Digital Money is Coming!
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In this newsletter, we explore the transformative potential of tokenisation and how it's poised to revolutionise the monetary system. Tokenisation, the process of representing claims digitally on a programmable platform, is the next logical step in digital recordkeeping and asset transfer. It promises to bring unprecedented levels of portability, versatility, and programmability to money, enabling it to seamlessly integrate with various digital environments. ????
Throughout this newsletter, we'll provide you with a solid understanding of tokenised money, also known as digitally native money. We'll share insights on the key initiatives being undertaken by the Bank of England, Commercial Banks, and Mastercard to bring this new form of digital currency to life. These developments set the stage for innovative 24/7 property transactions, which we'll explore in greater detail in the up-and-coming newsletter on digital completion.
Let's get started! ????
?? What is Money
Before we explore tokenised money, let's revisit the fundamentals of money itself. Money exists in two primary forms: central bank money and private money. Central bank money, a liability of the central bank, is available to the public as cash and to commercial banks as central bank reserves. Private money, on the other hand, mainly takes the form of deposits in commercial banks, created when these banks make loans to households and companies. ????
Money serves three crucial functions in the economy: as a Medium of Exchange, a Store of Value, and a Unit of Account. The Bank of England plays a pivotal role in establishing and maintaining sterling as the unit of account for virtually all transactions in the UK economy, thereby anchoring the monetary system. Understanding these basic concepts is essential as we navigate the evolving landscape of tokenised money.
?? A More Useful Form of Money
My personal journey into the world of new forms of money began with my first cryptocurrency purchase in 2017. The idea of programmable money that could operate based on specific circumstances or events was incredibly appealing, offering a level of dynamism far beyond traditional bank account balances. Holding cryptocurrency on a USB stick felt more tangible and personal than digits in a bank account, akin to the sense of control and responsibility that comes with holding a ￡50 note. ????
However, the cryptocurrency experience also exposed me to the challenges of volatility and lack of regulation. The value of my cryptocurrency holdings could fluctuate wildly, and I found myself vulnerable to scams and market instability as a retail user. Unbeknownst to me at the time, the following seven years would witness the emergence of regulated tokenised money, offering the benefits of programmable cryptocurrencies without their inherent instability. In this newsletter, we look at regulated tokenised money and its potential to revolutionise our financial landscape. ????
?? What is Tokenised Money
To understand tokenised money, let's turn to the insights of Andrew Bailey, Governor of the Bank of England. In his "New Prospects for Money" speech in 2023, Bailey described enhanced digital (tokenised) money as a unit of money with the added capability to execute a wide range of actions through smart contracts. These actions can range from simple to highly complex, expanding the functionality and utility of money without altering its intrinsic nature or "singleness."
Building upon Bailey's perspective, we can define tokenised money as 'a digitally unique, executable object that is immutable, ownable, and transferable, representing a unit of money.' This definition highlights several key attributes of tokenised money:
Tokenised money leverages blockchain technology for enhanced security, efficiency, and programmability, opening up a world of possibilities for financial innovation and integration with digital environments.
?? The Internet of Value (2012)
The concept of an "Internet of Value" can be traced back to Ripple, a global system for real-time settlement, currency exchange, and remittance launched in 2012. Developed by Ripple Labs Inc., Ripple provided a distributed open-source protocol supporting various tokens, including fiat currencies and cryptocurrencies. Its main cryptocurrency, XRP, was designed for quick, secure, and low-cost international transactions.
However, Ripple's journey has been marked by significant regulatory challenges, particularly regarding compliance with financial regulations. In December 2020, the U.S. Securities and Exchange Commission (SEC) sued Ripple Labs and its top executives, alleging that XRP tokens were sold as unregistered securities. This lawsuit highlighted the ongoing debate surrounding the classification of certain cryptocurrencies as securities under U.S. law. ????
The Ripple case underscores the importance of regulatory clarity and compliance in the development of tokenised money and digital currencies. As we move forward, striking a balance between innovation and regulation will be crucial to fostering a stable and trusted environment for the growth of the tokenised economy.
