Zou Chuanwei: The logic and mechanism of the blockchain applied in the post-processing of financial transactions

The central bank's digital currency and the global stable currency represented by Libra reflect the application of blockchain in the field of currency and payment, and have become a frontier issue that has attracted much attention. In addition to payment scenarios, global stablecoins and central bank digital currencies are also used in financial transaction scenarios. Compared with the previous scenario, the latter scenario has received less attention, but its importance is not at all low, and the key to understanding the latter scenario is that blockchain is applied to post-trade processing of financial transactions.

Financial transaction post-processing includes the process from completion of the transaction (Trade Completion) to final settlement (Final Settlement), the core is the clearing and settlement of securities and funds.

In this article, securities refer to tradable financial assets, securities are issued to raise funds from investors; funds refer to electronic central bank currency (excluding cash) and commercial bank deposits and other payment instruments; final settlement refers to securities and funds not The moment of revocation and unconditional completion of the transfer.

The post-processing of financial transactions targets both securities and funds. If the funds are also processed with blockchain, post-processing of financial transactions involves central bank digital currencies and global stablecoins. The Stella project cooperated by the Bank of Japan and the European Central Bank, the Ubin project of the Singapore Monetary Authority, and the Jasper project of the Bank of Canada, etc., all contain experiments on the application of blockchain to post-processing financial transactions. Not only that, the use of blockchain to process securities and the use of blockchain to process funds follow the same economic logic, and both use the blockchain Token paradigm to replace the account paradigm (Zou Chuanwei, 2019a).

Therefore, to understand the application of blockchain in the mainstream financial field, post-processing of financial transactions is a problem that must be studied clearly. There is already a lot of valuable work in this area.

In 2015, the Nasdaq Stock Exchange launched Linq, a private equity trading platform based on blockchain technology, mainly based on blockchain to issue Pre-IPO stock services.

In 2016, the preparatory group of the Shanghai Stock Exchange and the preparatory group of the People's Bank of China Digital Currency Research Institute teamed up with several commercial banks to develop a digital bill trading platform prototype system. Digital currency's delivery versus payment (DvP) settlement function.

In 2018, the World Bank issued the world's first bond created and managed using blockchain, called Bond-i.

In 2019, the United States Securities Depository and Clearing Corporation (Depository Trust & Clearing Corporation, DTCC) proposed the post-transaction processing principles of tokenized securities (DTCC, 2019).

These works have attracted media attention, but also accompanied by many specious views. For example, some media articles believe that the issuance and trading of securities through blockchain is obvious, and rarely dig into the complex mechanisms behind it.

The application of blockchain to the post-processing of financial transactions involves both the understanding of blockchain and the understanding of financial infrastructure. It is not easy to study this issue without relevant work experience, but with the attention of front-line experts in financial infrastructure, a batch of high-quality professional literature has appeared.

In 2017, the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS) proposed an analytical framework for the application of distributed ledgers in payment, clearing, and settlement (CPMI, 2017).

Yao Qian (2019) discussed financial infrastructure based on distributed ledgers, especially Central Securities Depository (CSD), Securities Settlement System (SSS), Payment System (PS) and The new form of Central Counterparty (CCP) under the distributed ledger. However, because of space limitations, he did not discuss some key issues in the post-processing of blockchain financial transactions.

Since the end of 2019, CPMI has three research reports discussing the impact of distributed ledgers on payment and securities settlement from different perspectives. CPMI (2019) discussed the wholesale settlement token (Whole Settlement Token), but the economic logic is applicable to the use of blockchain to process funds and securities.

In the March 2020 BIS Quarterly, Bench and Hancock (2020) discussed the future payment system, and Bench et al. (2020) discussed the future securities settlement system.

Combining these research reports, you can already see the overview and core issues of the application of blockchain in financial transaction post-processing. This is exactly the goal of this article.

This article is divided into three parts. The first part briefly introduces the core components of financial transaction post-processing, the second part discusses the economic logic of tokenization of funds and securities, and the third part discusses the key mechanism of blockchain applied to financial transaction post-processing.

1. The core components of financial transaction post-processing

This part lays the groundwork for the rest of the article, because only by understanding the core components of financial transaction post-processing can we analyze the necessity and rationality of blockchain for financial transaction post-processing.

