Marten Nelson, Co-Founder & CEO, M10 Networks
Here’s a good question: Can digital currency (DC) thrive within the two-tier monetary system that banks use the world over? After all, the current system has stood the test of time and is used by, well, everyone. Tearing it apart and trying to replace it with, say, a cryptocurrency makes little sense. How can we realize the promises of DC without throwing the baby out with the bathwater?
Earlier this year, Citi published a paper entitled “The Regulated Internet of Value” (the “Citi Paper”). In it, Tony McLaughlin, Head of Emerging Payments and Business Development at Citi’s Treasury and Trade Solutions, makes a case for settling the ongoing tug-of-war between proponents of stablecoins and those who favor central bank digital currency (CBDC) with a third option: the creation of a Regulated Liabilities Networks (RLN). As he explains: “Tomorrow’s money needs to be global, so we may envision a constellation of interoperable Regulated Liability Networks each founded on national currencies and supervised by local regulators.”
McLaughlin is right on this account. If tokenization really is the best way to store and transfer digital value, as the Citi Paper suggests, it’s important that the regulated finance sector take a unified approach to avoid fragmentation and promote functionality. And perhaps, more importantly, to prevent transactions from migrating to the unregulated sector and putting our current system on the back burner.
According to the Citi Paper, pursuing tokenization in lockstep would allow central banks to expand beyond CBDC projects and include tokenization of all regulated liabilities. McLaughlin believes this would effectively “overcome a potential downside, which is the disintermediation of private regulated entities”. He suggests that this broader focus on regulated liabilities “brings the benefits of tokenization without the adverse consequences. It upgrades regulated money, which today only exists in account-based format.”
What McLaughlin doesn’t appreciate, however, is that systems like this are already up and running in the pilot phase with banks around the world.
Several central banks (think: China and the Bahamas) have made great strides toward issuing digital currency on their own. Others have realized the value in embracing alternative ways to deliver the benefits of tokenization without actually issuing digital currency to residents. Afterall, if a central bank can avoid opening Pandora’s Box and still offer the benefits of CBDC, such as 24/7 access to banking services and fast, cheap, and easy cross-border payments, it will truly have located the Holy Grail. Emerging models for digital money make this possible – and are closer to bringing an RLN to life than McLaughlin might suspect.
The Citi paper rightly notes that maintaining a stable economic environment with sound monetary policies requires safe digital money that must be: “(a) regulated, (b) redeemable at par value on demand, (c) denominated in national currency units and, (d) an unambiguous legal claim on the regulated issuer.”
Unlike cryptocurrencies such as Bitcoin, regulated liabilities include central bank money, commercial bank money, and electronic money since they all live on the balance sheet of the relevant regulated financial institution. An RLN would also allow stablecoins to be incorporated into the current financial system as regulated liabilities. By design, the transfer of money in a network of regulated liabilities will be in favor of verified legal persons, reducing the risk of financial crimes, and would be conducted through the transfer of tokens. These transfers are done through entries on a private ledger maintained by the bank, and not using bearer instruments. Consider the following definitions from the Citi Paper:
- A token in a central bank wallet is a liability of the central bank
- A token in a commercial bank wallet is a liability of the commercial bank
- A token in an E-money wallet is a liability of the E-money issuer
“The legal meaning of the token is given by its location of the wallet in which it resides. When a token is at rest in a wallet controlled by an institution, then it is on the balance sheet of that institution as a liability in favour of the token holder.” By contrast, Bitcoin payments are conducted as a digital form of a bearer instrument.
Today, emerging models for digital money have harnessed the power of blockchain technology to express tokenized liabilities on the same shared ledger. This shared ledger represents the best of both worlds, creating digital money that is ‘always on’, instant and programmable, global in scope, but regulated by a sound banking system.
In fact, a shared ledger system enables both central bank money and commercial bank money to be tokenized. Furthermore, it allows transactions to settle instantly since banks on the system are transacting using tokenized central bank balances on shared ledgers. The platform would support multiple regulated liabilities. To address data sovereignty, there would be one ledger for each currency and it would host multiple types of liabilities for that currency. Banks can have positions on multiple ledgers. The ability for a bank to debit a position on one ledger and credit the balance on a different ledger enables cross-border payments.