?? Central Bank Digital Currency (CBDC)
Central Bank Digital Currencies (CBDCs) have emerged as a prominent topic in the world of tokenised money. The Bank of England has been at the forefront of exploring CBDCs, with early discussions dating back to 2014. A notable milestone was a Bank of England video titled "The economics of digital currencies" on YouTube, showcasing bank representatives discussing Bitcoin and its potential implications.
Over the years, the Bank of England has continued to go deeper into the potential of CBDCs. In March 2016, Ben Broadbent, in a speech at the London School of Economics, emphasised the significance of digital currency innovations and their potential economic implications.
In March 2018, Bank of England Governor Mark Carney further discussed the future of money, focusing on CBDCs and their potential to transform the economy.
A pivotal moment occurred in March 2020 when the Bank of England released a discussion paper on CBDCs, proposing an electronic form of central bank money for payments by households and businesses. This was followed by Project Rosalind in 2023, a collaboration between the Bank of England and the Bank for International Settlements Innovation Hub to develop and test a prototype CBDC infrastructure. ????
The Digital Pounds Consultation in Jan 2024 marked another significant milestone, with the Bank of England responding to 50,000 public responses regarding the potential introduction of a digital pound. The consultation highlighted ongoing concerns and prompted the Bank of England and HM Treasury to propose measures to regulate a digital pound, including legislative measures, privacy protections, and access to cash.
While no definitive decision has been made on a CBDC in the UK, the growing belief is that its introduction is inevitable, given the recent pace of development. As we navigate this new era of digital currencies, striking the right balance between innovation, regulation, and public trust will be paramount.
?? Facebook Coin (Libra)
The release of the Libra white paper by Facebook in June 2019 marked a significant moment in the world of digital currencies. While previous digital currencies like Bitcoin and Ethereum had garnered public attention and substantial investments, they were largely seen as secondary to sovereign currencies, without posing a significant threat to traditional financial systems.
However, Libra represented a departure from this perception. Facebook's extensive user base, with 2.1 billion individuals using its array of services daily, including Facebook, Instagram, WhatsApp, and Messenger, combined with its substantial revenue, emerged as a potential challenge to commercial banks. The prospect of a digital currency backed by a tech giant with such a vast reach and financial resources sent shockwaves through the financial industry.
The emergence of Libra accelerated the move towards digital or tokenised commercial bank money and hastened progress in Central Bank Digital Currencies (CBDCs). It served as a wake-up call for the sovereign banking sector, highlighting the need to explore digital money options and adapt to the changing landscape of financial technology.
However, Facebook's venture into digital currency also attracted significant regulatory attention. The Libra project, later rebranded as Diem, faced intense scrutiny and regulatory hurdles. Concerns regarding regulatory compliance, consumer protection, and potential risks to financial stability led to the project's ultimate discontinuation in January 2022. ????
The rise and fall of Libra underscore the complexities and challenges involved in introducing a new digital currency into the financial market. It highlights the importance of regulatory compliance, stakeholder collaboration, and a thorough consideration of the potential impacts on consumers, businesses, and the broader financial system.
As we move forward, the lessons learned from the Libra experience will undoubtedly shape the development of tokenised money and digital currencies. It serves as a reminder of the need for a balanced approach that fosters innovation while prioritising stability, security, and regulatory compliance.
?? Regulated Internet of Value
In June 2021, just a year after the release of the Libra white paper, Tony McLaughlin, who leads Emerging Payments and Business Development, Treasury and Trade Solutions at Citi, published a blog post entitled "The Regulated Internet of Value." This blog post assessed the transformative potential of Distributed Ledger Technology (DLT) for the future of digital finance.
McLaughlin's vision outlined a future where the tokenisation of digital value, particularly regulated liabilities such as central bank money, commercial bank money, and electronic money (e-money), could significantly enhance the efficiency, security, and accessibility of financial systems globally. He argued for a shift from traditional account-based transactions to a token-based digital economy facilitated by DLT. ??
The blog post highlighted several key themes:
The Tokenisation Thesis: DLT offers a superior framework for representing and transacting digital value, enabling the creation of "always on," resilient, and programmable financial networks.
The Future of Digital Currencies: While the blog post acknowledged the potential for a future dominated by stablecoins and CBDCs, it suggested a more inclusive path encompassing the tokenisation of all regulated liabilities.