Early securities used physical forms, which were paper certificates, which can be divided into bearer securities and inscribed securities.

Unregistered securities do not need to be registered with the issuer, the holder is the beneficiary and has the same anonymity as cash. No one or institution records the information of the bearer of the bearer securities, but once the bearer securities are lost, stolen or destroyed, the holder will generally suffer a complete loss. There is no endorsement for transfer of bearer securities, and transactions are the same as cash. As long as both parties to the transaction confirm the authenticity of the bearer securities, they can complete the transaction and deliver the securities without the assistance of a third-party trusted institution. After the liquidation and settlement are completed, the bearer securities transaction process is completed.

The U.S. Treasury issued long-term paper bearer bonds before 1986 (see Figure 1). China's economic construction bonds issued in the 1950s and treasury bonds issued since 1981 are all bearer (physical) bonds. However, the supervision of bearer securities is more difficult, including forgery, money laundering and tax evasion.

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Figure 1: U.S. paper bearer bonds

Registered securities are currently the main model of physical securities, following the direct holding model. According to the Hong Kong Stock Exchange (2020), investors hold physical securities and directly exercise some rights of the securities under their name, and there is no custodial risk (securities held by intermediaries will have the risk of loss). For the settlement after securities trading, you need to submit physical certificates. The investor ’s ownership of the securities is directly registered in the securities issuer ’s register.

On November 14, 1986, Shanghai Feilo Acoustics Co., Ltd., which Deng Xiaoping gave to John Fanlin, chairman of the New York Stock Exchange, was registered securities (Figure 2). At present, there are no physical stocks in China, Australia and the European Union (after 2025). The United States, Hong Kong, Singapore, South Korea and India still have physical stocks, but they must be dematerialized before trading (Dematerialize, see below).

Because the preservation and settlement of physical securities implies high costs and risks for investors, investors usually leave physical securities to be held by the custodian institution, which leads to an indirect holding model.

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Figure 2: Shanghai Feilo Acoustics Co., Ltd. gifted by John Fanlin

To understand the mainstream securities holding model, one must understand the function and operation mode of CSD. CSD dematerializes securities, making securities an electronic bookkeeping (Book-entry) account in CSD accounts, and further immobilizes securities so that securities transactions do not involve physical delivery of paper vouchers.

CSD mainly undertakes three functions: one is to authenticate and maintain the records of issued securities fairly and trusted; the second is to settle and transfer the ownership of the securities from the seller to the buyer; the third is to maintain the account, establish and update the securities Ownership records.

In the indirect holding model, investors hold securities through agents (including CSD and market intermediaries such as brokers and custodians). The name of the agent is shown on the securities register rather than the name of the investor.

According to the Hong Kong Stock Exchange (2020), the indirect holding model can be subdivided into a single-layer holding model and a multi-layer holding model (Figure 3). In the single-tier holding model, the investor is a direct participant of the CSD, and the CSD manages the agent account for its participants. In the multi-tier holding model, the highest layer is usually CSD, and the lower layers have various financial service providers (such as brokers and custodians) acting as agents of investors.

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Figure 3: Agent account structure of the indirect holding model

Different countries and regions differ greatly in their securities holding patterns (Hong Kong Stock Exchange, 2020).

China is mainly a direct holding model. Investors need to open a securities account under the real name of China Clearing (CSD in China's stock market), and the account opening procedure can be handled through an authorized securities company. The investor's securities account is composed of a general account (ie "One Code Link" account) and associated sub-accounts. Account real-name system, and has a unique identification code. China Clearing is responsible for maintaining the investor ’s securities account information and the securities issuer ’s share register. The shares held by investors are managed by securities companies on their behalf, and the shares held by securities companies themselves and those held on behalf of clients are deposited in China Clearing. China's agent accounts are limited to foreign investors who hold stocks under the Shanghai-Shenzhen-Hong Kong Stock Connect through Hong Kong agents.

While the United States and India are indirect holding models, Hong Kong, Singapore, and South Korea, which have both direct and indirect holding models, have agent accounts. The existence of the agent account reduces the information requirements for CSD, but the securities ownership information is "fragmented" and it is more difficult to reconcile.

