The CBDC project is gaining traction, with the multi-asset settlement platform entering trials. UK Finance, the trade association for the UK financial services industry, has announced that the Regulated Liability Network (RLN) has entered an experimentation phase projected to run until summer 2024.
The initiative is spearheaded by eleven heavyweights from the banking and finance industry: Barclays, Citi, HSBC, Lloyds Banking Group, Mastercard, NatWest, Nationwide, Santander, Standard Chartered, Virgin Money, and VISA, with legal and tech support from, respectively, EY and Linklaters and R3, Quant, DXC, and Coadjute.
What is the Regulated Liability Network, and what is its goal?
Launched in 2022, the project seeks to impact the future of money and payments. It aims to explore the technical, legal, and business requirements necessary to enable programmable transactions in publicly and privately issued sovereign currencies – defined as regulated liabilities, i.e., "promises made by regulated entities to pay the customer on demand at par value in national currency units." Ultimately, the goal is to create a shared ledger platform for all regulated monies in compliance with existing regulations.
The current financial system is dominated by traditional players running their proprietary databases. While shared ledger technology (DLT), such as blockchain, can serve as a common platform for settlements, the legal and regulatory aspects are just as crucial as the underlying technology.
The RLN is exploring the potential to create a new financial market infrastructure that would enable finalizing transactions in both technical and legal sense of the word. All this, while leveraging the benefits of DLT, such as being always-on, multi-asset capabilities, and programmability.
How is the RLN related to the CBDC?
The RLN white paper discusses various types of digital assets, but its core focus is on regulated means of payment, with special regard for central bank digital currencies (CBDCs).
The chapter analyzing the RLN benefits states the following: "If the sovereign currency system is to adopt shared ledger technology, then interoperability should be an important consideration. The emergence of CBDC, bank coins, and stablecoins as separate islands may not lead to an efficient market structure." The bottom line is that the platform should include support for CBDCs as key assets for final settlements.
As keenly observed by Tom Nuttall, a capital markets expert from Baringa, a London-based business management consultancy, in an analysis on the company's website, "Central Bank money initiatives are running the world over and the RLN will need to align with these networks if it is to succeed in global adoption. Any design of RLN for the UK should consider future global interoperability, and therefore be in conjunction with the Digital Pound consultation on retail Central Bank Digital Currency (rCBDCs)."
The RLN and the programmability of money – CBDC supercharged?
Obviously, the platform aims to accommodate a number of other assets, such as those of regulated non-bank institutions, including e-money providers and regulated stablecoin issuers. Apart from digital money, the types of assets under consideration include debt, equity, and other regulated instruments.
Another feature highlighted in the white paper is the programmability layer across the digital assets represented within the system. In B2B transactions, it could enable conditional payments and future dated payments dependent on specified events. There are use cases that should be considered more carefully though, especially those involving citizen–government interactions.
The programmability of money has long stirred anxieties regarding governments' influence on citizens' financial activity. The ability to directly control taxpayers' sources of income and buying decisions would be a powerful tool in the hands of authorities eager to overstep their institutional and constitutional prerogatives – a common affliction nowadays.
Key use cases and focus areas of the RLN trials
The ongoing trials focus on three use cases:
- on-delivery payments for physical products bought at online marketplaces with a view to curbing fraud,
- home buying process enhanced with regard to fighting fraud related to the conveyance of property,
- digital bond settlement, providing a link between digital customer money and digital assets.
The experimentation will cover three critical areas, namely:
- customer and business benefits – by exploring the "foundational capabilities," in which, the press release states, it will align with Project Rosalind, the BIS's and Bank of England's foray into programmable retail CBDC,
- technical viability – by creating a sandbox to test the proof of concept, evaluating the functional and non-functional requirements of the RLN's design,
- legal framework – by determining how current laws and regulations would apply to the operation of a shared ledger-based settlement system.
