Yao Qian: What is the difference between the new financial market infrastructure based on blockchain and traditional FMI?

Author: Before Yao (China Securities Depository and Clearing Corporation Limited General Manager)

Source: China Finance Journal

Editor's Note: The original title was "Yao Qian: A New Financial Market Infrastructure Based on Blockchain"

The important speech made by General Secretary Xi Jinping during the eighteenth collective study of the Political Bureau of the CPC, profoundly clarified the important role of blockchain technology in new technological innovation and industrial transformation, and put forward clear requirements for promoting blockchain technology and industrial development With strong strategic guidance and realistic pertinence. At present, the application of blockchain technology has extended to many fields such as digital finance, the Internet of Things, intelligent manufacturing, supply chain management, and digital asset trading, showing a wide range of application prospects. Blockchain technology is also known as Distributed Ledge Technology (DLT). Compared with traditional technology, it has the advantages of preventing tampering, easy auditing, high transparency, strong reliability, and automatic execution of smart contracts. It is considered a new technology. The technological prototype of the first-generation Financial Market Infrastructures (FMI). So, what is the essential difference between it and the traditional FMI, what are the key points of the new financial market infrastructure (DLT-FMI) based on blockchain technology that we need to focus on?

The basic idea of ​​DLT-FMI

Highly integrated system. Generally speaking, the function of FMI is to achieve the final delivery of coupons and funds after the transaction. For example, Central Securities Depository (CSD) is a system for the registration and confirmation of securities. Securities are settled through the Securities Settlement System (SSS), and funds are settled through the Payment System (PS). The Counterparty (CCP) provides net margin and guarantee settlement services. The existing FMI offices have different institutions and different systems, which are independent of each other and rely on message transmission for information interaction. Under the DLT model, CSD, PS, SSS, and CCP are integrated. The closed securities registration system originally operated by CSD has become an open DLT ledger relying on trusted technologies such as consensus mechanisms and encryption algorithms. Securities that were originally manifested as account balances can be turned into unspent transaction output (UTXO) mode. The CSD (DLT-CSD) based on blockchain technology itself has the SSS securities settlement function, the CCP's guarantee settlement function and risk management function can be coded as smart contracts respectively, and can be automatically executed as soon as they are triggered. Not only that, the order matching algorithm running in the current securities trading system can also be encoded as a smart contract for automatic execution of transactions. The PS system can be independent of the CSD system or integrated into one to complete the clearing and settlement on the chain.

Unified and seamless business. Segmentation is a common feature of FMI. The CSD on the market is relatively uniform, but there are many types of off-site securities registration and settlement agencies. Some marginal assets cannot be activated through registration and confirmation of rights. Due to jurisdiction, cross-border CSDs are also independent of each other. The split registration system is prone to "Double Spending" (that is, the same digital asset is double occupied). Take Deposit Receipt (DR) as an example. Due to the long processing time of cross-border settlement business and the time difference factor, the step-by-step DR issue cycle is longer and it is easy to miss the best issue time. In order to improve the issuance efficiency, a pre-issuance system is usually adopted in practice, that is, in the case that the overseas basic stocks are not yet in place, the depositary issues DR in advance. This may have the problem of "double spending": DR inflated, used for naked short selling and tax evasion, suspected of fraudulent issuance. This is the dilemma of efficiency and security: either through pre-issuance to improve efficiency, but there are hidden risks; or pre-issuance (such as China) is not allowed, but the efficiency is low. The use of DLT technology can solve this contradiction. Through cross-chain technologies such as hash lock, the DR on the domestic DLT ledger and the stocks of the overseas DLT ledger are automatically consistent in real time, with high efficiency, and there is no hidden danger of "double spending".

