Marten Nelson, Co-Founder & CEO of M10 Networks, explores payments systems that would work offline, avoid bank runs, and be successfully applied in a DeFi world
What is M10 for those who do not know it yet?
M10 Networks is a digital money platform for banks that delivers speed, low cost, safety, and utility to value transfer. M10’s partners include FIS, IBM, BPC, and NIFT.
M10’s turnkey platform is delivered as a cloud-based service, is based on immutable hierarchical ledger technology, and is operated by a proprietary, permissioned blockchain. It tokenises regulated liabilities such as central bank money, commercial bank money, and e-money, and can be configured to meet the digital money needs of central banks and commercial banks.
M10 prioritises markets where traditional cross-border payments suffer from high cost, slow speed, and poor access. Our go-to-market approach is to work with commercial and central banks in the Middle East, Africa, and Asia, to address market inefficiencies in cross-border payments and greenfield Central Bank Digital Currency (CBDC) opportunities.
What is a Regulated Liabilities Network (RLN) as proposed by Citi in its paper ‘The Regulated Internet of Value’? Let’s go a bit further by explaining what is Tokenised Regulated Liabilities, or TRLs for short?
A Regulated Liabilities Network is a network of fungible liabilities from multiple types of regulated financial institutions. An interoperable Regulated Liabilities Network is founded on national currencies and supervised by local regulators.
Unlike cryptocurrencies such as Bitcoin, regulated liabilities include central bank money, commercial bank money, and electronic money since they all live on the balance sheet of the relevant regulated financial institution.
An RLN would also allow regulated stablecoins to be incorporated into the current financial system as regulated liabilities. By design, the transfer of money in a network of regulated liabilities will be in favour of verified legal persons, reducing the risk of financial crimes, and would be conducted through the transfer of tokens. These transfers are done through entries on a ledger, and not using bearer instruments. Consider the following definitions from the Citi Paper (2021: 3)
A token in a central bank wallet is a liability of the central bank
A token in a commercial bank wallet is a liability of the commercial bank
A token in an E-money wallet is a liability of the E-money issuer
The legal meaning of the token is given by the location of the wallet in which it resides. When a token is at rest in a wallet controlled by an institution, then it is on the balance sheet of that institution as a liability in favour of the token holder.
By contrast, Bitcoin payments are conducted as a digital form of a bearer instrument.
How can TRLs enable offline payments?
One of the main challenges with offline support is how to prevent double-spending. One way to accomplish this is to have TRLs in separate online and offline wallets. Offline wallets can transact with each other, and account balances and transaction history are reconciled with the online system periodically.
If we assume that the Regulated Liabilities Network would also support offline payments - we would now have a very robust retail payment system that could handle most, if not all, retail payments use cases, including online, offline, and programmable payments.
An RLN with support for offline payments may be the most efficient and least risky path toward a cashless society.
Central bankers also aim for developing paying offline capabilities for their CBDC. How can M10 be part of President Biden’s Executive Order on Crypto that targets the development of a US CBDC (and more)?
M10’s turnkey CBDC platform meets all the needs of a US CBDC, which are:
Interoperability with commercial banks’ digital currency initiatives (RLN)
High throughput and low latency
Robust and resilient against cyber threats
Flexible privacy options
Open, secure APIs to foster a rich PSP ecosystem
Low carbon footprint
Commenting on the crypto industry, how do you see this space evolving over the next 5 years – how will traditional FIs join this space? How will stablecoins be perceived?
Over the next five years, we will see more and more banks offering crypto trading.
I also predict that stablecoins will become regulated. The very nature and design of stablecoins, not to mention their relationship to regulated reserve money, makes them a prime target for regulators. Add big bank support and central bank officials keen to minimise risk and you get perfect conditions for government regulators to start making moves.
As Decentralised Finance (DeFi) matures and challenges banks’ core business of lending, I do believe that the adoption of tokenised deposits will overtake stablecoins. Let me explain why. To create stablecoins, money is siphoned out from the banking system and into stablecoins, locking up liquidity that banks could use to extend credit. Since economies are largely built on credit, this could have problematic consequences. However, this is a problem that can be solved by tokenised deposits. Just like stablecoins are issued on a blockchain, bank deposits can be tokenised and put ‘on chain’.
This blockchain would need to be a high-performance, low-latency (settlement in less than one second) blockchain. Additionally, it would be important that tokenised deposits (let’s call them ‘coins’) from different banks are fungible since it would be unwieldy (and annoying!) if a customer couldn’t accept tokenised deposits from bank A at bank B. And the most obvious use case is to use tokenised deposits instead of stablecoins when buying and selling crypto, either in a crypto exchange environment or through an OTC desk.
Returning to 2022, with crypto regulation still needing some clarity, how can we enjoy the benefits of crypto with the current technological solutions?
With the current technological solutions, we can have the benefits of crypto whilst respecting the current monetary system.
I’m not a crypto fanatic but I do believe blockchain holds the answer to the creation of an RLN. Today, emerging models for digital money have harnessed the power of blockchain technology to express tokenised liabilities on the same shared ledger. This shared ledger represents the best of both worlds, creating digital money that is ‘always on’, instant and programmable, global in scope but regulated by a sound banking system.
In fact, a shared ledger system enables both central bank money and commercial bank money to be tokenised, and transactions to settle instantly since banks on the system are transacting using tokenised central bank balances. The platform would support multiple regulated liabilities. But the best part is that it all fits neatly within the two-tier monetary system.
About Marten Nelson
Before starting M10, Marten co-founded Token, the industry leader in API platform solutions for banks and developers and served as its CMO. He is a member of ITUs Global Digital Currency Initiative and was a member of the Federal Reserves Faster Payments Task Force.
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