The Committee on Payments and Market Infrastructures (CPMI), hosted by the central bank of central banks, the BIS, has released a report which informs developers and market participants how wholesale digital tokens might look like.
Today, wholesale payments between financial institutions are effected through central systems and payment arrangements using traditional account-based transfers.
“Because the technology and use cases for wholesale digital tokens are at an early stage of development, it is still unclear what design choices developers will make. This section addresses some potential design choices based on a limited dialogue with the industry, highlighting areas where ambiguity remains, and includes a non-exhaustive list of questions that token developers may need to consider,” the report says in its section on digital token design. The report excludes digital tokens held by retail consumers.
Benoît Cœuré, Chair of the CPMI, calls it "useful considerations for token designers," adding that there is no single roadmap for success.
"Success will depend on whether wholesale digital tokens can provide both improved safety and increased efficiency over the traditional account-based settlement assets used today," Cœuré, who was also appointed in November as the head of the new BIS Innovation Hub, where he’s tasked with co-operating with the Swiss National Bank on creating a central bank digital currency for wholesale use between banks.
According to the report, potential innovations using wholesale digital tokens include:
- New settlement platforms
- Access to an alternative settlement asset
- Other efficiency considerations, such as reduced settlement cycles, longer availability, richer data etc.
Also, the CPMI identifies twelve design elements of a wholesale token to be considered by developers and market participants:
- Availability. Arrangements may be designed to allow their transfer 24/7 or during a defined time frame which was implications or their issuance/redemption and liquidity risk.
- Issuance and redemption. A wholesale token arrangement also needs to have an entity or mechanism to control its issuance and redemption, either automatically or manually, and with the direct involvement of the central bank or another authorized entity.
- Access. The Committee recognizes it is possible that not all tokenholders will be enabled with the same level of access to the wholesale token arrangement, so „it should be clear which tokenholders can obtain, hold, transfer and/or redeem tokens.”
- Underlying assets/funds and claims. For wholesale tokens to be exchanged peer-to-peer without an intermediary’s direct involvement of an intermediary, tokenholders must have a strong assurance that the token will be accepted by others and it will retain its value.
- Transfer mechanism. Wholesale token arrangements may require varying degrees of decentralization and intermediation to transfer tokens.
- Privacy and regulatory compliance. Design choices have an impact on the privacy characteristics of wholesale token arrangements, and there might be trade-offs between privacy and efficiency.
- Interoperability. Wholesale token arrangements may be connected to various other arrangements and entities, including other token arrangements and traditional financial market infrastructures.
- Legal basis. To perform as a safe settlement asset, wholesale tokens require a sound legal underpinning.
- Governance. 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.
- Liquidity risk. Liquidity risks could exist when the wholesale token arrangement operating hours do not fully overlap with the availability and operating hours of connected infrastructures.
- Operational risk. It is important that developers recognize and manage the range of operational risks, including those stemming from interlinkages to traditional systems.
- Transparency. It is important that wholesale token arrangements provide sufficient information to enable tokenholders and relevant authorities to fully understand the risks and responsibilities.
The CPMI says its role is to promote the safety and efficiency of payment, clearing, settlement and related arrangements, ensuring support to global financial stability and the wider economy. Today, senior representatives of 28 member central banks take part in the CPMI’s activities.