The Ongoing Transition Towards Digital Money: McLaughlin explored the limitations and potential of current digital financial instruments, emphasising the need for their evolution to meet the demands of a modern economy. ??
The Benefits of DLT: The blog post argued that DLT could offer unprecedented benefits, including continuous operation, single sources of truth, programmability, instant settlement, and the ability to represent a wide array of assets on a single ledger.
The Call for Regulatory and Technological Shift: McLaughlin called for a regulatory and technological shift to support the widespread adoption of tokenised regulated liabilities, involving a pivot in CBDC explorations and multi-bank efforts to tokenise commercial bank money.
The ultimate vision presented in the blog post was a global, DLT-based financial infrastructure that seamlessly integrates regulated liabilities and assets. This network would streamline transactions and incorporate a range of financial instruments into a unified, programmable platform. ????
The "Regulated Internet of Value" blog post served as a thought-provoking call to action, urging stakeholders to embrace the potential of tokenisation and work towards a more efficient, secure, and inclusive financial system. As we navigate the path towards a tokenised future, the ideas put forth by McLaughlin will undoubtedly shape the discourse and development of digital currencies and financial infrastructure.
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?? Regulated Liabilities Network
The publication of the Regulated Liability Network (RLN) Digital Sovereign Currency Whitepaper in November 2022 marked a significant milestone in the journey towards a tokenised financial system. Jointly authored by SWIFT, BNY Mellon Treasury Services, HSBC Global Payments Solutions, Lloyds Bank, OCBC, ANZ, Wells Fargo, U.S. Bank, and Trust Financial Corporation, the whitepaper built upon the key themes outlined in Tony McLaughlin "Regulated Internet of Value" blog post from the previous year. ????
The RLN whitepaper called for a broader perspective on digital currency, moving beyond a narrow focus on central bank liabilities. It emphasised the importance of viewing regulated liabilities, including central bank money, commercial bank money, and e-money, as a unified entity. The paper proposed a shift from a Central Bank Digital Currency (CBDC) focus to a more encompassing approach of "Digital Sovereign Currency."
One of the key points highlighted in the whitepaper was the technological neutrality of legal instruments. It argued that the legal validity of financial instruments remains constant regardless of the technology used to record them, whether it be paper ledgers, databases, or distributed ledger technology (DLT) platforms. This concept underscored the potential for updating the national currency system within existing legal frameworks, leveraging advanced technologies like DLT.
The RLN whitepaper also addressed the challenges posed by the emergence of unregulated digital currencies, such as Bitcoin and stablecoins. It highlighted the potential risks these currencies pose to consumer protection, financial stability, and the prevention of financial crime. The growth of unregulated networks could potentially weaken the sovereign currency system. To counter this, the RLN suggested bringing novel digital currencies into the regulated perimeter and enhancing traditional payment systems, a move that the Financial Conduct Authority (FCA) has since published plans for. ??
Overall, the RLN whitepaper emphasised the importance of adapting the sovereign currency system to modern technologies, ensuring regulatory compliance, and preserving the integral role of the nation-state in the monetary system. It laid the foundation for a collaborative effort between commercial banks and central banks to create a more efficient, secure, and inclusive financial system.
As Peter Left , Head of Prudential Liquidity Management at Lloyds Banking Group, stated:
"RLN is an exciting foundation for the industry to make regulated commercial bank money interoperable to an extent we have never been able to achieve before. Commercial bank money smart contracts could be designed to be smoothly interoperable across commercial banks and central banks. Having made regulated money interoperable to this extent, we can then open innovation opportunities for smarter, more competitive payments."
The RLN whitepaper represents a significant step towards a more connected, efficient, and innovative financial system, powered by the potential of tokenisation and DLT. As we move forward, the vision outlined in the whitepaper will serve as a guiding light for the development of digital currencies and the transformation of the global financial landscape.
UK Regulated Liabilities Network
Following the publication of the RLN whitepaper, UK Finance, in collaboration with EY and leading UK Financial Institutions, embarked on starting the creation of the UK RLN, positioned ‘as a common ‘platform for innovation’ across multiple forms of money, including existing commercial bank deposits and a shared ledger for tokenised commercial bank deposits.?‘
A press release in April 2024 stated that ‘through a collaboration of several stakeholders within the financial services industry, the UK RLN explores the options for users to make payments, transact and settle liabilities in the increasingly digital marketplaces of the future.’?
