The world needs digital currencies, but it doesn’t need to start from scratch with financial infrastructure to enable them. Adopting the concept of distributed digital cash allows commercial banks to issue electronic money using existing infrastructure and in compliance with current regulations.
The growth in online commerce has led to a Cambrian explosion in electronic trade. Global transactions are seamless and nearly invisible to buyers and sellers of goods and services. As more and more of the $125tn globally in annual B2B payments and $52tn in consumer payments moves online, digital capabilities of market participants enable fast completion of the exchange of goods and services. However, the payment process is still dependent on the legacy rails established in the 1970s. They require significant ongoing maintenance and layer upon layer of legacy technology. The result is a complex value chain between multiple intermediaries and opaque connectivity between the transaction and related goods or services related.
With the advent of digital currencies, multiple players have launched digital payment mechanisms backed by cryptocurrencies and stablecoins. These mechanisms possess many of the features that could enable payments to catch up with the pace of global trade. However, cryptocurrency-derived blockchain technologies have their own limitations, and suitability for widespread adoption of these non-sovereign currencies is being questioned by central banks globally. What’s needed instead is a new form of Distributed Digital Cash that works better than a stablecoin.
To understand the challenges of stablecoins, it helps to understand how a cryptocurrency transaction typically works. First, a sender buys the cryptocurrency or stablecoins. Next, they transfer them and finally, the receiver sells the stablecoins they received. In principle, if the stablecoin is pegged to a dollar, then a stablecoin dollar is more technologically secure than unencrypted dollars - right?
Stablecoin models appear indeed straightforward. However, the behind-the-scenes complexity required to keep stablecoin prices pegged to fiat currencies while meeting reserve requirements limits their scalability. Converting funds into and out of stablecoins requires its own additional liquidity. The price of a coin is pegged to a fixed price by varying underlying liquidity levels to adjust to changing underlying demand. In addition, stablecoins incur third party costs related to operations, technology and compliance. Furthermore, regulatory frameworks applicable to stablecoin issuers are still in their nascency. In effect, stablecoin issuers can take more liberties with how they control the minting and burning of tokens, operate coins and meet reserve requirements.
None of this helps businesses to solve the real challenge they face, which is to follow payment regulations for immutable transactions. Therefore it is more elegant to design digital cash solutions from the ground up to fully comply with existing regulations.
A far simpler model is enabled by Billon’s regulated digital cash solution. The key distinction of regulated digital cash fromstable coins is that it is issued and controlled by banks or regulated institutions, who can seamlessly back an encrypted token with any government issued currency.
In Billon's digital cash model a 1:1 reserve backing is required under the electronic money regulatory regimes with specific mandated controls on safeguarding accounts at credit institutions. Regulated Participating Institution issuers - that is banks - already have a stringent set of compliance requirements on their businesses. Their operational control and compliance frameworks are reviewed and challenged as part of their regulatory authorisation processes and ongoing supervision. Non-bank Regulated Participating Institution issuers are also under scrutiny by regulators during authorisation processes and ongoing supervisory reviews.
Thanks to that, Billon’s solution for regulated digital cash enables regulated issuance in accordance with electronic money institution requirements, and the levels of control and compliance common to regulated financial institutions more generally. Furthermore, the regulated digital cash model does not require miners and exchanges, removing additional points of risk and cost/. Price fluctuations, common to stablecoins, are eliminated.
Billon have developed a unique solution enabled by a distributed ledger technology platform. It is explicitly designed for issuing and operating regulated digital cash. In constructing it we had the following requirements in mind:
Beyond meeting the core requirements above, Billon’s regulated digital cash solution lowers the costs of managing bank accounts. It also streamlines both payments and reconciliation of associated data and identity flows with a state-of-the art and customizable payment processing solution. Its key features include:
Check how you can apply Billon's regulated digital cash in your business:
Do you want to learn more about Billon and our enterprise DLT system? Get in touch!