The complete securities trading process can be divided into two links.

The first link is trading, that is, securities trading, which requires a centralized intermediary agency or multiple intermediary agencies to match the purchase order. For stocks, the declaration and matching are completed on the exchange.

The second link is post-processing, which is divided into clearing and settlement. Liquidation is mainly to calculate the securities and capital payment obligations of the parties involved in the transaction, and some of the payment obligations will be offset or offset. Liquidation also includes sending transaction information to a third-party agency for reconciliation and confirming the object to be settled. Settlement refers to the transfer of ownership of securities and funds in accordance with the agreement, which is divided into a delivery leg (Delivery Leg) and a payment leg (Payment Leg). Among them, the payment side refers to transferring securities from the securities seller to the securities buyer, and the payment side refers to transferring funds from the securities buyer to the securities seller.

The payment side involves PS. PS refers to a set of tools, processes and rules to transfer funds between two or more traders.

Payment is divided into wholesale payment and retail payment. Wholesale payments take place between financial institutions, securities and foreign exchange transactions between financial institutions, transactions between financial institutions and CCP, and financing between financial institutions. Retail payment is related to the purchase of goods and services by consumers and commercial banks, including individual to individual (P2P), individual to commercial bank (P2B), commercial institution to individual (B2P) and commercial institution to commercial institution (B2B).

Whether it is wholesale payment or retail payment, there is between the front end and the back end. The front-end includes: one is the source of funds, such as a bank account; the second is the service channel that initiates payment, such as a retail payment app; and the third is a payment tool. The back-end includes: one is liquidation, which refers to the payment instruction transmission and reconciliation process, and sometimes includes transaction confirmation before settlement; the second is settlement, which refers to the transfer of funds to relieve the payment obligations between two or more parties.

There are three main settlement methods in PS.

The first type is Real Time Gross Settlement (RTGS), which refers to a full settlement payment instruction one by one. The efficiency of RTGS is high, which reduces the credit risk of all parties involved in the payment, but requires higher liquidity.

The second type is Deferred Net Settlement (DNS), which refers to net settlement after the payment instruction is rolled over. DNS can save liquidity, but it takes a certain amount of time for both settlement and settlement. DNS has settlement risk, which is reflected in two dimensions: one is credit risk, which refers to the risk caused by the payment service provider (Payment Service Provider, PSP, generally a commercial bank) of the payee or payer before the settlement is completed; the second is Liquidity risk refers to the risk that the recipient may delay receiving funds.

The third is the mixed mode of RTGS and DNS. For example, if the payer's PSP does not have sufficient funds to implement RTGS, PS provides a Liquidity Saving Mechanism (LSM), which settles after the payment instruction and other payment instructions are narrowed.

In almost all countries, RTGS is used for wholesale payments, and the RTGS system is usually owned and managed by the central bank. In the RTGS system, if the balance of the financial institution's account is insufficient, payment instructions may be blocked. For this reason, the central bank will provide financial institutions with an intraday credit limit (Intraday Credit). DNS is usually used before retail payment.

A major risk of settlement is principal risk (Principal Risk), which refers to the risk that the seller cannot obtain funds after the delivery of the securities or the buyer cannot obtain the securities after paying the funds because the payment of funds and the delivery of the securities are not synchronized.

Therefore, the post-processing of financial transactions emphasizes the DvP principle: securities are delivered only if the funds are paid. Depends on whether the payment side and the payment side are settled in full or net after settlement, there are three DvP modes: one is DvP mode 1, which means that securities and funds are settled one by one in full; the other is DvP mode 2. Refers to the settlement of securities in full one by one, and the net settlement after funds are rolled over; the third is DvP mode 3, which refers to the net settlement of securities and funds after netting.

Figure 4 is a typical post-processing process of financial transactions.

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Figure 4: Financial transaction post-processing process

2. Economic logic of tokenization of funds and securities

(1) The general logic of tokenization

Before the formal discussion, it is necessary to clarify three concepts: account, token and ledger.