My Company Coadjute is involved in the project working alongside our strategic investor Banks Lloyds, Nationwide, NatWest and also Barclays, Citi, HSBC, Mastercard, Santander, Standard Chartered, Virgin Money, Visa, EY, Linklaters and a technology team of R3, Quant, and DXC.
The experimentation phase will have a core focus on the process of buying a home with a view to improving customer transparency and mitigating conveyancing fraud, and this is where Coadjute will come in by connecting out transaction orchestration service or deal room to the RLN we will enable buyers, sellers and the conveyancers that serve them to request a settlement service from RLN. ?
The success of the UK's regulated liabilities initiative will undoubtedly serve as a model for other countries and regions seeking to embrace the benefits of tokenisation. It will provide valuable insights and lessons learnt, paving the way for a more connected and interoperable global financial system.
?? MasterCard Multi-Token Network (MTN)
The unveiling of Mastercard's Multi-Token Network (MTN) white paper in July 2023 marked another significant milestone in the journey towards a tokenised financial system. The MTN aims to be a version of the type of network outlined in the RLN white paper – a regulated network that enables the issuance of tokens representing a claim on sovereign money, specifically commercial bank money. ????
At its core, the MTN seeks to transform a portion of bank deposits into digital tokens. These tokens are designed to represent bank deposits directly, offering a level of reliability and stability comparable to the funds in a traditional bank account. By converting regular bank deposits into tokenised deposits, the MTN enables businesses to engage in transactions that directly utilise customers' bank funds, bridging the trustworthiness of conventional banking with the agility and innovation of digital currencies.
The technical achievement of creating tokenised deposits lies in translating part of a bank's balance into a blockchain-compatible digital format. These tokens retain all the functionalities of blockchain technology, including interoperability with other tokens and the ability to participate in smart contracts within the MTN. This opens up a world of possibilities for new financial products, services, and experiences.
In the summer of 2023, Mastercard selected Coadjute, a leading blockchain technology provider, as one of the few businesses out of more than 140 global applicants to develop a prototype application on the MTN network. Coadjute, led by the author of this chapter, developed a prototype solution for settling a mortgage transaction using commercial bank tokenised deposits. The prototype was showcased to tier-one mortgage lenders in the UK, demonstrating the potential of tokenised money in real-world financial transactions. ????
The MasterCard MultiToken Network represents a significant step towards the mainstream adoption of tokenised money. By partnering with industry leaders like Coadjute, Mastercard is driving innovation and laying the foundation for a more connected, efficient, and secure financial system. As more businesses and consumers embrace the benefits of tokenised deposits, we can expect to see a transformative shift in the way we think about and interact with money.
The success of the MTN and similar initiatives will play a crucial role in shaping the future of finance. As tokenised money becomes more prevalent, it will unlock new opportunities for financial inclusion, cross-border transactions, and the creation of innovative financial products and services. The collaboration between traditional financial institutions, technology providers, and regulators will be essential in ensuring the smooth and secure adoption of tokenised money on a global scale.
?? Blueprint for the Future Monetary System
In June 2023, the Bank for International Settlements (BIS) released a significant paper titled "Blueprint for the Future Monetary System" as part of its Annual Economic Report. The BIS, an international organisation that supports central banks in their pursuit of monetary and financial stability, has established Innovation Hubs globally, including a centre in London working with the Bank of England.
The "Blueprint for the Future Monetary System" paper expands on the core theme of the Regulated Liabilities Network, articulating and endorsing the benefits of a "unified ledger." It presents a vision for a future monetary system that harnesses the potential of tokenisation to enhance existing systems and enable new possibilities. The key components of this blueprint include Central Bank Digital Currencies (CBDCs), tokenised deposits, and other tokenised claims on financial and real assets, converging in a novel type of Financial Market Infrastructure (FMI) known as a "unified ledger."
