The UK Regulated Liability Network (RLN) is gearing up to experiment with a retail digital pound backed by commercial bank money or tokenized deposits. The RLN, a blockchain network facilitating interbank payments and digital assets, made headlines earlier in the United States with trials involving several banks, Mastercard, and the New York Federal Reserve. In the UK, the RLN is now exploring a retail digital pound as one of its use cases in the Experimental Phase.
Last year, the UK conducted a proof of concept for cross-border payments, which included participation from major banks like HSBC, Barclays, and Lloyds, along with Santander UK and Visa. EY spearheaded the project on behalf of industry body UK Finance, culminating in the publication of a paper.
The RLN supports separate “partitions” or mini-networks for each participating bank and central banks. It primarily aims to facilitate interbank payments, but various options for settlement methods are under consideration.
Out of the three use cases analyzed during the Discovery Phase, the retail digital pound was selected for the Experimental Phase. This choice was based on the principle of “functional consistency” of money. The Bank of England has indicated a likelihood of launching a retail central bank digital currency (CBDC), potentially threatening the uniformity of money. To maintain uniformity and consistency, programmability should also be available for commercial bank money.
Barclays has suggested that a financial market infrastructure could host the programmability function, which might include the RLN. Pay UK, operator of several UK payment infrastructures, could potentially host the programmability aspect, allowing tokenized deposits and a CBDC digital pound to share the same infrastructure.
The other two use cases—wholesale cross-border payments and securities settlement—were assessed for feasibility. Wholesale cross-border payments, while offering benefits like speed and cost reduction, involve greater complexity due to overseas regulatory involvement. Three RLN participants—Barclays, Lloyds, and Santander—are also involved in Fnality, a UK-based infrastructure focusing on token-based wholesale cross-border payments. This overlap might lead to duplication of purpose.
The third use case, securities settlement, involves the post-trade settlement of repurchase agreements (repos) and is seen as attractive timing-wise due to the UK’s Digital Securities Sandbox. While the advantages of using the RLN include 24/7 liquidity, settlement efficiency, and automated margining, the involvement of non-bank entities, such as central securities depositaries (CSD), places it in the medium feasibility category.
Part of the Discovery Phase included evaluating whether to adopt centralized or decentralized technology, with a preference for distributed ledger technology (DLT) due to reasons like tokenization, integrity, transparency, and privacy. Various technologies, including Corda, Adhara, Quant, Polygon, and others, were assessed, but specific tech providers were not disclosed.
The RLN’s move to experiment with a retail digital pound underscores the UK’s commitment to exploring innovative solutions in the realm of digital currencies and financial technology. As these experiments progress, the landscape of digital finance in the UK continues to evolve, potentially paving the way for greater financial inclusion and efficiency.
