Citi Perspectives 2024 E-commerce Edition

In 2023, phase one of RLN established a proof-of- concept in the U.S. that looked at the potential to upgrade international payments using deposit tokens settled in a wholesale central bank digital currency (CBDC). A project run by UK Finance is currently examining the feasibility of commercial bank digital money sitting alongside a retail CBDC. Other entities are set to kick off shared or unified ledger projects in 2024. It’s worth noting too that the BIS unified ledger is closely related to the RLN concept. “The driver for these collaborations is not in finding a single technology but about moving regulated financial market participants toward a consensus on building a new tokenized infrastructure,” comments McLaughlin. “Without consensus and industry adoption, the silos will remain.” In the regulated space, the main risk around tokenization on the private- permission side really is lack of consensus around the big picture of what tokenization can deliver — a picture that goes beyond existing silos. This, warns McLaughlin, will lead to the persistence of silos, defeating one of tokenization’s main benefits. RLN is making a bold effort, but it sounds like a steep mountain to climb. However, there is precedent. When electronic banking was first introduced, every bank created its own proprietary system. Over time, corporate clients, wearied by multiple different systems, pressed their banks into finding a multi-bank solution, culminating recently in the roll-out of ISO 20022 messaging. “We’re at the stage now,” notes McLaughlin, “where we are seeing proprietary tokenization solutions emerge. The best advice for corporate treasurers would be to start encouraging their banks to begin working on multi-bank solutions.” Of course, proprietary electronic banking still exists alongside ISO XML, and for large corporates, host-to-host, multi-bank connectivity. But, states McLaughlin, “I cannot imagine that blockchain will remain at the stage of proprietary electronic banking for very much longer. It needs to move toward multi-banking to be useful to corporate treasurers.” Harnessing the power The positives of tokenization are manifold. It facilitates simultaneous and indisputable settlement; it simplifies reconciliation; it enables programmability, which in turn opens up a much wider domain of functionality and innovation for banks and clients. It even lessens the need for financial intermediaries. To reap these benefits, the best plan of action for a treasurer, advises McLaughlin, is to embark upon “a learning journey,” to understand the technology and its use cases. Here, the role of an already- engaged bank such as Citi is to clearly articulate to clients tokenization’s objectives, purpose, and advantages. At a practical level, alongside its broader regulatory engagement, Citi is enhancing its existing internal risk and control framework, aimed in part at informing its own journey. The bank is already building out proprietary Distributed Ledger Technology (DLT) solutions: the recently launched Citi Token Services, for example, enables clients to facilitate money movements across the Citi branch network. However, mindful that collaboration is essential to move beyond a fragmented market, McLaughlin reveals that Citi is simultaneously working with the RLN community. Doing so demands the parking of self-interest, as it is ultimately seen as a “major test of the thesis that the future of the financial system exists in the emergence of a 24/7, multi-asset, state machine.” If the industry decides to build it, he believes it will offer a “significant platform for innovation.” 36 | Services Citi Perspectives