A group of technology experts within banks and tech companies designed an anti-Bitcoin. It is an architectural representation of a distributed ledger that captures many of the concepts behind bitcoin. But instead of existing outside the government and existing banking system, as bitcoin and many other cryptocurrencies do, this version will be used by central banks, traditional banks and some fintechs and will be fully regulated.
The idea is to counter the rapid rise of unregulated digital currencies with a validated and controlled form of the digital dollar, and along the way help modernize many of the aging payment rails and other technology platforms used in financial services.
“The impetus for this was that the debate over the future of the digital dollar was turning into a sort of Ping-Pong battle between central bank digital currencies and stablecoins,” said Tony McLaughlin, head of emerging payments and business development. Citi Treasury & Trade Solutions. “It’s like the choice is really between centralizing everything with a central bank or having unregulated wild stablecoins. And that seemed like the wrong choice.”
McLaughlin and several colleagues at other banks, including TD, Wells Fargo and US Bank, have developed a shared ledger scheme where digital dollars issued by governments can coexist with digital dollars issued by banks and private companies such as PayPal and Square. The group published one white paper It describes a system they call the Regulated Liability Network.
It starts with first principles, McLaughlin said: Is a dollar just a dollar in your pocket, or a coin? Or is it a deposit in a bank or a balance in a fintech wallet?
“The concept of a regulated liability network is, yes, let’s have a programmable digital dollar, but not limit it to central bank money,” McLaughlin said.
Public blockchains like Ethereum run 24/7 and are programmable and highly active. Bankers want to see these virtues harnessed in a regulated financial system through the adoption of shared ledger technology.
“We cannot afford to ignore or try to contain this technology,” said Jon Prendergast, head of US payments strategy for TD Enterprise Payments and a contributor to the Regulatory Accountability Network’s white paper. “Blockchain is one of the most revolutionary, brilliant technologies to exist in ages. But using it in a way that seeks to avoid any regulatory oversight by a sovereign government is just a non-starter. The government will ultimately disagree. This technology should be used outside of its sphere of influence.” .
On the other hand, the group wants to limit digital dollars to regulated entities.
“Cryptocurrencies and stablecoins could replace sovereign money if allowed to develop outside of regulation,” the white paper says. “They can undermine an important instrument of national self-determination and negatively affect financial stability.”
Outside experts see promise in the idea.
“It’s a very interesting idea that deserves to be explored,” said Timothy Massad, a researcher at Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government. “What’s interesting is that he’s trying to bring shared ledger technology together with sovereign currencies and what I call a regulated financial system. He’s basically saying, if shared ledger technology has advantages, why can’t it be used” for sovereign currencies and other traditional assets ?
Like the bankers involved, Massad said such a shared ledger could make the US financial system more efficient.
“One of the things that is true about our financial system is that many institutions spend a lot of time reconciling the same data set and common ledger technology,” he said. “It’s probably a way to reduce the cost of that, to create a golden record of information. If it can also be a transmission mechanism, that’s a promising approach.”
Prendergast also sees this work as part of efforts to modernize the financial system.
“Most systems that support payments have been around for generations. “If you think about card rails, if you think about wiring, they’ve been around for generations, but nothing lasts forever. And so it’s real-time systems that have recently come out with the ISO 20022 format, or systems like that. It’s a distributed ledger-based, evolving and there will be new platforms that dominate the movement of money and the transfer of value.”
Prendergast and TD “want to make sure that we’re dealing with these new forms of money and these new platforms and how we’re able to inform how they’re built and structured, but also how to make sure we’re not left behind.”
RLN can operate 24/7 and enable the instantaneous movement of value across borders between organizations or large companies.
“There are aspects of this concept that can solve problems for our customers, and that’s what we want to do,” Prendergast said.
Giving the government a role
Banks already use shared distributed ledgers in several cases. Tassat announced this in October three banks had started using its distributed ledger for corporate payments, among others: Cogent Bank, Clients Bank and Western Alliance Bank. The Provenance Blockchain FoundationThere are 50 member banks created by Image Technologies that use a shared distributed ledger for mortgage transactions and transactions between corporate clients.
A key difference of the Regulated Accountability Network from these existing efforts is the involvement of a government agency.
