CBDC SPECIAL EDITION: RLNs coming to the US instead of CBDC; The blueprint for the future: tokens and "unified ledgers," and CBDC interoperability is a pipe dream.
The future is just starting to come into focus and it needs tokens. Crypto already knew that!
1. Regulated liability networks coming to the US? (tokenization small scale)
2. The BIS’s “unified ledger” needs tokens (tokenization large scale)
3. CBDC interoperability
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1. Regulated liability networks coming to the US?
The Fed’s Regulated Liability Network POC gives us hope for the modernization of the US payment system!
Download the reports: here Another great resource on RLNs is this report by EY: here For those in favor of stablecoins instead of RLNs read why the BIS dislikes them: here
The NY Fed’s RLN PoC was a smashing success, with the working group (9 banks and Mastercard) concluding that:
🔥“RLN offers a potential design for a network that enables instant settlement for US dollar payments globally, which is delivered through the regulated financial system.”🔥
That’s good news, and I look forward to the day when RLNs can provide instant tokenized USD transfers across the globe. Let’s be honest; the US’s CBDC program is a “dead man walking.”
RLNs are fine technology with the potential for transmitting not just USD but multiple regulated asset classes including debt and other instruments.
KYC keeps regulators happy
The key to understanding RLNS is that the tokens, unlike stablecoins or crypto, are not bearer instruments. Tokens represent an issuer’s liability and are not directly transferable to individuals outside the issuer's KYC boundary. Regulators love this!
No disintermediation keeps banks happy
Within the RLN, the payment process mimics the practice in the current two-tier monetary system of debiting the sender's account and crediting the receiver's account, together with settlement on the central bank’s balance sheet. Importantly, unlike CBDCs, which offer some level of bank disintermediation, RLN networks maintain banks’ central role in payments. Banks love this!
Here are the results of the Fed’s Business, Legal and Technical reports:
🔹 Business workstream
Global payments in USD could be improved by a network like RLN through the use of shared ledger technology, tokenized money, 24/7 availability, and increased operational efficiency. The working group concludes that the creation of a global, near real-time, 24/7, dollar payment system is conceivable.
🔹 Legal workstream
It is likely that RLN could be delivered under existing legal frameworks. The legal analysis concluded that no issues were identified that would prevent the creation of RLN as contemplated within the PoC.
🔹 Technical workstream
It is technically feasible to deliver the RLN functionality using shared ledger technology. The sandbox demonstrated the ability to orchestrate the movements of central bank money and commercial bank money between participants in an “atomic”, or an instantaneous, irrevocable transfer of value, manner and maintain a shared state. Privacy was preserved across the network.
All 3 of the POC documents are included in the attachment.
Thoughts?
Takeaways:
—RLNs are great tech, and I hope we build them soon!
—Banks love RLNs because they do not risk disintermediation as with CBDC.
—Regulators love RLNs because of the KYC.
—Tokenized liabilities are NOT bearer instruments!
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2. The BIS’s “unified ledger” needs tokens
Tokenization, smart contracts, DeFi, and the number 42 are the “Blueprint for the future monetary system.”
Regular readers may know that I love science fiction, see Spock below. The BIS’s “unified ledger” is so big in scope that it reminded me of the number 42 as the ultimate answer to the ultimate question! Download the BIS report: here
The BIS is no slouch in reinventing our financial plumbing, and like The Hitchhiker's Guide to the Galaxy by Douglas Adams, it seeks the "Answer to the Ultimate Question of Life, the Universe, and Everything."
The ultimate answer in Hitchhikers Guide was 42, and for the BIS, the answer is “unified ledger” made possible through tokenization. The BIS is thinking big and if you read what they propose, it isn’t unreasonable but is so big in scope that this is years away. This is not the typical BIS CBDC document where we can expect results in the next few years.
🔹 Unified ledger is the ultimate answer the "blueprint" for financial markets:
“The key elements of the blueprint are CBDCs, tokenised deposits, and other tokenised claims on financial and real assets. The blueprint envisages these elements being brought together in a new type of financial market infrastructure (FMI) – a "unified ledger". The full benefits of tokenisation could be harnessed in a unified ledger due to the settlement finality that comes from central bank money residing in the same venue as other claims."
