Professor, School of Law, University of Nottingham
Having a regulated 24*7 tokenized cash ecosystem with a common bridge asset that supports peer-to-peer interactions is foundational to improving settlement efficiency of digital assets and enhancing market liquidity. Initiatives like RLN and Fnality are designed to upgrade our settlement rails, based on the application of shared ledger technology. Solving for the digital native cash leg of commercial and financial transactions could unlock a host of industry innovations and enhancements. The ability to embed self-executing smart contracts within a regulated and compliant token that provides settlement finality could be transformational for the industry.
- Vivek Kohli, Head of Emerging Technology & Digital Assets, BNY Mellon
RLN is proving to be an outstanding design for digital currency. It promises to provide an essential cash ledger on chain at scale to catalyze the reshaping of financial market infrastructure and accelerate cycle times for the global economy. It brings the benefits of digital currency, while protecting the two-tier financial system globally. Importantly, it also protects the fractional reserve system to enable credit formation against bank deposits, unlike a stablecoin which impairs credit formation due to the required narrow bank model. We are excited to see the level of interest by central banks in exploring, and ultimately adopting, RLN to deliver a digital version of its sovereign currency.
- Richard Walker, Partner and Global Co-Lead for Web3, Bain & Company
Digital Finance will be a combination of both centralized and decentralized networks build on distributed ledger technologies that enables tokenization of real-world assets. ANZ’s working hypothesis is these new networks are emerging forms of financial markets infrastructure with new form factor for transacting value. Central to this new ecosystem for transacting value are tokenized commercial bank monies, paving the way for regulated interoperability across networks. We foresee significant customer benefits from these emerging capabilities in terms of lower costs, reduced settlement times, more resilient infrastructure, and mitigation of counterparty risks.
- Luke Marriott, Global Head of eFICC (Electronic Fixed Income, Currencies, and Commodities), ANZ
RLN is an exciting foundation for the industry to make regulated commercial bank money interoperable to an extent we have never been able to achieve before. Commercial bank money smart contracts could be designed to be smoothly interoperable across commercial banks and central banks. Having made regulated money interoperable to this extent, we can then open innovation opportunities for smarter, more competitive payments.
- Peter Left, Head of Prudential Liquidity Management, Lloyds Banking Group
We need to separate the wheat from the chaff when applying DLT to regulated financial services. We don’t want to create anonymous currencies that are de- coupled from nation states and thus proper and valuable oversight. We want to provide a safe and secure medium of exchange that users will have confidence in. Upgrading the applicability of sovereign currency with new technology, such as DLT, makes sure that the regulated financial sector continues to innovate.
- Jon Prendergast, Head of Payment Strategy, TD Bank
One of the attractive design features of the RLN concept is that every end user of the system is a customer of a regulated institution. This is in contrast with schemes that disconnect the issuer of the instrument with the end user. For decades we have been reducing the usage of bearer instruments in the fight against financial crime. The next generation of value transfer systems need to maintain the principles of “Know Your Customer” on which many vital controls are based.
- Michael Knorr, Head of Payment and Liquidity Management, Wells Fargo
RLN presents a paradigm shift in the mindset of banking infrastructure that leverages modern technology to overcome friction in today’s payment and settlement landscape. I am particularly excited by the opportunity to provide digital access to money for millions of unbanked individuals in developing markets of South-East Asia through a network of regulated instruments (CBDCs, private bank monies, and e-wallets) instantly on a 24*7 basis with trust and security.
- Melvyn Low, Head of Transaction Banking, OCBC
More and more consumers, governments and businesses are exploring the benefits of using digital currencies for payments. In addition to considerations around CBDCs and compliant stablecoins, there should be the option of leveraging the scale and economic value of bank deposits. The RLN is an innovative proof of concept led by the industry that could help shape how consumers and businesses view the credibility of token-based payments.
Commercial bank money is a powerful contributor to economic well-being because it performs two functions at once. It provides a convenient medium of exchange for most economic purposes and these transfers increasingly happen in real time. More subtly, commercial bank money provides the raw material for the creation of the risk assets—the lending that powers economic growth and progress. If DLT is a superior technology platform, then the right kind of money to deploy on DLT is commercial bank money.
- J. Christopher Ward, EVP, Head of Wholesale Payments, Truist
Working with banks, importers, exporters and transport companies, we have proven with Contour that Trade can be transparent, digitised and de-fragmented with enhanced coordination using de-centralised technology. However, we process all related payments off-chain using traditional rails. We can further improve Trade reconciliation if we can bring payment and settlement on chain as well because every Trade transaction ends with a payment.
- Carl Wegner, CEO, Contour Network
Market volatility dictates the speed at which collateral needs to be mobilized but the technology deployed across the market determines the speed at which it operates. In a T+0 ecosystem, HQLAx already facilitates the transfer of ownership of securities at precise moments in time but the ability to mobilize collateral 'on chain' versus payment and with increased velocity is the panacea.
