Blockchain for Banking News

UK Regulated Liability Network to experiment with digital pound as tokenized deposits

UK regulated liability network digital pound

Earlier this year, the Regulated Liability Network (RLN) made a big splash in the United States with trials involving several banks, Mastercard and the New York Federal Reserve. Now the UK Regulated Liability Network plans to experiment with a retail digital pound backed by commercial bank money or tokenized deposits. The RLN is a blockchain network for interbank payments and other digital assets. 

This is not the first piece of UK Regulated Liability Network work. Last year, EY coordinated another UK proof of concept for cross border payments. Like this one, it was a relatively low key affair in terms of publicity. 

However, we can confirm participants include the UK’s three largest banks, HSBC, Barclays and Lloyds. They were joined by Santander UK and Visa, with EY running the project on behalf of industry body UK Finance. Together, they published a paper today without mentioning the bank participants.

“We look forward to continuing this partnership to make all regulated money, all pounds and more, smarter for our customers,” said Peter Left of Lloyds Banking Group.

The RLN supports separate “partitions” or mini networks for each participating bank, as well as central banks. The idea is that interbank payments are settled using the central bank’s partition, but the UK RLN participants also considered other options.

In this Discovery Phase the UK Regulated Liability Network analyzed three use cases considering the business, technology, and regulatory requirements. The applications considered were a retail digital pound, wholesale B2B cross border payments, and securities settlement.

Retail digital pound chosen out of three use cases

Moving forward with the consumer payments use case for the Experimental Phase may not be the most obvious choice. However, a key rationale was the ‘functional consistency’ of money. The Bank of England has said it is more than 50% likely that there will be a decision to launch a retail central bank digital currency (CBDC), and third parties will provide programmability. Hence, unless commercial bank money is also programmable, a CBDC threatens to break the ‘uniformity’ of money in the UK. 

Our interpretation is with commercial bank money lacking programmability, a CBDC might prove attractive for corporates and consumers. Additionally, UK Finance has previously pushed back on the high holding limits of £10-£20,000 ($13-$26,000) that the central bank is planning for the digital pound CBDC. Hence, the RLN might help to level the playing field.

Barclays recently published a paper on this topic of functional consistency. Its analysis concludes that a financial market infrastructure should host the programmability function. It doesn’t name institutions, but that could include the RLN. 

Our interpretation is to achieve consistency, PayUK potentially might host the programmability aspect. Pay UK operates several existing UK payment infrastructures. And if it hosted the functionality, tokenized deposits and a CBDC digital pound could share the same programmability infrastructure. Extending that logic, Pay UK could operate the RLN.

Retail tokenized deposts will involve a large number of merchants participants, which would need to be simulated in the early stages. The RLN mentioned potentially building on the work from the Bank of England’s digital pound Project Rosalind

Tokenized deposits for cross border, securities settlement

Out of the three UK Regulated Liability Network use cases, wholesale cross border payments came last regarding feasibility. The RLN participants recognized the potential benefits of improved speed and cost, 24/7 availability and reduced risk. However, cross border payments are seen as more complex because of the need to involve overseas regulators.

A point not mentioned in the report is that at least three of the RLN participants – Barclays, Lloyds and Santander – are also involved in Fnality. That’s a UK-based infrastructure targeting token-based wholesale cross border payments using a different model to RLN. So, if RLN pursues the same use case, there would be quite a bit of duplication of purpose. But those participating in both projects also have a front row seat to the regulatory struggles. 

Fnality is also viewed as one of the potential RLN settlement assets alongside an API linked to the real time gross settlement system (RTGS), and a wholesale CBDC.

The third securities settlement use case also overlaps somewhat with Fnality. The RLN participants view it as attractive timing-wise because of the UK’s Digital Securities Sandbox. Specifically, the use case is to use the RLN for the post trade settlement of repurchase agreements (repos). Repo is currently amongst the highest traction use cases for regulated DLT.

Some of the advantages of using the RLN would include 24/7 liquidity, settlement efficiency and automated margining. But the involvement of non bank entities, such as central securities depositaries (CSD), pushed it into the medium feasibility category.

UK RLN is likely to use blockchain

Part of the Discovery Phase work included comparing whether to adopt a centralized or decentralized technology, arriving at a preference for DLT. The reasons given were tokenisation, integrity, transparency and privacy. 

A range of technologies were assessed, including Corda (R3), Adhara, Millicent, Quant, Polygon, Canton (Digital Asset), Setl and Knox. They also analyzed others such as Quorum, Parity and Hyperledger Besu. 

However, the participants didn’t share any decisions on the tech providers. We believe that Setl with Citi originated the RLN concept, and Setl and Digital Asset have been working on it for more than a year.

Image Copyright: Ledger Insights