Blockchain-based PS (DLT-PS) is also of great significance for improving modern payment systems. The traditional PS layer by layer, the system is complex. Even if the user pays face to face, the actual funds behind them need to cross "a thousand mountains and thousands of rivers" in order to really reach the account. Especially in the field of cross-border payment, the pain points are more obvious. There are disadvantages such as different international payment standards, high interoperability risks, low process transparency, repeated supervision, time-consuming, and high costs. DLT-PS can solve these problems well. There are currently two modes of DLT-PS construction. The first is government-led. For example, the Jasper project in Canada, the Ubin project in Singapore, the Stella project of the European Central Bank and the Japanese Central Bank. But these projects are only experimental, and only for the wholesale side. The second is initiated by the private sector. Including various public and alliance chains such as Bitcoin, Ethereum, Ripple, and global stable token models such as Libra. Libra has absorbed the advantages of the public chain, and at the same time solved the problem of the unstable value of the token. Due to the wide community coverage, its potential in the field of cross-border payment has attracted much attention. The advantages of Libra are: it reuses the existing Internet infrastructure; it only circulates Libra coins, and does not involve cross-currency conversion; it is decoupled from Real Time Gross Settlement (RTGS) in various countries to avoid being restricted by RTGS. 7 × 24 hours operation; point-to-point transfers, no need to rely on correspondent banks, low cost, high transparency; payment network is flat and simple, eliminating interoperability between different systems, and avoiding the problem of inconsistent international standards, and the transfer is smooth . In short, blockchain makes it possible to build a unified and seamless social payment system.

From another perspective, DLT-CSD also requires DLT-PS. In theory, traditional PS can still support DLT-CSD fund settlement. However, the use of traditional PS will bring DLT-CSD a short board effect. For example, the limited operating time of the RTGS system results in DLT-CSD's Delivery versus Payment (DVP) and final completion time subject to the availability of RTGS, which cannot take advantage of the DLT network's 7 × 24-hour operation. The point is that DLT-PS can also enhance the technical advantages of DLT-CSD. For example, DLT-PS and DLT-CSD can be combined into a chain to carry out DVP on the chain, which is more efficient; DLT-PS can carry margin smart contracts, reserve smart contracts, risk fund smart contracts, etc., and automatically launch CCP central counterparties Party liquidation, derivatives trading, etc. As early as 2016, the Central Bank's Digital Currency Research Institute carried out a digital currency prototype system test and docked with a digital bill trading platform based on blockchain technology. At that time, two sets of schemes were designed for the settlement of funds for digital bills: off-chain settlement, that is, RTGS settlement; and on-chain settlement, settlement through central bank digital currency. The test results found that the introduction of the central bank's digital currency has greatly simplified the bill transaction process, and can realize functions such as automatic real-time DVP and monitoring the flow of funds. If the off-chain settlement is adopted, the advantages of digital bills based on blockchain technology will be greatly reduced, which is not much different from the traditional electronic bill system.

Open and inclusive ecology. In a sense, one of the main reasons that currently leads to the on- and off-market stratification of the market is the lack of technical credibility. Traditional technology cannot solve the trust problem of financial transactions well. Therefore, many transactions need to be carried out in an organized on-site market (of course, there are also factors of economies of scale). The legal protection recognized by the state solves the problem of credibility. With the development of modern digital financial technology such as blockchain, technical credibility has become a supplementary means for increasing legal trust. Through the empowerment of credible technology, the data and value of the original "two skins" are truly aggregated into a physical and logical digital asset. Numbers are value, and the circulation of numbers is the circulation of value. Any asset can be digitized using trusted technology, and the circulation can be activated without relying entirely on the trust of the law. At this time, it is no longer clear what is on-site and what is off-site. The new FMI based on blockchain technology will carry all types of assets, including traditional financial assets such as stocks, bonds, derivatives, asset securitization products, and will also activate all kinds of marginal assets that are currently "out of the market" on a large scale. The deeper meaning of asset digitization is that data information will be native, can be penetrated and traced, and can be self-certified and other evidence, thus extending from the financial model, the economic prospects and significance are immeasurable.