"A unified ledger could harness programmability to enable arrangements that are currently not practicable, thereby expanding the universe of possible economic outcomes."
🔹 Tokenization is our future
“[Tokenization] can be seen as the next logical step in digital recordkeeping and asset transfer. Tokenisation could dramatically enhance the capabilities of the monetary and financial system by harnessing new ways for intermediaries to interact in serving end users, removing the traditional separation of messaging, reconciliation and settlement.”
🔹 The BIS gives credit to crypto but makes it clear they hate it:
“Crypto and decentralised finance (DeFi) have offered a glimpse of tokenisation's promise, but crypto is a flawed system that cannot take on the mantle of the future of money. Not only is crypto self-referential, with little contact with the real world, it also lacks the anchor of the trust in money provided by the central bank.”
🔹 Unified ledger does not mean "one ledger to rule them all:"
Multiple ledgers – each with a specific use case – might coexist, interlinked by application programming interfaces (APIs) to ensure interoperability as well as promote financial inclusion and a level playing field.
Thoughts?
Takeaways:
—The BIS’s ultimate answer to the ultimate question is “unified ledger” and they’re right.
—Consider this very long-term: unlike other BIS projects that are usable in the short-term.
—That tokenization is the future is perhaps the most clear and compelling message in the ultimate answer!
—The BIS continues to think big, and I give them credit!
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3. CBDC interoperability
CBDC interoperability is key, but the WEF totally misses the plot by confusing “cause and effect.”
Download the WEF report: here
The WEF states that the potential EFFECTS of CBDCs are new currency alliances (multipolarity) and de-dollarization when they are the root CAUSE for CBDC issuance.
Don’t get me wrong; this is still a great read. The WEF does a good job of pressing the case for CBDC interoperability, even if it is a pipe dream. Did I say that?
I couldn’t agree more with the WEF’s conclusion that central banks must foster public-private cooperation with CBDC design, education, advocacy, and awareness.
Fatal ERROR
Still, the WEF is committing a fatal error by not acknowledging that the reason why many nations are exploring CBDCs is the desire for multipolarity and de-dollarization! The WEF is missing the plot if it doesn’t acknowledge that many countries see this as a benefit, not a risk!
Interoperability has to be considered from a domestic and international perspective. Within the domestic context, the interoperability of CBDC with existing payment systems is a necessary feature for widespread adoption.
Interoperability in the international context is very different. Given that CBDCs' first design priority is to work with domestic payment architecture, international interoperability will always take a back seat.
Pipe dream you say?
That’s why I call international interoperability a pipe dream. It's not bad, but for now, it's unreasonable to assume that nations will build CBDCs to a common standard. CBDC technology is “made to measure” for the country adopting it so its hard to imagine them talking to one another. Then there is the political side of CBDCs where countries don’t want their CBDCs to be interoperable!
Recognizing this, the BIS built common CBDC transfer platforms rather than promoting common CBDC standards. The platforms, “multi-CBDC bridges,” mBridge in Hong Kong, and Dunbar in Singapore provide transferability when platform-to-platform interoperability isn’t possible or unwanted.
The WEF sees CBDC Risks. I see these as reasons why nations build CBDC:
🔹 Geopolitical risk
The adoption of CBDCs may influence countries’ choices regarding financial alliances and partnerships. Countries seeking to reduce their exposure to geopolitical risks may seek closer relationships with countries or regions with similar goals and interests in CBDC adoption.
🔹 De-dollarization
If a CBDC gains international acceptance and trust, other countries could use it as a reserve currency, leading to a diversification of global currency reserves away from traditional reserve currencies like the US dollar.
The WEF truly misses the plot of CBDCs by proclaiming that de-dollarization and what many would call “multi-polar” currency relationships are risks. They are precisely why countries within the global south are building CBDCs! That the WEF refuses to acknowledge this in their report is stunning.
Thoughts?
Takeaways:
—CBDCs are coming and interoperability is important!
—The WEF confuses cause and effect with CBDC a major error.
—De-dollarization and multipolarity are CAUSES for building CBDC not the EFFECT.
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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