Gu Yanxi: The Governance Mechanism of the Future Encrypted Digital Asset Trading Industry

More and more encrypted digital asset exchanges have emerged in the US market recently. In addition to existing encrypted digital currency exchanges such as Coinbase and Kraken, other types of encrypted digital asset exchanges are emerging. One type is that mainstream financial institutions are entering this field. The most typical representative is the exchange Bakkt led by ICE, one of the three major exchange groups. In addition, ErisX, jointly supported by Fidelity Group and several other financial institutions, and Seed CX supported by Bain Capital. Another type of emerging exchange is the ST trading platform with ATS licenses such as tZERO and OpenFinance Network. In addition to the above three types of existing trading platforms, companies have applied to the SEC to establish a new digital stock exchange, such as tZERO and BOX. Templum and MIH have jointly applied to establish such an exchange. In other countries, encrypted digital asset exchanges are also emerging, such as SIX in Switzerland and the Canadian Stock Exchange in Canada.

However, the encryption of digital asset exchanges developed within these systems faces an embarrassing situation. The impact of distributed accounting techniques and encrypted digital assets on the existing securities market is very large in depth and breadth, and is still in progress (see my article, SEC 监管 监管 尴尬 , blockchain technology in securities The embarrassment of the application in the trading market, the dusk of the Nasdaqs ). If an emerging exchange operates entirely within the existing regulatory regime, it cannot fully exploit the potential of blockchain technology and encrypted digital assets. Therefore, the demand of these exchanges is in conflict with the existing securities market supervision system. There is a need for multiple regulatory interactions between the market and the regulatory body to form a new regulatory regime. But this communication will discuss the decision-making process for a long time. In addition, because the various jurisdictions in the world are independent, their respective policies may not be consistent with each other, which will still affect the "compliant" development of the encrypted digital asset trading business on a global scale. But the success of the volatility of digital currency trading platforms that have emerged in the market on a global scale is certainly inspiring the operation of emerging markets within these systems in larger markets. This forces regulators in each jurisdiction to work together to develop a common governance rule for the encrypted digital asset trading industry. However, if we expect some jurisdictions to cooperate actively and formulate such governance rules in a timely manner, this is basically impossible.

The best application scenario for blockchain technology is to ensure mutual cooperation between multiple parties. This is one of the best applications in the governance of the encrypted digital asset trading industry. It is possible for the market to generate a reasonable set of governance mechanisms and then obtain approval from local authorities. This governance mechanism should use blockchain technology to meet the basic requirements of financial and securities market regulation, and use economic leverage to ensure the implementation of these governance rules.

Protecting the interests of investors and maintaining the stability of financial markets are the common goals of financial market regulators. The securities market governance mechanisms derived from blockchain technology also need to meet these goals. On the basis of technical means to achieve these goals as much as possible, regulators in various countries can formulate their own specific requirements, such as various standards for listing.

First, the correct market structure

The correct market structure is the foundation of the trading industry. Such market institutions are not only to ensure the most efficient operation of the entire market, but also to protect the interests of investors. Protecting the interests of investors is the main responsibility of supervision. The structure of the existing securities market is the best market structure for the development of the industry to date. In this market structure, the roles of each participant are refined and each performs its own proprietary functions. These roles include investment banks, brokers, exchanges and asset registration custodians. Because of their respective roles, there is no way for agencies to collude to harm the interests of investors. The assets of the trading user are required to be kept in the asset escrow company, and other institutions cannot use the trading assets of the customer, which avoids the misappropriation of user assets.

The emergence of blockchain technology and encrypted digital assets has had a major impact on the functions of these existing institutions, but there has been no change in this market structure. For example, due to the emergence of distributed accounting techniques, the current clearing functions performed by brokers and clearing companies will be replaced by technology, but other functions of brokers and clearing companies, such as customer service and risk control, still need to be available separately. The brokerage and clearing company to complete. The impact of blockchain technology on existing securities market institutions is to weaken the intermediary, and not to completely de-intermediate. Therefore, in the future digital asset trading industry, the current market structure will still exist, but the function of the role will change greatly. The corresponding governance mechanism also needs to be based on this.

Second, the truthful, comprehensive and timely information disclosure

The information disclosed in the securities market needs to be truthful, comprehensive and timely. This is the basic requirement of the securities market. These requirements are to ensure that investors can make their own investment decisions based on real information. In the era of blockchain, these requirements can be directly achieved through technical means. For example, the authenticity of the customer's identity and related information, blockchain technology should be used to ensure that this information is disclosed to the appropriate reviewer, where appropriate. For example, in a financing project, the identity of major players and relevant participating institutions must be guaranteed to be true and transparent. The transparency of orders and transaction data in the trading market is also likely to be. This is likely to be a completely different place for future encrypted digital asset transactions than existing ones. The existing exchange is the so-called SRO (Self Regulated Organization) mechanism. The exchange is responsible for managing all aspects of the transaction, including monitoring and detecting transaction fraud in the market. But the future of the encrypted digital asset trading market is likely to be the result of a multi-party cooperation, there is no centralized management. One mode that can be adopted is to use technical means to deliver relevant data to the market in a truly transparent manner, which is supervised by various third-party market supervision agencies in the market.

Third, the economic levers of punishment

Individuals and related institutions that make financing need to use mortgage funds to ensure the authenticity of the information or services they provide. If the authenticity of the information or services provided is verified over a period of time, the funds for this portion of the mortgage are automatically returned. If any errors are found, this part of the funds will be automatically deducted. This punishes fraud in the economic aspect. In addition, such bad records will be seen by all in the market in a timely manner through information disclosure. This double punishment mechanism will force each participant to seriously maintain their professional reputation and professional integrity.

Fourth, try to be able to run automatically

The operation of the entire system should be as automated as possible. That is to say, the execution of various business rules is automatically implemented through smart contracts to avoid human intervention. For example, if the information is not disclosed in time, the system will automatically suspend the transaction and deduct it from the mortgaged funds; if the project does not meet the criteria for maintaining the listing, the project will be automatically delisted, the project's financier and the funds pledged by each service organization. It will also be automatically deducted. Since the rules are accepted by all participants, their automatic execution therefore does not lead to objections.

Such a governance mechanism is essentially based on the existing securities market structure, exploiting the characteristics of blockchain and smart contracts, and adopting economic incentives and penalties to automatically manage the encrypted digital asset trading business. Of course, these mechanisms are only part of the overall governance system. The specific requirements of a jurisdiction can also be automated through data and technical means. With the continuous improvement of such a governance system, the transaction business it supports will not be restricted to only one jurisdiction. The scope of operations of various institutions involved in this industry is therefore global.

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