If the Regulated Liabilities Network paper was a proposal from Commercial Banks to Central Banks for collaboration on a shared infrastructure for sovereign money, the "Blueprint for the Future Monetary System" can be seen as the formal response, expressing acceptance of the proposal. This endorsement from central banks highlights the growing recognition of the need for advancement in both commercial bank and central bank money.
The blueprint underscores the potential of tokenisation to revolutionise the financial landscape, enabling seamless integration of various financial instruments and assets on a single, unified platform. As we move forward, collaboration between commercial banks and central banks will be crucial in shaping the future of money and ensuring a stable, efficient, and inclusive monetary system.
??? New Prospects for Money
In July 2023, Andrew Bailey, Governor of the Bank of England, delivered a speech titled "New Prospects for Money," reiterating the central banks' endorsement of the necessity for advancement in both commercial bank and central bank money. Bailey's call to action, particularly to banks, emphasised the importance of exploring enhanced digital bank deposits, also known as tokenised deposits.
Bailey's speech highlighted the potential coexistence of commercial bank and central bank digital currencies, acknowledging the challenges and opportunities that lie ahead. As David Birch , a renowned expert in digital money, points out, while CBDCs might offer societal benefits, they also pose risks such as bank disintermediation and potential destruction due to the flight of bank deposits to zero-risk central bank money.
The "New Prospects for Money" speech underscores the need for a collaborative and balanced approach to the development of tokenised money. It calls for active participation from both commercial banks and central banks in shaping the future of money, ensuring that the benefits of tokenisation are harnessed while mitigating potential risks.
?? Legal and Regulatory Framework
The legal and regulatory framework surrounding tokenised deposits is a critical aspect of the transition towards a tokenised financial system. The Regulated Liabilities Network (RLN) white paper provides valuable insights into this framework, highlighting the adaptability of existing legal structures to accommodate technological advancements.
The RLN whitepaper emphasises that the legal definition and essence of money have remained constant throughout history, despite the evolution of recordkeeping methods from paper ledgers to computer databases. The concept of a legal instrument, such as a bank's commitment to its customers, retains its significance regardless of the medium through which it is recorded. This principle holds true whether the instrument is documented on paper, stored in a digital database, or inscribed on a distributed ledger. ????
The transition from individual bank databases to a shared ledger system, as envisioned by the RLN, does not alter the fundamental legal nature of these instruments. Moving to shared ledgers represents a technological advancement without affecting the legal and regulatory framework that governs money. This perspective underscores the idea that the essence of money transcends its physical or digital representation, remaining fundamentally a legal agreement and a bond of trust between a bank and its customers.
The RLN whitepaper's approach to differentiating the private law aspects of digital assets from their regulatory characterisation highlights a crucial point: the adoption of new technology to facilitate existing regulated activities often requires minimal or no changes to private law or regulation. As Michael Voisin, Partner at Linklaters, explains:
"By contrast, very little adaptation of private law, and often no adaptation of regulation, is required where new technology is deployed to deliver existing regulated activities. As a rule, there is generally no difference in the legal characterisation of a deposit at a bank whether it is recorded in a physical ledger, in an on-site hard drive, in the cloud, or on a distributed ledger." ????
This understanding is crucial in navigating the legal and regulatory environment of tokenised deposits and underscores the adaptability of existing legal frameworks to technological innovations in the financial sector. As we move towards a tokenised future, it is essential to strike a balance between fostering innovation and ensuring the stability and integrity of the financial system through appropriate legal and regulatory measures.
We stand at the cusp of this transformative shift, it is clear that tokenised digital money will play a central role in shaping the future of finance and the property market.
The advent of tokenised digital money represents a significant step in the transformation of physical entities into digital ones. It offers a more useful, regulated, and secure form of money that can be seamlessly integrated into various digital environments. For the property market this new form of money has the potential to transform the completion process and beyond that have digital property and money embedded in a future Propertyverse.??
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Head of Group IT/SAP | Strategischer IT-Leader mit praktischen L?sungen | Steigerung der operativen Effizienz
7 个月Exciting news! ?? It's also worth noting that major financial institutions are collaborating on the experimentation phase of RLN, with property transactions being one of the core use cases. ?????? Thanks for sharing John Reynolds ??????
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