In this article, the account corresponds to Account. For example, securities are recorded in a CSD account, electronic central bank currency is recorded in a central bank deposit reserve account, and commercial bank deposits are recorded in a commercial bank deposit account. These are all ways of expressing value under the account paradigm. Asset ownership and transaction records are maintained and updated by a centralized account manager. Token as a digital certificate is another way of expressing value. A comparison between the account paradigm and the token paradigm can be found in Zou Chuanwei (2019a). The ledger corresponds to Ledger. The ledger records asset ownership and transactions, either in the account paradigm or in the token paradigm.

Zou Chuanwei (2019a) discussed the rules that should be followed for the tokenization of funds and securities. Token is a piece of computer code in the form of existence and has no intrinsic value.

The value of Token comes from the assets (funds and securities) carried, and there are three rules to follow.

One is the 1: 1 issue rule. Token issuers issue tokens in a 1: 1 relationship based on the underlying assets. The user issues 1 unit of target assets to the Token issuing institution, and the Token issuing institution issues 1 unit of Token to the user.

The second is the 1: 1 redemption rule. The user returns 1 unit of Token to the Token issuing institution, and the Token issuing institution returns 1 unit of the target asset to the user. Under the first two rules, the Token issuer ensures a two-way 1: 1 exchange between Token and the underlying asset.

The third is the credible rule. Token issuers must regularly accept third-party audits and fully disclose information to ensure the authenticity and sufficiency of the underlying assets as Token issuance reserves. Under the constraints of these three rules, 1 unit of Token represents the value of 1 unit of the underlying asset. The number of tokens at each address in the ledger records asset ownership information, and the transfer of tokens between addresses records asset transaction information. When the Token has a secondary market transaction, the Token market price may deviate from the value of the underlying asset, but the market arbitrage mechanism will drive the price back to value. Once these three rules are not strictly followed, the effect of the market arbitrage mechanism will be weakened, and the token price will be decoupled from the value of the underlying asset, but not necessarily completely decoupled.

(2) Tokenization of funds

CPMI (2019) uses the following diagram to illustrate the mechanism design of wholesale settlement Token, the steps are as follows:

1. Bank A transfers funds to the Token Arrangement Account for the purchase of Token;

2. Token arranges the account balance to increase, triggering the Token issuer to issue a new amount of Token;

3. Transfer the newly issued Token to Bank A;

4. Bank A transfers Token to Bank B, this transfer is peer-to-peer;

5. When Bank B redeems the Token, it transfers a certain amount of Token back to the Token issuer;

6. Token redemption triggers Token to arrange the transfer of equal amount of account funds;

7. These funds are transferred to Bank B's account.

Figure 5 shows the mechanism for the issuance, transfer and redemption of wholesale settlement tokens, reflecting the two rules of 1: 1 issuance and 1: 1 redemption. The left side of Figure 5 is the operation under the account paradigm, and the right side is the operation under the Token paradigm, indicating that there should be interoperability between the two paradigms, that is, the technical and legal compatibility between different systems or mechanisms.

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Figure 5: Mechanism design of wholesale settlement Token

According to Yao Qian (2018) 's design of the central bank's digital currency prototype system, in order to ensure that digital currency issuance and withdrawal do not change the central bank's total currency issuance, there is an equal exchange mechanism between commercial bank deposit reserves and digital currency- At this stage, the central bank deducts the deposit reserve of commercial banks to the digital currency issuance fund and issues digital currency in equal amounts. If the Token arrangement account in Figure 5 is understood as a digital currency issuance fund and the Token issuer is understood as a central bank, Figure 5 actually describes the design of Yao Qian (2018) well.

In addition, if the Token arrangement account in Figure 5 is understood as the Libra fiat currency reserve pool, banks A and B are understood as Libra authorized dealers, and the Token issuer is understood as the Libra alliance, and Figure 5 also conforms to the Libra design plan (Libra Association, 2019 ), Except that the trading unit between the authorized dealer and the legal currency reserve pool is a basket of currencies.

(3) Tokenization of securities

The previous article discussed the economic logic of tokenization of funds, which is also applicable to the tokenization of securities. When tokens are used to represent securities, tokens can be used to represent existing securities or newly issued securities in the form of tokens. The best way to understand tokenized securities is to compare them with Depository Receipts (DR).

Depositary receipts are negotiable certificates issued and circulated in the securities market of a country and represent the securities of foreign companies (called "basic securities"). Each depositary receipt represents a certain amount of basic securities.