- Guido Stroemer, CEO, HQLAx
As the financial system adopts new technologies like DLT, there will be a strong need for interoperability and common rules. RLN is an initiative that looks into the future of tokenized finance and recognizes the need to solve for settlement in an interoperable way. Corporations do business in multiple geographies, currencies and with multiple banking partners. They are looking for banking solutions that take advantage of the latest technologies and are beginning to demand the kind of services that might take advantage of blockchain technology to deliver smarter money.
- Vincent Lau, Asia Head of International Payments, HSBC
Corporate cash management is one application of programmable money that might be conducted using tokenized commercial bank money. Domestic instant payment schemes have proven popular and satisfy the needs of local consumers making relatively low-value payments. RLN could extend the benefits of instant payments to corporations globally. This could not only assist with internal liquidity management but could also create better payment connectivity to commercial counterparties. A new global settlement rail could be a significant contribution to G20 objectives to improve cross-border payments.
- Shahmir Khaliq, Global Head of Treasury & Trade Solutions, Citi
Multinational corporates are beginning to explore and demand programmable money to support new business models like internet of things and machine-to- machine payments. There is an emerging consensus that new form factors of the Euro could lead to significant efficiency gains and innovation. Corporations believe that a uniform standard will be required for tokenized commercial bank money—they do not want each bank to develop their own coin systems in isolation. They have walked that road already with proprietary electronic banking systems. RLN demonstrates how the regulated private sector can collaborate with the public sector to deliver an interoperable programmable currency that will meet these emerging needs.
- Dr. Jan Rosam, Partner and EMEIA Digital Asset & Digital Currency Consulting Lead, Ernst & Young
In 2020, the Digital Dollar Project announced a U.S. CBDC champion model as a tangible contribution to the U.S. maintaining leadership in the rapidly evolving digital economy. Programmable money could unlock a new wave of innovation while maintaining the vital role of U.S. dollars in the global economy. The RLN concept adds another candidate model that merits close consideration. Rigorous testing and analysis of a range of different models is the best way to reach consensus on the next generation of national digital currencies.
- Jennifer Lassiter, Executive Director, Digital Dollar Project
The RLN is an intriguing concept. It promises to bring potential efficiencies from distributed ledger technology to the world of payments, without creating the same financial stability and economic growth problems of a central bank digital currency. With RLN, commercial bank money and central bank money maintain their current roles, but both could transfer on a blockchain. As a result, they could displace other less regulated and less safe money-like instruments whose current selling point is 24*7 on-chain availability.
- Greg Baer, CEO, Bank Policy Institute
The benefits of regulated liability networks for financial services firms are vast. When paired with the right smart contract and distributed ledger technology, the regulated network itself contains the necessary privacy and scalability features essential for maintaining regulatory compliance and ensuring the foundation for the continued growth of digital currencies and the tokenization of related financial instruments.
- Yuval Rooz, Co-Founder and CEO, Digital Asset
The RLN provides a potential path forward the interoperability of the different aspects of sovereign currency. The suggestion of a common transaction network for central bank money, commercial bank money and regulated e-money could provide food for thought for monetary authorities thinking about the next generation of national payment systems. Bitt’s experience shows that there is appetite to modernize national currencies through the latest technologies, with our platform being interoperable with multiple underlying transaction networks. We consider RLN to be an intriguing addition to the thought process, with the potential to unite commercial banks, fintechs and central banks in a common vision.
- Simon Chantry, Co-Founder and Chief Information Office, Bitt
As we seek to leverage the benefits of blockchain in financial services, it is critical that we maintain the numerous protections and benefits that our two-tier banking system provides today. We believe it is critical that banks be able to perform the same credit creation role on-chain as they do in every other market. USDF is committed to ensuring that banks of all sizes can leverage tokenized deposits and participate in the RLN ecosystem.
- Rob Morgan, CEO, USDF Consortium
Novel settlement infrastructures powered by innovative DLT technologies and “smart money” offer tremendous benefits for regulated financial institutions, while laying a foundation for continued innovation. The concept of the RLN promises to enable an interoperable network of sovereign currencies, unlocking liquidity across emerging financial market infrastructures. R3 is proud to participate and contribute to the research and development of the RLN and the ongoing transformation of the global financial system.
- Alisa DiCaprio, Chief Economist, R3
We have been excited about contributing to the concept of RLN by providing design and engineering expertise to bring it to life. We all rely on a network of promises to give value to our money and our savings, and to finance our businesses and governments. Our freedom to use those promises without constraint or interference depends on an open and interoperable network for their exchange. RLN provides the framework for such a global settlement network that could become the most important infrastructural innovation to emerge in finance for generations.
