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Central bank digital currency (CBDC) has reached a new phase of maturity, with most central banks actively exploring and testing its potential. Global institutions like the Bank for International Settlements, the International Monetary Fund, and UN agencies are researching solutions for faster, cheaper, and more transparent payments. However, aside from China’s digital yuan, central banks still face design, technological, and policy decisions before rolling out CBDC to the public. The conversation is expanding, now incorporating deep industry discussions among regulated private-sector players.
What Is the Regulated Liability Network?
Alongside central banks’ CBDC evaluations, commercial banks and payment providers have proposed a Regulated Liability Network (RLN)—a framework leveraging existing regulations to harness digital currency benefits today. The RLN enhances current public-private payment networks between central and commercial banks while incorporating key CBDC attributes.
How the RLN Works
Mainstream financial institutions operate under distinct rulebooks:
- Central Bank Liabilities: Cash carries near-zero risk, and transactions are instant and final.
- Commercial Bank Liabilities: Deposits involve credit risk, regulatory compliance (e.g., KYC), and slower settlement times, especially for cross-border payments.
The RLN connects these liabilities, streamlining transactions without requiring new rules. As outlined in Citi’s concept paper, it minimizes settlement times and risks by unifying technology frameworks across central banks, commercial banks, and payment processors.
"Settlement risk will be eliminated… releasing capital and lowering transaction costs."
—Charles Sanford, 1994
Current State of the RLN
The RLN replicates the two-tiered banking system, enabling interoperable digital representations of liabilities:
| Functionality | Description |
|--------------|-------------|
| Commercial Bank Money | Issued on the RLN and managed by individual banks. |
| Fungibility | Transfers between banks are seamless with synchronized ledger updates. |
| Smart Contracts | Enforce rules, ensure atomicity, and preserve privacy across organizations. |
Key Benefits
- Risk Reduction: Atomic transactions eliminate counterparty risk.
- Privacy: Data access is restricted to need-to-know basis.
- Extensibility: Supports future asset classes and use cases.
Path to Implementation
Daml, a multi-party application framework, provides the foundation for RLN success:
- Privacy Protection: Granular permissions ensure confidential data is shared only when necessary.
- Enhanced Settlement: Real-time transparency reduces operational costs.
- Atomicity: Ensures transactions fail entirely if one leg fails (e.g., PvP/DvP).
- Interoperability: Connects existing banking systems and emerging ledgers.
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The RLN and CBDC: A Complementary Future
While the RLN isn’t CBDC, it can coexist with central bank digital currencies, offering near-term benefits:
- Reduced Depository Risk: CBDC eliminates this risk as a central bank liability.
- Programmable Money: Enables instant cross-border settlements and transparency.
- Financial Inclusion: Expands access through interoperable networks.
A robust RLN could integrate with future CBDCs, accelerating financial innovation.
FAQs
1. How does the RLN differ from CBDC?
The RLN leverages existing commercial bank liabilities, while CBDC is issued by central banks. They can operate in parallel, with CBDC reducing depository risk.
2. What role do smart contracts play in the RLN?
They enforce atomicity, privacy, and cross-institutional workflows, ensuring transactions complete only if all steps succeed.
3. Can the RLN support international payments?
Yes, by synchronizing ledgers across borders, it minimizes settlement times and credit risk.
4. Is Daml the only technology for RLN implementation?
While other solutions exist, Daml’s interoperability and privacy features make it a strong candidate.
5. How does the RLN address shrinking bank balance sheets?
By improving liquidity management and enabling efficient liability transfers, it supports lending capacity.
6. What’s next for RLN adoption?
Industry collaboration and pilot programs will drive scalability, with potential integration into CBDC ecosystems.
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### Keywords:
- Regulated Liability Network (RLN)
- Central Bank Digital Currency (CBDC)
- Tokenization
- Smart Contracts
- Interoperability
- Atomic Transactions
- Financial Inclusion
- Daml Framework