UK Finance released the results of the experimentation phase of the Regulated Liability Network (RLN) which explores the potential for tokenized deposits and programmability. The banks involved were Barclays, Citi UK, HSBC UK, Lloyds Banking Group, Mastercard, NatWest, Nationwide, Santander UK, Standard Chartered, Virgin Money and Visa. The overall conclusion was the RLN provides a viable innovation platform, and the next step is to engage with regulators.
Numerous projects around the world are exploring tokenized deposits to support settlement for other tokenization solutions and to enable programmable payments, including conditional payments.
RLN business benefits
Five use cases were trialed, ranging from buying a home to the settlement of a tokenized bond. As tokenization use cases become more advanced, a key issue is their commercial viability. What are the benefits that are delivered, how much will it cost, and what are the potential revenue opportunities? The project found significant benefits and explored various revenue models. However, in order to be commercially viable, more use cases than those trialed would expand the range of transaction types. That would allow an earlier payback period.
There were 40 specific business benefits grouped into five higher level ones. The first was greater settlement efficiency, because of the interoperability between money and asset ledgers, which will translate to customer savings. Next, is the ability to address authorized push payment fraud (APP) which is a major issue in the UK. This happens where a payer is tricked into sending money to the wrong recipient, sometimes using a fake invoice. Another benefit is simplifying customer journeys, demonstrated in the home buying use case. Additionally, the solution will reduce the cost of failed payments and boost the economy owing to greater payment efficiencies.
On the legal front, the current legal system would support the RLN. However, there was some debate about structuring RLN as a Financial Market Infrastructure (FMI). Part of the discussion is the potential recognition of the RLN as a payment system while it is still developing. It will mean a heavy regulatory burden (and hence cost).
Tokenization benefits
The technical solution involved in the Regulated Liability Network experiments wasn’t just about tokenized deposits. There were two facets, the tokenization platform (developed by R3) and an orchestration and API layer (from Quant). One of the findings was that the latter can potentially provide a common point of access to all UK payment infrastructures, including for fintechs. It demonstrated a key goal to ensure interoperability across the different payment platforms and forms of money.
On the tokenization front, tokenized deposits can support programmable payments and locking and unlocking of funds. The trials also simulated interbank settlement using a variety of solutions, such as the real time gross settlement (RTGS) system, a wholesale CBDC and an omnibus account (like Fnality).
A network of networks model was used for the Tokenization Platform, allowing each bank to have its own application network. This supports significant transaction volumes, allows autonomy for banks and enables the incremental development of the larger network. However, at a practical level it made it tricky to showcase some of the benefits of a shared ledger.
“The RLN project has been a unique opportunity for industry collaboration to deliver a platform for innovation across the sector,” said Peter Left, Head of Digital and Markets Innovation at Lloyds Banking Group, and co-Chair of the RLN Project.
“Working in partnership, we have demonstrated how this platform supports developments in money and payments aligned to common public and private sector objectives, while also providing clear and long-term customer and industry benefits. We look forward to continuing to collaborate in public-private partnership to ensure the UK remains at the technological frontier of payments innovation globally.”
Other partners in the work were EY, Linklaters, DXC and Coadjute.
Stay tuned for follow up pieces over the next few days.
Ledger Insights Research has published a report on bank-issued stablecoins and tokenized deposits featuring more than 70 projects. Find out more here.
