Is a unified programmable platform for multiple forms of digital money and digital assets a viable objective?

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The basic choice in digital asset infrastructure projects is between building linkages between systems or building common platforms. The difficulty the digital money and assets industries have encountered already in developing interoperability between platforms is a reminder that links require widespread if not universal agreement between market participants and introduce additional complexities and costs. Common platforms, on the other hand, can in theory achieve success through market incentives. 

An infrastructure provides a common means to many ends. Just as a transport or telecommunications network enables entrepreneurs to develop a variety of products and services, a common blockchain platform would enable entrepreneurs to develop a myriad applications. The obstacle to this is that digital entrepreneurs are currently building closed networks to capture value for their owners, just as Web 2.0 turned the promise of the Dot Com era into a series of monopolistic centralised platforms that use mass market surveillance and data collection to generate rents for their owners. 

This is the origin of the interoperability problem. It is also a "market failure." Which implies that a public (or at least public-private) initiative is needed to provide an infrastructure open to all-comers. An open blockchain infrastructure would solve the inter-operability problem by design. It would also foster investment in innovative applications in a way that no blockchain layer one ever can. This is why both the International Monetary Fund (IMF), with its X-C design and the Bank for International Settlements (BIS), with its concept of a “unified ledger,” have both argued for common platforms. 

While the X-C platform remains purely theoretical – the IMF is not an operational entity – the BIS “unified ledger” is being developed. Project Agorá is a BIS-led project in which seven central banks (France, Japan, Korea, Mexico, Switzerland, England and the United States) are testing the practicability of putting central and commercial bank money on the same public-private platform as all other digital assets, making possible instant payment and clearing and settlement of any transaction in any digital asset. It uses composable smart contracts coded into tokens and the platform infrastructure to settle transactions in any digital asset (Payment versus Payment and Delivery versus Payment) instantly and atomically. 

Cryptocurrency enthusiasts argue that the market has a common public platform on which entrepreneurs are free to build applications already. It is called Ethereum. Unfortunately, the Ethereum blockchain is not scalable, or secure enough for regulated financial institutions to risk using it for mission-critical business such as payments. HyperLedger Besu, which is designed for use with tokens issued on to the Ethereum network as well as private networks, might yet enable Ethereum to develop into a common platform. But institutions are showing more interest in another public-private initiative: the Regulated Liability Network (RLN), which is now seen as the foundation of a wider Regulated Settlement Network (RNS). 

Importantly, all these models are careful to preserve the singleness of fiat currency money and banks as intermediaries, effectively creating a tokenised version of the current monetary system. This creates obvious opportunities for central banks to continue to lead the development of open blockchain infrastructures with private sector funding - including co-ownership – akin to the way they solved Herstatt Risk in the foreign exchange market by building CLS, also after a market failure. 

Unfortunately, although central banks already run critical market infrastructures such as Real Time Gross Settlement (RTGS) systems, too many are disinclined in the case of blockchain to interfere with “market forces,” or mistake construction of a blockchain infrastructure for making a technology choice. Until a major central bank overcomes such hesitations, a common platform is unlikely to be developed. 

Benefits

• One reason digital money and assets are not growing is that entrepreneurs are building closed digital islands to capture all the value created for themselves, and this will continue until interoperability makes commercial sense for them and a common platform emerges that achieves interoperability by design. 

• The incentive for entrepreneurs to abandon closed islands for a common platform requires a switch from the present assumption that value is created at the platform level and must be captured there to an assumption that value is created at the application level and can be captured there. 

• The Bank of England cooperation with the private sector has proved that the principal advantage of a retail CBDC over existing forms of money is programmability, and it is the ability to programme commercial bank money that will create new business opportunities for the private sector. 

• It is facile to think of a common platform as a single technical platform or protocol rather than a series of platforms “unified” by standard linkages, not least because different platforms will be built for different use cases, though a “unified” platform is not synonymous with interoperability between platforms. 

Issues

• Analogies between the Internet as an open protocol and a common blockchain platform as an open protocol are only partially valid because users of Web 3.0 will be transferring value whereas users of Web 2.0 are transferring data only and the risks of non-delivery are much lower. 

• A lesson of the failure of Open Banking is that financial institutions moving from participation in experiments to investing in a common platform need platform services to be commercially viable, in terms of attracting transaction volumes, lowering costs and risks and improving the customer experience. 

• There is a risk that common platforms develop using distributed databases rather than blockchain technology, limiting the degree of innovation, and that regulators, despite claims to be technology-agnostic, encourage reliance on legacy technologies by unwarranted sensitivity to the risks of blockchain. 

• Disintermediation of banks is a plausible outcome of the development of common platforms with corporates, for example, initiating payments to payees identified by digital identities 24/7 not by instructing a bank but by instructing a common payments platform directly. 

• Public common platforms that rely on “oracles” to bring off-chain data on-chain create a risk of discrepancies between the on-chain representation of an asset and off-chain reality leading to, for example, a digital re-run of the mortgage-backed assets crisis in which the securities lost contact with reality. 

Regulations

• A common platform must at least match the highest standards set by existing infrastructure because regulated financial institutions will never use infrastructure that has any shortcomings in terms of regulatory and financial crime compliance, operational resilience and client confidentiality. 

• The Bank for International Settlements (BIS) is leading a public-private project (Project Agorá) to explore how tokenised deposits can be integrated with a wholesale central bank digital currency (CBDC) on a unified and programmable platform to accelerate and cut the cost of cross-border payments. 

• In developing a common platform, there is ample public-private cooperation to build on not only via BIS projects but in the collaboration between, for example, the Swiss National Bank and the Swiss stock exchange group and the Monetary Authority of Singapore (MAS) and numerous private sector actors in Singapore. 

• The Regulated Liability Network (RLN) – which is expanding into a Regulated Settlement Network (RSN)- is a good example of public-private collaboration to develop a common platform, or at least an interbank network on which digital versions of commercial and central bank money can be integrated. 

• Another public-private collaboration is LACChain, an interbank payments settlement platform open to banks and central banks that uses tokenised deposits in multiple currencies to settle transactions between counterparties in a dozen Latin American countries.