Key considerations for DLT-FMI

  • Business performance

Performance is important, and it will affect the large-scale application of blockchain systems. Traditional securities transactions mainly include reporting, matching, clearing, and settlement steps. Among them, reporting and matching are on the exchange, and settlement and settlement are on CCP, SSS, and PS. The systems of different institutions are only a part of dealing with securities transactions. One hundred thousand TPS is just the system processing speed of a single link. For example, the stock exchange only deals with the matching transactions between the buyer and the seller, and the completion of the matching is regarded as the completion of the transaction, so it can achieve hundreds of thousands of TPS. But in essence, the transaction has not ended, and the final settlement and settlement of funds and securities must be delayed until T + n days to complete. The transaction processed by the blockchain is a complete process, not a certain link, the transaction is settled, and the transaction completion is the final completion of the settlement, which is irrevocable and difficult to change.

At the same time, we must also see that through the improvement of consensus mechanism, lightning network, channel technology, and layered fragmentation technology, the public chain is expected to solve performance problems in the future. For example, Zilliqa's test performance reached more than 2400 transactions per second. Elrond's simulation performance exceeded the average level of Visa (3500TPS) in 2 shards, and close to the highest level of Visa (55,000 TPS) in 16 shards. ). In comparison, the daily average TPS of the Shanghai Stock Exchange's trading system is 1380, with a historical peak of 90,000 and a peak pressure of 130,000. The Shenzhen Stock Exchange's trading system has a daily average TPS of 2181, a historical peak of 192,000, and a peak pressure of 230,000. In theory, through various optimization technologies, the performance of the blockchain system is expected to be close to the normal performance of traditional financial systems.

Of course, we must also clearly realize that there are still some difficulties in blockchain technology that need to be resolved. For example, TPS over 10,000 is currently only implemented in an experimental environment. In addition, state sharding and smart contract sharding technology also need to continue to break through, which is of great significance for DLT-FMI. First, the client of DLT-FMI should be a light node, and it should not have too high storage load and bandwidth pressure. At present, all public nodes in the public chain are required to update and store transactions and various states simultaneously. As the number of transactions continues to increase, the amount of data will swell accordingly. In particular, a high TPS system will inevitably bring a large amount of transaction data, which will lead to the need for high-speed bandwidth when data is synchronized, and a large amount of space for storage, which will bring a lot of challenges to the verification node. Second, as mentioned above, DLT-FMI will carry many smart contracts, such as transaction smart contracts, CCP smart contracts, etc., each smart contract calls each other. At present, Ethereum 2.0 and Elrond have proposed ideas such as a fair chain and a yank solution, but in general, smart contract fragmentation technology is still in the early stages of research and development, and more exploration and research are needed to reach commercial availability.

  • Bond settlement and settlement risk

Settlement risk is the focus that FMI attaches the most importance to, and many institutional arrangements are also designed for settlement risk. At present, securities settlement usually adopts the “restricted delivery” method of centralized institutions to implement DVP, and in a decentralized environment, trusted technologies such as hash locking are used for DVP. The settlement risk of single-chain DVP is small; if some steps in the process are not completed based on hash-locked (HTLC) cross-chain DVP, there may be settlement risk. For example, the seller has disclosed the hash cipher to the buyer, but because of network delays or untimely operations, the buyer did not submit the hash cipher on the DLT-CSD ledger, so no securities were obtained. In this case, there is no guarantee that DVP will be completed in a timely manner. In this regard, the introduction of a notary mechanism may be considered, and the ownership of the securities shall be determined by the notary. In order to avoid frequent use of the notary mechanism, some default actions of the buyer can be punished to ensure the successful operation of the DVP.

  • Settlement period

At present, the securities transaction settlement business is a chain that links together. Trading, clearing and settlement of different branches are carried out step by step. All the business in the next link must wait for the completion of the previous link to receive the previous link system. The data sent can be activated. This results in a long transaction settlement cycle, and each link must be processed centrally. Even if some transactions have been completed, the aggregated data must be processed after the other transactions are completed. The settlement period of securities in overseas mature markets is mostly T + 2.