There are two core institutions in the depositary receipt business: One is the Depositary Institution (Depositary Institution), which serves as the nominal issuer of the depositary receipts and the depositary receipt market intermediary, and serves the depository receipt investors, including the issuance of depositary receipts , Registration, transfer and cancellation, etc .; second is the custodian institution (Custodian Institution), which is a bank arranged by the depositary institution in the country where the underlying securities are issued, and is responsible for custodian of the underlying securities represented by the depositary receipts. Depository receipts are classified into financing and non-financing based on whether the underlying securities are newly issued or existing stocks.

Depository receipts can be used for cross-border transactions with underlying securities. After the domestic investor issues an instruction to purchase depositary receipts to the domestic broker, the domestic broker may choose to purchase the depositary receipts in the domestic market, or purchase the underlying securities in the overseas market through the foreign broker, which is converted by the depositary institution The depositary receipts will be sold to domestic investors (corresponding to the 1: 1 issuance rules above). After the domestic investor issues an instruction to sell the depositary receipt to the domestic broker, the domestic broker can choose to sell the depositary receipt in the domestic market, or sell the basic securities in the overseas market through the foreign broker, and the depositary institution Cancel equivalent depository receipts (corresponding to the 1: 1 redemption rules above). Because of the arbitrage mechanism formed by cross-border transactions, there will generally not be a large price difference between the depositary receipts and the underlying securities.

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Figure 6: Blockchain depository receipt

Tokenized securities can be regarded as Blockchain Depository Receipt (BDR), except that the mainstream depository receipts are for overseas securities and domestic investors, and the blockchain depository receipts are for the same securities account Pattern and Token pattern (Figure 6, where the blue arrow indicates account operation and the orange arrow indicates Token operation). Depository institutions are at the core of securities tokenization. The depository institution holds the underlying securities in accordance with the agreement of the depository agreement, entrusts the custodian institution to escrow, and issues a BDR representing the underlying securities on the blockchain. It is not difficult to see the isomorphic relationship between Figure 5 and Figure 6: the Token arrangement account corresponds to the depository institution's securities account, and the Token issuer corresponds to the depository institution. Depository institutions can be commercial banks or securities companies, or stock exchanges or CSDs. If CSD serves as a depositary institution, it is the case where Yao Qian (2019) said that CSD and SSS are integrated.

The economic logic of tokenization of funds and securities was discussed above. It should be said that this logic is not complicated, but legal issues are more complicated than economic issues.

CPMI (2019) proposes to study the legal rights of Token holders and the relationship between Token holders, Token issuers and reserve assets issued by Tokens. For example, does the Token holder have the right to claim the Token issuer or the reserve asset issued by the Token? If the latter, do token holders have rights to reserve assets as individuals or as a whole? This will result in compliance risks and operational risks that cannot be ignored.

For the post-processing of financial transactions under the account paradigm, there has been long-term exploration and research, and a series of risk mitigation and management mechanisms have been established, and the legal basis of tokenized securities remains to be studied.

3. The key mechanism of blockchain applied in post-processing of financial transactions

(1) Necessity and rationality analysis

The application of blockchain to the post-processing of financial transactions is a paradigm shift, from the account paradigm to the token paradigm. But the paradigm shift alone is not enough to support the necessity and rationality of introducing blockchain in the post-processing of financial transactions. The key is to prove that blockchain can improve efficiency, reduce risks, and retain the advantages of the current model.

In the indirect holding model of securities, a transaction involves multiple intermediaries, such as CSDs, custodians (which can have multiple layers), exchanges, and brokers. Each intermediary agency uses its own system to process, send and receive transaction orders, check data and manage errors, etc., and maintain its own transaction records. The data standards used by each intermediary organization are also not uniform. These will generate a lot of costs and increase the difficulty of reconciliation between intermediaries. This problem is very obvious when holding multiple layers of securities.

