The Regulated Liability Network completed its proof-of-concept phase on 6 July, proving it can achieve legal instant dollar settlement anywhere in the world.
The RLN is a wholesale payments project. At present, it is promising near instant global settlement of dollars, but Tony McLaughlin, emerging payments and business development at Citi, said during Thursday’s webinar that he envisages it encompassing other currencies and types of assets in the future. Even as a dollar settlement network, it goes further than wholesale central bank digital currency projects, which are essentially tokenised versions of 24/7 real-time gross settlement systems, because the RLN would include commercial bank money as well as central bank money.
Enabling 24/7 cross-border dollar settlement anywhere in the world would drastically improve the payments landscape, reducing risks and improving transaction speed, freeing up liquidity to be better used elsewhere.
This would help to cement the dollar’s status as the preferred currency for international trade and foreign exchange reserves. Multi-currency CBDC platforms like mBridge are springing up, seeking to give members a means of transacting locally without using dollars. However, with a global 24/7 dollar settlement system in place, there might be less demand for such systems.
The present system involves each institution maintaining its own ledgers and sending messages between them to update each other’s ledgers. Settlement takes place at the central bank level, also prompted by messages. The RLN would create a shared ledger where banks and central banks would be participants. Each participant, including the central bank, would mint and extinguish their own tokens to represent transfers within the network. This removes the messaging component, providing an opportunity for 24/7, automated transactions under the supervision of a financial market infrastructure.
While many blockchain projects claim to provide atomic settlement, the RLN working group argues that settlement is a legal notion, rather than technical, and as such is not simply a question of transferring value on the blockchain. That might be enough in a peer-to-peer unregulated space, but for financial markets, regulators are likely to consider FMIs a necessary component.
Perhaps the most exciting aspect of the RLN’s promise is that it offers an opportunity to test if distributed ledger technology can help improve the coordination of settlement. Many experiments with DLT seek either to replicate existing systems, or to create an entirely new system that does not align with the existing regulatory framework.
The RLN seeks to chart a middle course: creating a new trading system built upon the present system’s rules, making use of existing legal instruments without requiring a change in the legal structure.
As well as enabling near instant settlement, tokenisation delivers programmability, allowing the automation of complex, multi-party workflows, reducing risk and freeing up valuable liquidity to be more efficiently deployed.
Other projects that seek to apply DLT to traditional finance have typically focused on creating tokenised central bank money (CBDCs), tokenised private money (stablecoins or tokenised deposits), or tokenised versions of financial assets. All have a place within a tokenised economy, but creating them separately and connecting them relies on tricky pieces of infrastructure like interoperability bridges. Should the RLN fulfil its promise and expand to include other currencies and other financial instruments, creating one multi-asset network, this could prove a very powerful solution indeed.
The RLN working group has released three reports breaking down the legal, technical and business implications of the system.
Lewis McLellan is Editor of the Digital Monetary Institute, OMFIF.