DLT makes securities T + 0 settlement and even real-time settlement possible. The first is that the trader's signature when placing an order represents his approval of the transaction, which cannot be denied, eliminating the need for post-trade matching; the second is that through smart contracts, securities trading, clearing and settlement services can be integrated on the same DLT-CSD ledger , Eliminating the time lag caused by the data interaction of different systems; the third is that different traders can trade on different smart contracts, and can also clear on different CCP guarantee settlement smart contracts, without having to wait for other investors After completing the transaction, you can enter the settlement link independently. Fourth, the DLT system can operate 7 × 24 hours without time limit.

In addition, under the DLT-CSD settlement mode, traders can flexibly determine the securities settlement period. For example, in HTLC-DVP, the hash lock time can be set to any period after the buyer and the seller have agreed, which varies from person to person. At present, China's securities settlement period is inconsistent with mature overseas markets, and has become a technical issue in the process of China's capital market opening up. In the DLT-CSD mode, buyers and sellers can negotiate two by two, and the inconsistency in the settlement period is no longer a problem.

  • fluidity

It should be said that the liquidity impact caused by different settlement methods is different. For example, the short settlement cycle of full settlement is reduced the participants' liquidity risk, but the required liquidity is higher; and the net settlement through the gap, the required liquidity is significantly reduced, but the settlement is extended Time, only at the last point, can the settlement be finalized. Although the guarantee settlement reduces the participants' liquidity risk, it requires the participants to submit margin and risk funds in advance, occupying liquidity resources. Therefore, it is difficult to evaluate whether the new FMI based on blockchain technology has more liquidity advantages than the existing FMI, which depends on the specific settlement method, whether the net amount is rolled out, and whether the Liquid Saving Mechanism (LSM) is used. ), Whether to guarantee delivery, etc. However, it is certain that the new FLT based on DLT provides investors with more flexible settlement period arrangements, which is conducive to investors' liquidity management.

FMI's new role

The basic idea of ​​distributed ledger is to go to intermediary. In the DLT-CSD mode, the roles of FMI, such as CSD and CCP, seem to be redundant, but they can still play an important role in essence, but the content has changed.

One is to act as a smart contract manager. Smart contracts can only be used after they have been audited, tested and approved by the securities registration and settlement agency and relevant regulatory authorities.

The second is to act as a system security manager. CSD can act as the administrator of the entire DLT network, ensuring the consistency and continuity of system operation. For example, responsible for software patches, parameters and hardware configuration, establish standards, rules and guidelines for all participants, timely detect security vulnerabilities in the system, intervene in time when problems occur, and prevent and control various risks.

The third is the final handler of systemic risks. When the use of CCP equity and last aid is needed, this task is not what CCP smart contracts can bear. To this end, CCP can still act as the final disposer of systemic default risk, monitor the CCP smart contract operation status in real time, analyze the overall securities settlement default risk in the market, and use abnormal financial resources in a timely manner to resolve systemic defaults. risk.

The fourth is a notary. Play "Notary function" to avoid "double issue" of securities; resolve settlement disputes caused by the probability of DLT settlement, or fraud, hacking, and settlement failure; certificate management, and solve the irreversible problem when investment private keys are lost .

Fifth, it is a new type of digital wallet provider.


With the help of digital technology, DLT-based FMI is not only feasible and controllable, but supervision can also be made more precise. Therefore, it is normative. The DLT ledger is not easy to forge, it is difficult to tamper with, and it is traceable and easy to audit, so it is transparent. At the same time, it opened the wall of the traditional distributed system, making financial services more free and open, more dynamic, and it is also based on trusted technology, strong fault tolerance, and more resilient.

In summary, the new DLT-based FMI is a financial market infrastructure that meets the five standards of "standards, transparency, openness, vigor, and resilience", with unlimited potential and promising prospects.

(This article only represents personal academic opinions, and does not represent the opinions of the institution)

This article will be published in China Finance Issue 23