CPMI published a report that sets out a list of criteria for developers and market participants to consider when designing digital tokens for use in wholesale transactions. The report describes the potential innovations and design questions associated with digital tokens that could be used to settle wholesale, or large-value, payments, made possible by new technologies such as blockchain, or distributed ledger technology. The report also highlights the key related risk management challenges that need to be understood. The report states that, even in cases where a wholesale token is backed by deposits held in a central bank account, the claim of the token-holder will generally not be equivalent to central bank money, assuming that the right or claim is not on the central bank, and, therefore, will inherently incur additional credit and liquidity risk.
The report only covers variants of digital tokens issued by identifiable issuers and denominated in sovereign currency. At the current stage of development, many of the tokens envisaged as wholesale settlement assets represent a claim related to a pool of assets or funds and are characterized as being backed by commercial or central bank deposits denominated in a sovereign currency. With sufficient clarity on the nature of rights or claims embedded in the wholesale digital token and on how the asset or fund backing relates to such right or claim, a token could provide a safe or efficient alternative to settlement in traditional commercial bank money, especially when the underlying asset is represented by central bank money. The important considerations with respect to tokens include the following:
- Availability—Wholesale token arrangements, and token arrangements more generally, may be designed to allow tokens to be transferred 24/7 or during some defined window of time. Depending on the design chosen, this could also have implications for issuance or redemption and liquidity risk.
- Issuance and redemption—A wholesale token arrangement would need to have an entity or mechanism in place to control the issuance and redemption of tokens. This could be done either automatically or manually and with the direct involvement of the central bank or another authorized entity, depending on the institutional and technical design of the arrangement. The process of issuance may require adding to the aggregate amount of the underlying assets or funds that back the token. The process for increasing or reducing such assets to change the supply of tokens introduces risks, depending on the assets and entities involved.
- Access—It is possible that not all token holders will have the same level of access to the wholesale token arrangement. It should be clear which token holders can obtain, hold, transfer and/or redeem tokens. Access issues may be particularly important for wholesale token arrangements that contemplate tiered participation levels, including where indirect token holders rely on direct token holders for funding and de-funding.
- Underlying assets/funds and claims—For wholesale tokens to be exchanged peer-to-peer without the direct involvement of an intermediary, token holders need to have a strong assurance that the token will be accepted by others and will retain its value.
- Transfer mechanism—Wholesale token arrangements may differ on how much decentralization and intermediation is required to transfer tokens. Wholesale token arrangements with multiple participant tiers may have more complex transfer arrangements.
- Privacy and regulatory compliance—The interplay of design choices may have an impact on the privacy characteristics of the arrangement. If distributed ledger technology, or DLT, is used, the institutional and technical configuration of the network will affect the level of privacy for the arrangement and there may be a trade-off between privacy and efficiency.
- Interoperability—A wholesale token arrangement could be connected to various other arrangements and entities, including other token arrangements and traditional infrastructures.
The token arrangements raise new organizational and risk management challenges that need to be properly understood and addressed. A clear assignment of responsibilities may be required so that wholesale token arrangements are supported by sound governance arrangements, which would require a clear set of rules, procedures, and a legal entity with responsibility for ongoing comprehensive risk management of the arrangement. For arrangements that are highly automated and highly decentralized, sound governance principles may need to be incorporated in advance into the arrangement’s rules and automated processes. Liquidity risks could also exist when the wholesale token arrangement operating hours do not fully overlap with the availability and operating hours of connected infrastructures. It is important that developers recognize and manage the range of operational risks as well, including those stemming from inter-linkages to traditional systems. Wholesale token arrangements should also provide sufficient information to enable token holders and relevant authorities to fully understand the risks and responsibilities of all token holders in the arrangement.
Keywords: International, Banking, Securities, Digital Token, Wholesale Digital Token, Cryptocurrency, Cyber Risk, Operational Risk, Liquidity Risk, Distributed Ledger Technology, CPMI
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