If the settlement and ledger maintenance functions of CSD are implemented through blockchain, then CSD and SSS are integrated, and all market participants share a ledger, which will bring the following benefits:

One is to simplify and automate post-transaction processing work through distributed, simultaneous and shared securities ownership records, reducing the workload of CSD and various intermediaries for reconciliation and confirmation of transaction details in the background;

The second is to shorten the time required for settlement and reduce the exposure of settlement risk;

Third, because the transaction-related information is shared by both parties to the transaction, it can promote automatic liquidation;

The fourth is to shorten the escrow chain so that investors can directly hold securities and reduce the legal, operational risks and intermediary costs undertaken by investors;

Fifth, it has good traceability and high transparency;

Sixth, decentralization and multiple backups can improve system security and stress resistance (CPMI, 2017).

Another benefit is that holders of tokenized securities can program smart contracts to automate management of securities to achieve flexible risk transfer, hedging, and resource allocation. The account system can also automate the management of securities, but it is implemented by a centralized account manager, while tokenized securities devolve automated management capabilities to securities holders. Readers interested in the programmability of Token can refer to Zou Chuanwei (2020). But Bech et al. (2020) believe that self-executing contracts may trigger risk contagion and amplify procyclicality.

To realize the above benefits, tokenized securities need to meet the following premises:

First, CSD performs the authentication function well to ensure the authenticity of the issued securities information.

The second is that the records on the blockchain have legal effect. The third part has pointed out this problem.

The third is that the blockchain can ensure settlement finality (Settlement Finality). This problem is not difficult for the alliance chain, but some public chains can only guarantee the finality of settlement in a probability sense because of the possibility of forking.

The fourth is to achieve DvP.

Fifth, it can effectively deal with errors and exceptions. The immutable characteristics of the blockchain objectively increase the difficulty of this problem.

The sixth is to ensure the confidentiality of transaction information when multiple parties may participate in the verification.

Seventh, there are operational issues, including identity management, system scalability, and interoperability with existing processes and infrastructure.

Next, discuss the fifth to seventh points (ledger management issues), and then discuss the fourth point (DvP feasibility issues).

(2) Account management issues

Bench et al. (2020) proposed to understand account management issues from the following dimensions.

The first dimension is who has the right to verify the ledger. Under the account paradigm, only centralized account managers have the right to verify, and their credibility and authority are very important. For example, in payment, a commercial bank verifies the identity of the deposit account owner; in securities transactions, CSD verifies the identity of the securities account owner. In the Token paradigm, in theory, anyone can verify whether the Token transaction meets the previously defined algorithm rules. The former can be called trust based on mechanism design, and the latter can be called trust based on technology.

The second dimension is who has the right to update the ledger. There are two situations.

One is that no permission is required. In theory, any node can verify the transaction and update the ledger, and decide which node will exercise this right at a certain point through a consensus algorithm.

The second is permission, only trusted institutions can verify transactions and update the ledger. If only one node can update the ledger, it is no different from the account paradigm. But even in this case, the Token paradigm has value. For example, the People's Bank of China DC / EP prototype system may use a centralized ledger based on the UTXO (Unspent Transaction Output) model. This centralized ledger is embodied as a digital currency issuance registration system, which is maintained by the central bank. Because the credit of the central bank is significantly higher than that of commercial banks and other private institutions, there is no need to introduce a distributed trust mechanism in DC / EP, so it makes sense for DC / EP to use a centralized ledger (Zou Chuanwei, 2019b).

The third dimension is who has the right to use the ledger (that is, to initiate transactions), and there are two situations. One is public, anyone or institution can initiate a transaction. The second is private, and only trusted persons or institutions can initiate transactions. This situation is similar to the authority management in the account system.

The fourth dimension is who has the right to view the ledger, there are two situations. One is non-hierarchical. Any person or organization has a complete backup of the ledger and is informed of all the information in the ledger. The second is hierarchical, and only some people or institutions have full backups of the books.

(3) Feasibility of DvP

Some projects have tested whether blockchain can be used for post-processing of financial transactions to achieve DvP. The complexity of this problem lies in the fact that both the Token paradigm and the account paradigm can be used for the bond payment terminal and the payment terminal for post-processing of financial transactions. There are four different combinations. Table 1 shows that each combination can find the corresponding item.

