Hello again!
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Last week, I attended a fascinating Regulated Liability Network (RLN) event hosted by EY.
What is RLN?
Regulated Liability Network (RLN) was created by a group of industry participants from Lloyds, Barclays, Citi, R3, Quant and many more.
RLN concept is “a regulated Financial Market Infrastructure (FMI) that would operate a shared ledger that records, transfers, and settles regulated liabilities of central banks, commercial banks, and regulated non-banks.
The key goal of RLN is to create an interoperability layer, allowing existing and new solutions to be connected and bringing more liquidity into the industry.
Source: RLN
The interoperability challenge
Interoperability is undoubtedly a missing piece in the blockchain ecosystem. However, I often wonder who would be best positioned to provide such interoperability for the industry. Individual banks providing an interoperability layer may find it hard to achieve scalability as their competitors (other banks) would be reluctant to adopt it.
A consortium-based solution could be a promising approach. Or in the case of RLN, a group of banks and tech companies collaborating in an industry-wide solution. But the question remains: would banks outside the consortium adopt these solutions?
“Maybe, if the solution is really good”, a colleague told me.
This situation reminds me of SWIFT, which has played an essential role in payment interoperability for over fifty years.
In 1973, 239 banks from 15 countries got together to solve a common problem: how to communicate about cross-border payments. The banks formed a cooperative utility, the Society for Worldwide Interbank Financial Telecommunication, headquartered in Belgium.
The opportunity and potential for the RLN are clear, but they face competition from other players in this space. We'll have to wait and see if RLN can establish itself as a key player in blockchain interoperability. Their community-driven approach and willingness to embrace feedback are admirable and were highlights during the sessions. However, balancing community involvement with the need for rapid progress can be challenging.
What particularly inspired me to write about RLN this week were two key points discussed during the sessions that provided food for thought.
1. What is the real benefit of blockchain in a regulated environment?
One of the key benefits of blockchain is its efficiency layer—faster and cheaper. However, in regulated industries, we must add additional layers for KYC, AML, and other compliance checks. Companies want to keep their data private, and leaders need to ensure validators see only specific information. These additional layers and infrastructure requirements can dilute the efficiency benefits of blockchain.
In a regulated environment, we might find that the solution built includes so many layers and additional changes that we no longer achieve the expected efficiencies of blockchain.
A counterpoint raised during the session is that actually, the benefits of leveraging blockchain in finance may be different than originally thought. Instead of focusing on efficiency, the industry should consider the power of programmable money to enable earlier payments to individuals and businesses or to reduce fraud in Delivery vs Payment (DvP). For example, in Brazil there are ongoing pilots in which goods are delivered using automated lockers.
Brazil Use Case: Automated Lockers
In this pilot, customers buy goods via an online site and select a secure locker for delivery. The payment (in CBDC) is held in an escrow account until the transaction is completed.
Customers receive a one-time access code via text message. Upon entering this code, the designated locker opens, and smart contracts automatically release the payment from the escrow account to the seller, ensuring a seamless and secure transaction.
However, if the locker is not opened and the goods are not delivered, the payments is automatically released back to the customer via smart contracts.
2. Is the form of money changing?
Another intriguing discussion was around the concept of money.
The question posed was “should we have one form of money or can we assume individuals are smart enough to have a number of money forms available?”
This is an interesting question which made the group reconsider their notion of money.
What is money?
We often think of coins, notes, and bank deposits as money. However, flight points can also be considered money if they are used to buy a flight ticket.
In Africa for example, phone data usage is considered money.
Africa Use Case: Mobile Money
This started when M-Pesa realised consumers were using minutes and airtime as a form of currency, sending pre-purchased minutes and data to relatives, who could sell them on or keep them as a sort of informal bank account.
Nowadays, this concept has grown into a full-blown mobile money offering, which has expanded to offer microloans.
So, for me, limiting money to a single form, such as tokenised deposits, might restrict consumers' offerings. The future will be composed by various forms of money, with individuals using them based on their needs.
Final Thoughts
The discussions at the event emphasized the complexities and opportunities in creating a more interconnected and versatile financial ecosystem. Additionally, they highlighted the importance of looking beyond our borders, to regions and countries not bogged down by our complex financial system that are innovating and taking full advantage of this new technology.
💡News that caught my attention
NEWS : Ripple shares insights on quantum computers threat to blockchain systems
The story:
In a discussion with Ripple as part of their university lecture series, Professor Massimiliano Sala of the University of Trento highlighted the potential threat quantum computing can pose to blockchain security.
"Quantum computers could easily solve problems that are foundational to digital signatures, thus potentially undermining the mechanisms that protect users' assets on blockchain platforms", Professor Sala
Source: Cointelegraph
My take:
If the “Q-day” materialises, i.e. a point at which quantum computers become sufficiently powerful and available for bad actors to break classical encryption methods, the blockchain security would be highly compromised. In simple terms, blockchain encryption involves using public-private key cryptography to secure transactions and data. If quantum computers are able to crack the public-private keys encryption in the future, they could threaten the security of sensitive information and blockchain systems.
This scenario could have far-reaching implications outside of blockchain and impact any field where data security is critical, for example, financial services and identity.
While the industry is focused on AI developments due to ChatGPT's impressive solutions, other technological developments are happening in smaller circles. Leaders need to be aware of all developments and impacts.
Book Launch Event
If you are a subscriber to this newsletter I would love to invite to my Book Launch Event, register here! You will be able to buy a book and listen from experts in the industry about their journey and what they are building in this space.
Hope to see you there!
This is a new and exciting space, so ideas and perspectives may change as we learn more and technology improves.
Any views or opinions represented are personal and belong solely to the author and do not represent those of people, institutions or organisations with which the author may or may not be associated in a professional or personal capacity unless explicitly stated.
Hi Rita! Thanks for the post, and I genuinely enjoy your stuff. However, on this one, a couple questions. First, if you have genuine interoperability, why do you need a consortium of banks? I do like your point on programable money, and it's a short step to embedding KYC/AML protocols into smart contracts, and while there is a lot of benefit to this and it is happening, most banks still would prefer to do AML checks off-chain prior to embedding the instructions into the contract.
I look forward to your book, and would love an offline chat about the above.