Blockchain and Crypto

Feedback on the Regulated Liabilities Network: Financial services is one step closer to a use case for blockchain

  • The Fed’s New York Innovation Center spent 12 weeks testing a regulated liability network, which adds a shared ledger for settlement on top of existing infrastructure.
  • Along with some of the US's top banks, the PoC found it feasible that a system like this could enable 24/7 dollar-denominated transactions globally.

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Feedback on the Regulated Liabilities Network: Financial services is one step closer to a use case for blockchain

In November 2022, some of the biggest names in US banking came together to collaborate on a proof of concept for a regulated digital settlement platform of US dollars. Now, the results are in and they seem promising.

The PoC tested a version of a Regulated Liabilities Network (RLN) that operates exclusively in US dollars. Commercial banks issue simulated digital money or “tokens” -- representing the deposits of their own customers -- and settle through simulated central bank reserves on a shared multi-entity distributed ledger. No real money moved through the system -- just simulated data. The Regulated Liabilities Network used a private blockchain, as opposed to a public one, like Bitcoin or Ethereum.

The project looked at two use cases: interbank payments and cross-border payments. The results were shared Thursday in a ZOOM session with the media and again with the general public.

Essentially, the RLN is a distributed ledger settlement layer on top of today's regulated financial network. Combining public and private collaboration, Citi, Mastercard, and other banks joined the New York Fed's Innovation Center, as well as SETL and Digital Assets on the project.

“The RLN U.S. POC brought together public and private sector participants to explore the application
of shared ledger technology to the regulated financial system. The ‘tokenization thesis’ holds the
intriguing possibility to process financial transactions on a 24*7, multi-asset, programmable
infrastructure," said Tony Mclaughlin, Emerging Payments & Business Development at Citi
Treasury & Trade Solutions, in a statement.

"We have been greatly encouraged by the business, legal and technical findings. In particular, the prospect of a global, instant U.S. dollar payment system that could benefit cross-border settlements merits further serious study. It is important for the regulated financial sector to strongly consider the latest technologies to help ensure that the global, digital economy can flourish in a responsible manner,” he said.

RLN looked at shared ledger technology as an additional layer to existing infrastructure, and not to replace it. The project explored the business cases, technical aspects, and legal framework to assess whether this type of structure could work in real life.

While no further commitment to the PoC was made at this point, there are still more broad areas to explore. For example, a multi-asset liability network would be quite interesting, including securities along with dollars, in contrast to the settlement network we have today which only includes currency. Also, the RLN could include other currencies besides the US dollar, a network with central bank money from multiple countries to update all the balance sheets of multiple constituents in a transaction, all at the same time with legal finality.

Participants in the PoC said building and deploying a system like this could be 3 to 5 years away.

“From a central banking perspective, the proof of concept was conducive to exploring tokenized
regulated deposits and understanding the potential functional benefits of the central bank and
commercial bank digital money operating together on a shared ledger,” said Per von Zelowitz,
Director of the New York Innovation Center, in a statement.

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