Forget PayPal.
One of the largest banks in the world, Citigroup, decided to enter the token game. The bank announced that it is going to offer a token service to its customers. This will start with its business clients first before moving to individuals.
It is a big step forward and is also eliciting the call of CBDC from the usual suspects.
In this article we will sift through what is taking place to show what Citi is offering along with the fact this is not a CBDC.
For the sake of this article, we will call the token CITI.
Citi Token Service
The Citi Token Service basically allows a customer to tokenize deposits. This means the token is essentially backed by the deposits, i.e. liabilities, in Citi's balance sheet. It differs from what PayPal did which is to create a token, have people put up USD for it, and back it with a combination of cash and T-Bills.
Citi's service uses a private blockchain. According to the press release, this is the focus:
Institutional clients have a need for ‘always-on’, programmable financial services and Citi Token Services will provide cross-border payments, liquidity, and automated trade finance solutions on a 24/7 basis.
This alone provides some insight into what is taking place which we will get to in a bit.
Basically, Citi is using tokenization for bank guarantees and letters of credit. This allows for the easy transfer of this value within the financial system. It is also why the starting point is the institutional customers.
In other words, this is nothing more than another bank instrument.
Why This Is Not A CBDC
The CITI token is currency transformation, not currency creation.
What this means is the money supply is not altered. The dollars in circulation remain the same regardless of how many tokens outstanding.
For those who still cling to the 1920, there are two ways legal tender is produced under fractional reserve banking. The first is the printing of physical banknotes by the central bank. This is a minor part of the money supply since most transactions are digital.
The digital currency (legal tender) is generated when the banking system makes loans. This is often tied to the reserve requirements that the banks operate under, necessitating the holding of a certain amount of deposits as a percentage of the loans on the books.
While some call this credit, the other side of the loan, is the payment for the asset. For example, if a mortgage is written, at closing the seller gets a check (or more likely a bank deposit). Either way, additional liabilities (deposits) are entered into the domestic banking system.
Understanding this is crucial to what is taking place here. Citi is taking existing deposits and tokenizing them. They are not creating any new dollars through this process. That is why we have money transformation where the form is simply altered.
As we will see, the central bank has no involvement in this.
Is This Tied To FedNow
There are some claiming this is affirmation of how FedNow, the payment system rolled out by the Federal Reserve, is a precursor to a central bank digital currency. Again, this is nonsense.
What Citi is doing has nothing to do with FedNow.
FedNow is a payment system created by the central bank as a service it provides to its customers (the banks). It is an instant settlement system. Commercial banking requires two settlements. The first is with commercial bank money and the second with central bank. FedNow provides instant settlement on the ledger run by the Fed.
The indicator of why this is not FedNow is the cross border payments. FedNow is a domestic network. It does not extend internationally. This also has nothing to do with blockchain.
Citigroup is using a blockchain. They are incorporating smart contract technology. This is not using a public chain like Ethereum. Instead, it is all in house.
Ledgers
In the past we discussed how if someone wants to understand money, it is crucial to grasp the ledgers. Our world is now ledger based money.
The present banking system operates as such.
At the commercial bank level, the individuals banks keep their own ledgers. These are private and cannot be read by the other banks. In other words, if John has $150 in an account with BAC and Mary $200, the people at Chase have no idea. Chase is not privy to the ledger BAC is running.
This is also why an individual (or business) with multiple accounts can move money instantly. The bank will simply update the ledger without having to notify anyone else.
The totality of the bank's operations are kept by the central bank. So if BAC has $1 billion in deposits, and that goes up to $1.1 billion, the change is noted on the Fed's records. This is obviously something that other banks can see.
Here is where settlement takes place.
Under the existing system, settlement operates on a net basis. At end of day, the total transactions between BAC and Chase are totaled, with the difference requiring settlement. If BAC received $10 million from Chase, the latter will have to move reserves to the former. In this era, Brinks trucks full of banknotes used for transfer. Instead, the reserves on the balance sheet are simply transferred over.
FedNow changes this process to a gross settlement. If John sends $100 from his BAC account as a payment to someone with a Chase account, BAC will have $100 from its reserves moves to Chase. This takes place throughout the day.
With CITI, none of this is taking place.
Tokenization
The token is noting more than a representation of the deposit with the bank. It appears, for the moment, we are dealing with Citigroup only. This could expand in the future to include other banks.
CITI is a digital representation of the deposit on hand. Basically, it is a claim against that deposit. The difference is the deposit is not moved. Hence, the ledger stays the same.
Instead, we have another ledger added: the blockchain.
When a CITI is moved, the blockchain notes this, The receiver, by holding the token, is guaranteed by the bank, that it is backed by a deposit on the bank's balance sheet. As this keeps moving, the blockchain ledger is updated. Yet, there is no settlement required.
Again, this is no different than a letter of credit. When a bank issues that, it is simply saying that Business or individual ABC is good for the $500K. No money is transferred at that point. A LOC is really just a bank instrument that can be used, depending upon the institution, as money.
Hence, the CITI token is nothing more than a stablecoin that is a bank product. There is nothing novel here. It is just the banking system building another layer to allow for financial transactions to take place.
Here is another example of why understanding the banking system, ledgers, and how money truly operates is crucial. As we can see, the CBDC narrative is destroyed with CITI once we investigate what is happening.