On 12 December 2019, the Committee on Payments and Market Infrastructures (CPMI) published a report on wholesale digital tokens, focussing on their potential for use as a means of settling wholesale transactions.
Wholesale transactions are typically settled by updating account balances recorded on a centralised register such as a settlement institution’s ledger. But the development of distributed ledger technology has led to the possibility of digital cryptographic tokens being used as an asset to effect transaction settlement.
The report acknowledges that the development of this technology is in its nascent stages, and so there remain a multitude of choices for private sector developers to make when looking to apply the use of digital tokens to wholesale transaction settlement.
The report discusses some potential design choices and includes a list of non-exhaustive questions that token developers may need to consider. These considerations include: availability; issuance and redemption; access; underlying assets/funds and claims; transfer mechanism; privacy and regulatory compliance; and interoperability.
Tokens would need to be ‘backed’ by safe and reliable assets in order for them to retain value and to provide surety of acceptance by others. The report suggests that assets like deposits of central bank money or commercial bank money would be sufficiently safe and reliable to back a digital token.
The report goes on to state that in order to perform as a safe settlement asset, there should be clarity as to against whom the token holder would have a claim or right, and how the asset ‘backing’ the token is effected by that claim or right. The requirement for a sound legal underpinning is stated as being necessary, which may require revised legislation, given that the corpus of payments law, contracts law, settlement finality provisions and insolvency law was generally written without wholesale digital tokens in mind.
A wholesale digital token arrangement needs to be compliant with all applicable regulatory and oversight requirements. If a wholesale digital token arrangement is a systemically important financial market infrastructure (FMI), it will be expected to observe the Principles for Financial Market Infrastructures in the same way as other FMIs.
The report concludes that there is no single roadmap for success, but that success will be determined by whether the digital tokens provide improved safety and increased efficiency over the traditional account settlement assets used today.