US Conducts Successful Payment Tokenisation PoC

The New York Innovation Centre (NYIC), which operates under the auspices of the Federal Reserve Bank of New York, has collaborated with a number of US financial institutions in a proof of concept (PoC) to demonstrate the feasibility of a regulated digital asset settlement platform supported by shared ledger technology.

The project experimented with the concept of a regulated liability network (RLN), which envisions a theoretical payment infrastructure designed to support the exchange and settlement of regulated digital assets using distributed ledger technology (DLT).

The NYIC says that while existing payment systems function effectively, certain frictions remain, particularly around speed, cost, accessibility, and the settlement process. DLT has enabled certain capabilities in asset exchange, like a common source of truth and atomic settlement, it observes, but says current designs for exchange mechanisms based on DLT do not enable the interoperable transfer and settlement of digital assets between regulated financial institutions.

Participants in the PoC included BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, US Bank and Wells Fargo. Swift supported interoperability across the international financial ecosystem, while the technology sandbox vendor was SETL with Digital Asset.

To test the RLN concept, the working group led three workstreams that researched and analysed the technical feasibility, business applicability, and legal viability of the concept.

As part of the research study, the working group designed a distributed ledger-based network to settle payments between financial institutions using tokenised regulated commercial bank and central bank US dollar liabilities. The experiment was conducted in a test environment and used only simulated data.

It simulated wholesale payments between commercial banks and was intended to prove the core functionality of the theoretical payment system. Transactions were conducted in commercial bank deposit tokens and settled using a theoretical wholesale central bank digital currency, a tokenised record of a central bank liability.

A second use case focused on wholesale payments to counterparties outside of the US and explored the potential of the concept to enhance the experience of global users of dollars as an international trade and settlement currency.

The NYIC says the experiment successfully simulated both scenarios, thus identifying shared ledger technology as a potential solution to support payment innovation.

Following this, three workstreams analysed the technical feasibility, business applicability, and legal viability of using shared ledger technology. The technical workstream validated that the proposed architecture was able to deliver the benefits of settlement finality, a common source of truth, standard transaction data, and privacy for all participants on the network.

The second, business, workstream concluded that the network has the potential to deliver improvements in the processing of wholesale payments due to its ability to synchronise dollar-denominated payments and facilitate settlement on a near-real time, 24 hours a day, 7 days a week basis.

The legal workstream, the third, considered the application of certain US rules and regulations to the RLN system in the proof of concept. It found that the use of shared ledger technology, including tokens, to record and update the ownership of central bank and commercial bank deposits should not alter the legal treatment of such deposits.

The NYIC notes, however, that although further analysis, research, and engagement with regulators would be required before final conclusions can be reached, the legal workstream did not identify any insuperable legal impediments under existing US legal frameworks that would prevent the establishment of an RLN system as contemplated in the project.