The true utility of digital assets lies in their ability to reduce friction and boost efficiency, rather than to drive speculative gains. Realizing those benefits will be led by trusted, regulated financial institutions.
And it is becoming increasingly apparent that tomorrow’s financial infrastructure will most likely be underpinned by a combination of central bank digital currencies (CBDCs) and tokenized deposits representing deposit claims against commercial banks, among other types of digital currencies and tokenized assets.
In a sign of the times, a slew of major banks have come out with pilots or plans for tokenized deposit services.
JPMorgan Chase & Co., for example, which has run a system called JPM Coin since 2019 allowing corporate clients to transfer dollars and euros between their various accounts within the institution, is now exploring the use of tokenized deposits to speed up cross-border payments and settlement.
Last month, Citi Treasury and Trade Solutions (TTS) introduced Citi Token Services for its institutional clients. The service will integrate tokenized deposits and smart contracts into Citi’s global network, upgrading core cash management and trade finance capabilities. In addition to providing cross-border payments and liquidity on a 24/7 basis, it will also support automated trade finance solutions. In fact, it has already been used to demonstrate a digitized solution that serves the same purpose as bank guarantees and letters of credit.
Meanwhile, several Swiss banks, including UBS and Julius Baer are working to introduce a tokenized Swiss Franc under the aegis of the Swiss Banking Association. And South Korea’s Hana Bank and Woori Bank have said they are looking into tokenized deposits.
Moving to a Multi-Bank System
Though the tokenized deposit services of JP Morgan and Citi run on private/permissioned blockchains, a recent proof of concept (PoC) exploring the feasibility of a Regulated Liability Network (RLN) in the US shows a clear willingness for individual institutions to establish interoperable digital asset solutions on a multi-bank basis—using shared ledger technology to not only enhance their own services, but also the broader financial system in partnership with regulators and industry peers.
Spearheaded by Federal Reserve Bank of New York’s New York Innovation Centre (NYIC) – a partnership with the Bank for International Settlements – the RLN is a platform to bring together liabilities of both public and private regulated financial institutions.
The PoC was a success, with the RLN enabling value to move transparently between parties on a near-instant basis with 24/7 availability. Compared to traditional real-time gross settlement systems, it provides greater speed, efficiency, reliability and security. The biggest gains, however, were observed in cross-border payments, while the advantages over existing domestic payments systems were more modest.
Inclusive, Scalable and Readily Adoptable
Compared to proposed payments platforms based solely on wholesale CBDCs, the RLN is arguably more inclusive, scalable and readily adoptable. And crucially, it is compliant with all existing laws and regulations, functioning as essentially a blockchain-based settlement layer on top of today’s regulated financial network.
The participants on the RLN PoC included BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, Swift, TD Bank, Truist, U.S. Bank and Wells Fargo. While the PoC was limited to a single currency, the US dollar, the RLN could be expanded to support multiple currencies and tokenized assets, and potentially provide a platform to bring together more central banks and thousands of commercial banks from around the world.
This also points to a likely scenario for how digital assets’ potential to transform financial infrastructure will be realized. It will begin with banks enhancing client services using private blockchains. The benefits will then be magnified and expanded as those banks join shared multi-entity distributed ledgers.
Through this process of continuously building on foundations, blockchain technology will eventually transform global economies.
The first of those foundations is ensuring that the digital assets underpinning this infrastructure can be safely held and accessed. This has already been achieved, with the creation and broad adoption of bank-grade digital asset custody solutions, meeting the industry’s need for security, speed, scalability and flexibility.
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