British startup Millicent received a grant from UK Research and Innovation to develop a digital financial infrastructure. Earlier this month, it completed initial testing of its Full-Reserve Digital Currency (FRDC) as a demonstration in a sandbox environment. The FRDC is a distributed ledger (DLT) based currency, similar to a stablecoin, where the funds that underpin the digital currency are held in a dedicated central bank account. This addresses many of the concerns that stablecoins have about the quality and liquidity of their backing.
Millicent focuses directly on the retail sector for person-to-person payments. And as the name suggests, co-founder and CEO Stella Dyer has financial inclusion as a key goal for the company. Although Dyer has a Harvard education and a track record at Goldman Sachs and Morgan Stanley, she moved to the UK as a child refugee before the Nigerian civil war. She is aware that high payment costs are borne by those who can least afford them.
One of the first tests involved a 15p micropayment for a newspaper article with a paywall and a £1 digital tip to a busker using a QR code. All were settled almost immediately and with small fees.
Why the central bank account is important
Holding all of the digital currency’s collateral in a central bank account radically reduces the risk of a run on the token. This is because it can meet any demand to convert the digital currency back to traditional money at any time. And he can do that quickly.
Rumors about how the Tether stablecoin has invested its funds have been circulating for years. Even Circle’s USDC, which is seen as superior, has been questioned by some quarters. USDC is considered safer as its funds are now fully invested in US government bonds and commercial bank accounts. God forbid it has had a run. It would have to sell government bonds in bulk, which would result in a short lag. Large-scale Treasury sales could potentially impact Treasury markets and the economy at large if a digital currency were to become widespread.
In the Millicent case, there is no lag and no immediate impact on Treasury markets. The funds in the central bank account are private funds and do not belong to the central bank and therefore it meets the definition of a central bank synthetic digital currency (CBDC).
Millicent believes that synthetic CBDC terminology can be confusing and prefers to refer to it as FRDC to differentiate it from a CBDC and the typical stablecoin. A valid point, although it complements the jargon in the industry.
Another British synthetic CBDC project, Fnality, is also not keen on the synthetic CBDC label. Sixteen financial institutions have supported Fnality, which plans to launch its solution in October. Fnality’s offering is for interbank or wholesale transactions, while Millicent is aimed at retail.
How it works
Minting the Milicent FRDC works by transferring money from a UK commercial bank using the Faster Payment System. The money is held in a dedicated central bank account and the digital currency was then used to try out a variety of payment and settlement scenarios.
In terms of technology, it uses a publicly licensed DLT. Coming back to that jargon, the DLT is not a blockchain per se as it uses Directed Acrylic Graph (DAG) which is similar to IOTA and Hedera Hashgraph.
More on that below, where co-founder and president Kene Ezeji-Okoye responded to our questions via email.
Questions and Answers with Kene Ezeji-Okoye
Can you say more about the legal aspects?
We have a partnership agreement with a regulated financial institution who hold our client funds in a segregated dedicated account with the central bank. As part of our agreement, we cannot share the name of this partner until our network goes live.
Funds held on behalf of our clients comply with current UK e-money regulations and are therefore bankrupt as there are full liquidity reserves for each token issued. In the (unlikely) event of Millicent’s or our partner institution’s bankruptcy, all clients would still be entitled to their funds.
Does the privacy aspect differ from other stablecoins?
Currently our network offers the same anonymity as other blockchains like Ethereum etc.
However, the end-user application we are launching soon offers a powerful way to balance user privacy on-chain with the risk-based AML approach favored by regulators and used by fintechs and conventional financial institutions alike.
We are also investigating solutions with ZK proofs and viewing keys for some point in the future.
Which publicly-permitted blockchain?
We couldn’t find the perfect blockchain for our needs, so we decided to build a custom network using the Cosmos SDK. The SDK provides a fantastic foundation that has enabled us to create an ideal digital finance infrastructure, including sub-2 second settlement times and native interoperability with a wide variety of other blockchains. The upgradable nature of the framework also allows for a high degree of flexibility in terms of future-proofing or expanding the scope.
One of the key decisions in deciding to build a custom chain was the ability to affect the governance structure. There aren’t really any publicly approved frameworks out in the wild, although this is the best way to ensure that democratic community governance – where everyone gets a seat at the table – can be balanced with user security and regulatory compliance .
How do cross-chain transactions work?
With Cosmos’ InterBlockchain Communication (IBC) modules, the Millicent network will be natively interoperable with the “Internet of Blockchains” in the Cosmos ecosystem. There are already solid bridge frameworks, e.g. B. Gravity Bridge enabling cross-chain transactions with Ethereum and other chains, and projects developing IBC modules for asset and data interoperability with permissioned blockchains such as Hyperledger Fabric, Corda and Quorum, all present in CBDC- pilot projects around the world.
It is very likely that we will also release native versions of FRDC directly on Ethereum as well as a variety of EVM and non-EVM compatible chains in the near future.
Do you have any idea how CBDCs might work if a CBDC is not on the blockchain but still provides utility for blockchain payments?
The “platform” model of CBDCs as outlined by the Bank of England is a very viable design for a two-tier structure where a central bank would make CBDC available to regulated Payment Interface Providers (PIPs) rather than to the public. These PIPs would in turn spread CBDC to the general public – similar to how one can withdraw central bank money (cash) at an ATM provided by their local commercial bank.
The interface between the central bank and the PIPs does not have to be built on a blockchain, it could work via a simple API, but some PIPs could choose to build their retail networks on a blockchain like Millicent did.
What’s next?
Next up is a lot of testing ahead of a public launch. We’re excited to put the true benefits of digital currencies in the hands of as many people as possible – and already have tens of thousands of waiting lists for our consumer app – but financial services is a sensitive area and we need to make sure before we do Roll out that everything is perfect.
As my mother used to say, “More haste, less speed.” So we expect the public release to be late in the fourth quarter of this year.
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