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Table 1: Experiments on the application of blockchain in the post-processing of financial transactions

It is worth mentioning in Table 1 that both the coupon payment terminal and the payment terminal use a combination of Token paradigms. According to Yao Qian (2019), in the digital bill trading platform based on blockchain technology, two sets of schemes have been designed for the settlement of digital bill funds:

One is off-chain clearing, that is, RTGS clearing (corresponding to the Token paradigm of the payment side vs the paradigm of the payment side in Table 1);

The second is on-chain liquidation, which means settlement through the central bank's digital currency. The test results found that the introduction of central bank digital currency has greatly simplified the bill transaction process, and can realize automatic real-time DvP, monitoring capital flow and other functions. If you use off-chain liquidation, the advantages of digital bills based on blockchain technology will be greatly reduced, which is not much different from the traditional electronic bill system. This shows that after the tokenization of securities, it is necessary to cooperate with the tokenization of funds in order to realize the potential of the blockchain in the post-processing of financial transactions.

Both the coupon payment terminal and the payment terminal are Token paradigms. There are two situations in this combination (Figure 7):

The first is that the payment terminal and the payment terminal use the same Token system (that is, the same blockchain), which is called a single-ledger DvP (Single-ledger DvP). For a single ledger DvP, funds and securities are recorded in the same ledger. After the two counterparties confirm the transaction instructions, the Atomic Settlement smart contract can coordinate clearing and settlement, allowing securities and funds to be transferred at the same time. The Jasper project and Stella project believe that DvP mode 1 (that is, securities and funds are settled one by one in full) is feasible in this situation. Therefore, it is necessary to see that in the decentralized environment, net settlement is more difficult.

The second is the use of two different Token systems (that is, two different blockchains) at the coupon payment terminal and the payment terminal, called Cross-ledger DvP (Cross-ledger DvP). For cross-ledger DvP, funds and securities are recorded in two different ledgers. There is a mechanism between the ledgers to link the transactions of the two assets. There are two possible methods. The first is to coordinate the transfer of securities and funds on two blockchains by a centralized institution. The second is the Hashed Time Lock Contract (HTLC).

But whether DvP can be implemented in all scenarios is still a question that needs to be studied. The Jasper project believes that cross-chain settlement may have principal risk. The Stella project test found that settlement of cross-ledger DvP using HTLC may fail and lead to two different results. The first result is that the funds and securities are returned to their original holders. Both counterparties will not take too much risk, but they will face replacement cost risk (Replacement Cost Risk) Trading but the current market conditions deteriorated) and liquidity risk. The second result is that both funds and securities will be obtained by one trading party, and the other party will bear greater principal risk.

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Figure 7: DvP mode when the coupon payment terminal and payment terminal are in the Token paradigm

Based on the summary of the existing literature on the application of blockchain in the post-processing of financial transactions, this article attempts to answer the following questions: What is the principle of issuing and trading securities on the blockchain? How can central bank digital currency be used in financial transaction scenarios? What form will the blockchain be used in the mainstream financial field? It should be said that the answer to this article is very preliminary. There are a large number of economic, technical, legal and business development issues that need to be studied for the application of blockchain to post-processing financial transactions.

First, the economic logic of Tokenization of funds and securities is not complicated, but there is no clear answer to the legal questions, which is mainly reflected in the legal rights of Token holders, and the reserve assets issued by Token holders, Token issuers and Tokens. Relationship.

Second, the necessity and rationality of applying blockchain to post-processing financial transactions. The current analysis shows that the introduction of blockchain in the indirect holding model of securities can help shorten the custodian chain, reduce the dependence on intermediaries, simplify the reconciliation workload, and thus shorten the settlement flow and improve the settlement efficiency. These improvements are more apparent when there are multiple layers of securities. However, in China's capital market (including the stock market and the bond market) such as the direct holding model, the improvement of the blockchain remains to be observed and tested.

Third, China's experiments on digital bill trading platforms have shown that after tokenization of securities, it is necessary to cooperate with tokenization of funds in order to realize the potential of blockchain in the post-processing of financial transactions. This shows that the use of blockchain in the post-processing of financial transactions and the central bank's digital currency is an unavoidable problem.

Fourth, the blockchain will bring new problems to the post-processing of financial transactions, including but not limited to: 1. The finality of settlement; 2. The effective handling of errors and exceptions; 3. In a decentralized environment The feasibility of net settlement after the gap; 4. The feasibility of cross-ledger DvP.