Featured Product

    CPMI Details Considerations for Developers of Wholesale Digital Tokens

    December 12, 2019

    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 redemptionA 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.
    • AccessIt 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 claimsFor 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 mechanismWholesale 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 complianceThe 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.
    • InteroperabilityA 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.

     

    Related Links

    Keywords: International, Banking, Securities, Digital Token, Wholesale Digital Token, Cryptocurrency, Cyber Risk, Operational Risk, Liquidity Risk, Distributed Ledger Technology, CPMI

    Featured Experts
    Related Articles
    News

    APRA Issues Interim Update to Policy Priorities for 2021 and Beyond

    In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.

    September 24, 2021 WebPage Regulatory News
    News

    EC Adopts Solvency II and Resolution Rules Package for Insurers

    The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.

    September 22, 2021 WebPage Regulatory News
    News

    OCC Issues Booklets on Regulatory Reporting and Earnings

    The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.

    September 22, 2021 WebPage Regulatory News
    News

    ECB Sets Out Results of Economy-Wide Climate Stress Tests

    The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.

    September 22, 2021 WebPage Regulatory News
    News

    EBA Examines Implications of Increasing Use of Digital Platforms in EU

    The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.

    September 21, 2021 WebPage Regulatory News
    News

    HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact

    The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.

    September 21, 2021 WebPage Regulatory News
    News

    ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures

    The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.

    September 21, 2021 WebPage Regulatory News
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7494