And the best part? It all fits neatly within the two-tier monetary system.
The Citi Paper is an essential contribution to payments literature, providing the first public articulation of how an RLN can address the very real challenges of integrating digital money into our current financial framework. Yet, while McLaughlin states that creating such a network may seem like a “pipe dream,” at M10 Networks we’re already well on the way to bringing the vision to life for central banks and commercial banks around the world.
Transact365 launches seamless cross border payments in India
- Transact365 enables merchants to transact locally in India
- Merchants can partner directly with Transact365 without needing to source local partners
- Transact365 offers two local solutions – Unified Payments Interface (UPI), and NetBanking
UK-based fintech Transact365 has added local India payments for merchants. By using Transact365’s gateway solution, merchants can access new opportunities in India without having to form local payment partnerships or establish an Indian company. The move ensures merchants now have access to over one billion Indian-based consumers enabling them to pay faster in a familiar way.
Transact365 offers two local solutions tailored to the needs of the Indian market – Unified Payments Interface (UPI) and NetBanking.
Developed by the National Payments Corporation of India – UPI is an instant, real-time payment system that facilitates inter-bank transactions through smart phone devices, powering multiple bank accounts into a single mobile application of the 274 participating banks. UPI facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions.
NetBanking is a unique payment method facilitating online payment transactions in India. When a user makes a payment via NetBanking, the payment is initiated via the Transact365 gateway which allows the user to complete the transaction with the merchant in realtime in local currency.
Transact365 has also established a local payment distribution allowing merchants to pay clients in India in real time with fully automated api connectivity 247 365 Days a year.
Transact365’s launch in India is the first in a series of big market expansions planned for 2022. Having already expanded into Europe, Asia and Australia, Transact365’s payment gateway system ensures merchants of all sizes and sectors can access fast-growing markets seamlessly and quickly.
Dan Fernandez, CEO of Transact365, said: “We are pleased to announce that merchants can now use Transact365 to process payment transactions in India. By utililising local payment solutions, Transact365 ensures merchants can now facilitate payments in India, with users able to confirm their payment in a matter of seconds.
“Our expansion into India comes at an exciting time for the company. With customer and merchant demand for payment gateways rising, Transact365’s revolutionary system ensures more businesses are able to access consumers in rapidly expanding markets. Importantly, our launch in India will soon be followed by similar market expansion announcements throughout 2022.”
Europe’s first blockchain neobank, BENKER, opens for pre-registration
BENKER(http://www.benker.io/) is to become the first officially licensed blockchain neobank launched in Europe following approval by the Bank of Lithuania under the Electronic Money Institution (EMI) category. Now open for pre-registration, it is the first financial services provider in the European Union to operate entirely on blockchain.
The neobank will run on Natrix(https://natrix.io/), a purpose-built hybrid blockchain created for the financial sector to meet all GDPR, bank secrecy and regulatory requirements. BENKER will achieve the highest level of Compliant Client Autonomy, where users have complete control, autonomy and real freedom, assuring sustainability of the market where users and financial market participants are on the same level.
Viktor Bodnár, CEO of BENKER, hopes that the neobank will be a catalyst for fundamental transformation in personal finances, offering customers greater autonomy. On his vision for the future of the market, he said: “We’re introducing a new brand in financial services that can challenge the established order by extending existing legal and regulatory safeguards with the advanced technology-based guarantees achieved through blockchain. In obtaining our EMI licence we have been allowed to radically diminish client exposure to the actors of financial markets, and I see this as a move towards the ‘New World Order’.”
“By adding blockchain to the way in which customer accounts are managed securely, we are offering constant transparency, traceability and complete control over financial matters for our clients, creating the highest level of freedom. This is what we’re calling Compliant Client Autonomy and it’s an idea that is at the heart of BENKER.”
Following a two-year planning, development and application phase, and now with its EMI licences receiving full approval, the neobank will offer services for both individuals and SMEs, and a platform on which to buy and sell gold.
Bodnár finished: “We’ve worked hard to create a fully compliant and secure blockchain neobank, and I’m delighted that it is now going live in 2022. The result is a system in which clients and service providers are finally on the same level, and within all legal and regulatory requirements. This will make managing personal finances in the future more efficient than ever.”
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