“If it wasn’t regulated, we wouldn’t be dealing with it because ultimately it doesn’t end well,” Prendergast said. “The goal was to expand the right use of technology to make money flow and transactions more streamlined and efficient for customers. It’s the ability to take what bitcoin does in a test-tube environment and apply it in a test-tube environment. It’s a broader and more stable financial environment”.
The most powerful use cases
Prendergast said another priority for the initiative was that it had to solve the problem. But consumer payments don’t have a problem that needs a new digital solution.
“Do I need another solution to get coffee?” McLaughlin said. “I don’t.”
Prendergast noted that using this ledger to create digital dollars that go directly into a consumer’s wallet can be difficult from a privacy perspective, as ledger owners can see exactly where consumers’ money is going.
A major use case for RLN would be cash management for large corporations.
“Corporate cash management is a notable use case because it’s a place where programmable dollars can be extremely powerful, but it’s not a use case that can be easily supported by CBDC or stablecoins,” McLaughlin said.
According to him, US corporations have about 2 trillion dollars offshore, money often needs to be transferred between subsidiaries.
“For example, today if a multinational corporation wants to move dollars from a subsidiary in Hong Kong to a subsidiary in Australia, it cannot do that between different banks on a 24/7 basis,” McLaughlin said.
A CBDC would not fit this purpose because corporate cash management with CBDCs would require transferring all corporate cash to the Fed and removing it from the balance sheets of commercial banks.
Stablecoins also do not work for this purpose, as they are unregulated and not all equal to cash.
RLN could potentially be used for other things later.
“We’ll see how this develops as the white paper gets read and people start thinking about it,” Prendergast said. “The first thing for us as US banks is to try it at some point and make a case that we think there’s value here. Then refine it and grow from there.”
How RLN will work
The Regulated Liability Network is technology neutral, McLaughlin said.
“It doesn’t specifically promote blockchain or distributed ledger technology,” he said. “But they say, are there attributes of general ledgers that might be valuable to import into a traditional financial system?”
Several forms of digital dollars would coexist in the same ledger.
One type of central bank money is digital versions of dollar bills and coins. In the United States, these are obligations of the Federal Reserve Bank. Consumers and businesses cannot have accounts at the Fed at this point, but banks can.
The second type is money deposited in commercial banks.
“It’s the dominant form of digital money right now,” McLaughlin said.
The third type is what McLaughlin calls “e-money” issued by regulated fintechs — such as PayPal balances and Square Cash balances.
All these are promises to be paid by various institutions: a central bank, a commercial bank or a regulated non-bank. They can all live and interact in RLN.
Then there is non-sovereign money like bitcoin that lives on the bitcoin blockchain and cannot work with RLN.
“Bitcoin’s ideology is that money does not belong to a nation-state,” McLaughlin said.
And there are unregulated stablecoins. These too would not be available in RLN yet. If stablecoins are regulated, they can live on the network, McLaughlin said.
According to him, this ledger will be managed through the financial market, a regulated entity created as part of a public-private partnership. This is similar to CLS Group in New York, which is monitored by regulators around the world and can achieve settlement finality, meaning transfers in CLS and RLN will be legally final.
RLN disarms some potential drawbacks of CBDCs, McLaughlin said.
“What people don’t like about CBDCs are deposits and transactions going into the central bank because that can affect credit creation,” he said. “The RLN structure solves this problem by keeping money in personal balances where it can help lend to the economy.”
In RLN, central bank digital currencies act as settlement assets. If a person or company banking with Wells Fargo pays another person or company banking with Citi, “you’re instructing your bank to pay using your tokens, in other words, a different form factor of your bank balance.” McLaughlin said. “That means it must be subject to FDIC insurance, protected by banking regulations and protected by the capital that a commercial bank must maintain.”
To facilitate the $100 payment, RLN will extinguish the Wells Fargo token and issue a new Citi token, meaning Citi owes the buyer $100. And then it will transfer wholesale CBDC from Wells Fargo to Citi because Citi will only accept the new liability if it receives a matching asset.
According to supporters, this new network could affect the future of the US dollar.
“We don’t want transactions with other currencies to be easier than the US dollar,” McLaughlin said.