FI410 Unit 10 Ledger Institutional Recommendation Example

Not Yet, With Three Conditions for Yes: A Unit 10 Institutional Recommendation on Joining a Tokenized Deposit Network

[Student Name]

Purdue University Global

FI410: Blockchain for the Financial Industry

Unit 10 Institutional Recommendation

[Instructor Name]

[Date]

The corporate credit union, its members, the network and every figure are composite; the instant payment service is real, and the report, principles and articles cited are real.

Recommendation

The corporate credit union should decline membership in the tokenized deposit network at this time, connect to the Federal Reserve's instant payment service for members that want round-the-clock settlement, and revisit the network in eighteen months against three measurable conditions.

What Members Asked For

A survey of member credit unions last year, answered by 112 of 140, produced two clear requests. First, members want their own customers' transfers to settle faster, especially person-to-person and bill payments that now wait for the next business day. Second, members want access to liquidity on weekends and holidays, when payroll deposits and card settlements still move but funding markets are closed. No member asked for tokens, programmable money or a distributed ledger. They asked for speed and weekend liquidity.

The Invitation

Eleven commercial banks and two corporate credit unions have formed a network on which each issues tokens representing deposits. Members could pay one another at any hour, with transactions final in seconds, and settle net positions among themselves daily. The invitation asks us to run a validator, issue tokens for our members' settlement balances and pay a $650,000 entry fee plus about $400,000 a year.

Testing the Network Against the Need

Fit. The course's first test asks whether several parties need to write to a shared record, whether they distrust one another and whether an acceptable keeper exists. Our members' transfers need a record that every credit union trusts. An acceptable keeper already exists: the Federal Reserve, which already holds our settlement account and those of most of our members' counterparties.

Mechanism. The network's finality depends on its validators' agreement, which in turn depends on a charter. That charter, which we reviewed, sets out how members join and how software changes, but it is silent on reversing erroneous entries or on what happens if a member issuer fails. Tokenized deposits are claims on the issuing bank, so a member's token is only as good as that bank.

Settlement. The network settles each payment gross and instantly among its members, which requires prefunding. Research on blockchain settlement shows that faster finality raises the cost of having funds in place at the moment of payment (Chiu & Koeppl, 2019). For a corporate credit union, prefunding would come from our own liquidity, the same liquidity members want available on weekends.

Governance. Thirteen founding members wrote the rules. A new member's influence would be small, and the charter's gaps would remain.

Counterparty cost. For the network to help our members, their own core processors would need to connect to it, at an estimated cost of $25,000 to $60,000 per credit union. Only 9 of the 112 survey respondents said their processor had plans to support it.

The network offers instant settlement among its own members, but our members need instant settlement with everyone, and the Federal Reserve's service reaches far more of their counterparties than thirteen banks do, through an account we already hold.

The Alternative

The Federal Reserve's instant payment service, launched in 2023, settles payments in central bank money at any hour, weekends and holidays included. Banks and credit unions can participate directly or through a service provider. As a corporate credit union, we can act as settlement agent for members that join, using our existing master account. Most core processors serving our members already support or plan to support the service. Our connection cost is estimated at $350,000, and members' costs are far lower than for the token network because their processors bear most of the work.

Central bank researchers argue that tokenized platforms may eventually combine settlement, payment and record-keeping in one place, but that the value of such platforms depends on central bank money being at their core and on broad participation (Bank for International Settlements, 2023). Neither condition holds for the network today.

Objection 1: We Will Fall Behind Larger Institutions

Some board members worry that larger banks are joining and we will be left out. But being left out of a network our members cannot reach costs them nothing. If the network becomes the way most of our members' counterparties settle, the condition below will show it, and we can join then.

Objection 2: Early Members Shape the Rules

That is true for founders. We would join after the charter was written, as one of fourteen. Our influence would be modest, and we could make our future membership conditional on charter amendments, which gives us more influence than joining now.

Objection 3: Tokens Are Programmable

Tokenized deposits could support conditional payments, such as releasing funds when goods arrive. Our members have not asked for that, and the instant payment service can support many of the same uses through request-for-payment messages. Programmability is a reason to watch the network, not to pay to join it before members need it.

Objection 4: The Alternative Also Costs Money

It does, about $350,000. But it serves the needs members stated, uses our existing account and reaches the counterparties they actually pay. The question is which investment answers members' requests, and on that measure the alternative wins.

Risks of Declining

Declining carries a risk: if the network grows quickly, joining later may cost more. Economists note that a blockchain's value to each participant rises with the number of others on it, so early decisions can matter (Catalini & Gans, 2020). We judge that risk smaller than the cost of joining a network our members cannot use, and we have set conditions to catch it early.

Conditions That Would Reverse the Recommendation

Any one of three developments within eighteen months would justify a fresh vote: first, at least 40 percent of our members' outgoing payment volume goes to institutions on the network; second, the network's charter adds rules for reversing erroneous entries and resolving member failure consistent with international principles for settlement systems (Committee on Payment and Settlement Systems & Technical Committee of the International Organization of Securities Commissions, 2012); third, at least half of our members' core processors announce support for the network.

Conclusion

Our members asked for speed and weekend liquidity. An instant payment service built on the account we already hold delivers both, to far more counterparties, at lower cost. The tokenized network may become valuable, and we have set measurable conditions that would tell us when. Until one is met, the answer should be no.

References

Bank for International Settlements. (2023). Blueprint for the future monetary system: Improving the old, enabling the new. In Annual economic report 2023 (Chapter III). Bank for International Settlements.

Catalini, C., & Gans, J. S. (2020). Some simple economics of the blockchain. Communications of the ACM, 63(7), 80-90. https://doi.org/10.1145/3359552

Chiu, J., & Koeppl, T. V. (2019). Blockchain-based settlement for asset trading. The Review of Financial Studies, 32(5), 1716-1753. https://doi.org/10.1093/rfs/hhy122

Committee on Payment and Settlement Systems & Technical Committee of the International Organization of Securities Commissions. (2012). Principles for financial market infrastructures. Bank for International Settlements.