About RLN and Its Contributors
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.
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
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 AlternativesAs 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 MoneyPeople 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 LedgerSovereign 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 InstrumentsIf 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 SystemSovereign 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 ConceptThis 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 BenefitsThe 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 OutcomesAn 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.
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.