July 10, 2023

RLN Pilot Signals Important Step Forward for Tokenized Deposits

Pilot highlights opportunity for tokenized deposits.

Large bank test highlights opportunity for tokenized deposits.

On Thursday, participants in the Regulated Liability Network (RLN) announced the completion of their initial pilot. The findings of this test demonstrate the powerful potential for tokenized deposits to modernize our payments infrastructure. The pilot also highlights a growing consensus among banks on the features, functionality, and regulatory conditions necessary to implement interoperable blockchain payments infrastructure.

The approach taken in the RLN pilot is consistent with the approach that USDF and our member banks have taken. We believe it is critically important that banks of all sizes have access to the latest technology. We plan to stay close to this group going forward and believe USDF is a clear path for banks of all sizes to participate in the development of this shared ecosystem.

The announcement from the RLN participants includes three reports on the business case, technical infrastructure, and legal analysis conducted as part of the pilot. Each report is worth a close read, but a few key points should be highlighted:

First, real-world applications matter. Tokenization holds tremendous promise to improve the delivery of financial services. Financial innovation adds value only when it helps facilitate real-world economic activity like buying capital goods, hiring employees, or purchasing a home. Early applications of blockchain technology came from novel cryptocurrency markets, which remain isolated from the real economy.

The RLN pilot highlights the value of leveraging this technology to power traditional banking applications. In particular, the pilot highlights the potential for improving cross-border payments through the creation of a global, real-time, 24/7 payment rail to settle USD transactions. This can help supercharge the role that the US Dollar plays in global transactions, ensuring its continued role as the global reserve currency.

Second, public/private partnerships are key to progress. Efforts to modernize money or payments in the United States should be undertaken through public/private partnerships that leverage the way money exists in our economy today. Today, 73% of money in the United States is held in the form of bank deposits. These deposits play a critical role in funding loans that drive economic growth across the country. Bank deposits are supported by wholesale payment rails operated by both the private sector and the government to facilitate the secure movement of money to all parts of our economy.

By implementing blockchain infrastructure, we can improve the functioning of this system while maintaining the numerous protections and benefits that our two-tier banking system provides today. This stands in stark contrast to CBDC initiatives in other countries like China, where the government has pushed ahead without industry, implementing new forms of digital money that threaten both privacy and credit creation.

Third, new technology does not fundamentally change the nature of banking assets and liabilities. At the end of the day, blockchain is a ledger technology. Banks have long relied on ledgers to record value and facilitate transactions. Over the years, this technology has evolved from paper-based ledgers, to on-premises servers, to cloud infrastructure, and now blockchain.

The pilot included a legal analysis that shows that the use of a novel ledger technology to record liabilities like deposits, should not change the underlying legal nature of those deposits. This is an important distinction that will help provide regulatory clarity as banks adopt blockchain technology.

Fourth, design matters. The pilot included a technical report that highlighted key features and functions necessary for the successful operation a payments network and demonstrated that blockchain infrastructure can meet these needs. Technical alignment is critical as the banking industry works toward building interoperable systems. Clear criteria to evaluate infrastructure will also be helpful as banking regulators seek to articulate expectations for the safe and sound implementation of this novel technology.   

The report evaluated the following key attributes:

To read the full reports visit the RLN Pilot Page.