Today, the Federal Reserve’s New York Innovation Center (NYIC) and ten financial institutions shared the results of the Regulated Liability Network (RLN) proof-of-concept (PoC). The test successfully tested commercial bank deposit tokens and a wholesale central bank digital currency (wCBDC) on a shared DLT infrastructure.

The testing approach included US dollar payments both domestically and 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 made through messages, and each bank updates its ledgers separately. By using distributed ledger technology, messaging and settlement are unified, reducing the lengthy reconciliation process.

In addition, an RLN interbank payment could simultaneously update both bank records and the movement of funds between banks at the central bank.

The RLN aims to take advantage of the cost and speed savings of tokenization and the new business models enabled through programmable money. However, to date, most bank tokenization initiatives have functioned as islands and RLN’s goal is to make them interoperable.

This PoC focused on single-currency payments, but future testing could expand to tokenized assets and multiple currencies.

RLN PoC Key Findings

While both use cases turned out to be successful, the advantages of national payments over existing systems were harder to see. While smart contracts were used, the limited scope of the test meant there was no opportunity to take full advantage of them.

In contrast, transparency, speed, and 24/7 availability for cross-border payments shined.

“The prospect of a global, instant US dollar payment system that could benefit cross-border arrangements deserves further study,” said Citi’s Tony Mclaughlin, who first pioneered the RLN concept. “It is important that the regulated financial sector give serious consideration to the latest technologies to help ensure that the global digital economy can thrive responsibly.”

“Our large US-based corporate clients have a global operating footprint and the USD is their primary operating currency,” said Wells Fargo’s Arushi Sood Joshi. “Liquidity trapped in hundreds of accounts is not only a matter of efficiency, but also adds counterparty risk to treasury operations. The ability to move cash freely 24/7 through a company’s banking network will be a game changer.”

A legal workflow 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 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 its own partition, as do one or more central banks. If a Citi corporate customer pays a company that does banking at Wells Fargo, the amount is deducted from the payer’s Citi deposit token balance. At the same time, in the Federal Reserve partition, the same amount is deducted from Citi’s wCBDC balance and added to Wells Fargo’s wCBDC balance. For the receiving company, additional Wells Fargo deposit tokens appear in their wallet. All this happens simultaneously.

For one thing, the RLN is such a big idea that it won’t be easy to carry out. There are no formal plans to proceed with the PoC working group. Instead, it’s a matter of seeing the response to the research released 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 an investigation and does not reflect any policy direction. However, when the likes of the BIS start talking along very similar lines, that’s the right friend to have on your side.

A public webcast will take place today at noon ET.

Participants: The full list of participants was: BNY Mellon, Citi, HSBC, Mastercard, The New York Innovation Center at the Federal Reserve Bank of New York (NYIC), PNC Bank, Swift, TD Bank, Truist, US Bank, and Wells Fargo. . The technology was provided by Digital Asset and SETL, hosted by Amazon Web Services. Legal services were provided by Sullivan & Cromwell LLP, and advisory services were provided by Deloitte.