Gu Yanxi: Fnality, a milestone in the evolution of financial market infrastructure

Recently, a number of financial institutions led by UBS jointly initiated the establishment of the company Fnality International. Fnality raised a total of £50 million from fourteen sponsoring banks. The sponsoring banks include UBS, Barclays Bank, Credit Suisse Group, NASDAQ, Deutsche Bank, ING Group, Belgian United Bank, Lloyd Bank Group, Imperial Bank of Canada and Mitsubishi UFJ Financial Group. Fnality is based on UBS's previous USC (Utility Settlement Coin) project. The purpose of the USC project is to provide a currency clearing network between banks. Fnality will issue a stable currency USC for currency settlement between banks. USC will be based entirely on the legal currency collateralized at the participating central bank. Initially supported currencies include Canadian dollars, US dollars, British pounds, Euros and Japanese yen.

According to related reports, the application of USC seems to be limited to not only currency clearing between banks. The report mentions the assets of the pass and the post-trade liquidation. This seems to imply that the company's clearing business will not only be limited to currency clearing between banks, but will also support post-trade clearing of more complex financial products. If this is the case, I think this is also very normal. I have previously stated that the future financial business ecology must be an integrated ecosystem of securities business and banking business (see my article, unified exchange and banking ecology ). The future financial ecology must be based on the bottom of the same blockchain , using stable currency for circulation, and can easily carry out the ecology of retail payment and digital asset trading (see my related article, the missing part of the stable currency Bakkt strategy). The most stable coin to be made is Jack, not Mark ).

Money delivery between existing banking systems is done based on a centralized accounting system. Due to the computational performance and cost of the underlying technology, the initial billing was done through netting and overnight batch processing. Problems in this way include low efficiency, the risk of counterparty risk, and the ultimateity of the transaction. Further developments in this centralized accounting system began to support some real-time full transfer settlements, but users had to pay very high costs for this.

The emergence of distributed accounting techniques and stable currency provides a very good technical solution to the above problems. With this technology, money payments between banks can be done directly in full in real time, without the need for overnight net settlements as before. Therefore, the final problems of clearing efficiency, counterparty risk and settlement can be solved.

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I think USC can create great value early in the project. It will replace the current centralized interbank clearing institution (see my article, the first victim of the blockchain era ). But in this respect, it is not fundamentally different from the value created by other technical applications. For example, the bank's migration from a large database on a host to a relational database has increased the operational efficiency of the banking business. I think the biggest value of the USC project is the underlying technology, financial tools and business models it uses. These changes are actually fundamentally changing the infrastructure of the financial industry.

First, the bottom of the technology

At the bottom of the technology, the technology used by Fnality must be a blockchain that supports smart contracts. Smart contracts can be used to represent real-world assets. So on top of this underlying support, you can achieve point-to-point direct exchange of digital assets. Stabilizing coins are the simplest of all types of financial assets. The first step of the project was to achieve the free flow of stable coins between accounts and accounts on the bottom of the blockchain. Thereafter, various structured financial products such as securities, funds, real estate ownership, etc. can be circulated. Therefore, the landing of this system laid the foundation for participating financial institutions to trade various financial assets among each other. In fact, the project itself understands its goal very well and classifies the project as a distributed financial market infrastructure (dFMI).

Second, the stable currency

The short name of USC is Utility settlement coin. Obviously the original purpose of this token is for settlement, not for payment scenarios. At this stage, the USC is issued based on the legal currency mortgaged by the participating central banks. This is different from the dollar-based stable currency issued in the United States. The collateral issued by USC is based on several legal currencies, not just one. So in terms of the generation mechanism, USC has greater compatibility.

At this stage, USC's collateral is based on legal currency. But collateral is definitely more than just legal currency. Since the mortgaged currency is in the participating central banks, these banks can accept more types of mortgage assets to issue coins. I think the future digital currency exists in two ways. One is a digital currency based on the central bank's credit issuance, and the other is a stable currency based on a digital asset mortgage issued in a distributed manner (see my article, predicting the development direction of stable currency from monetary theory ). With the introduction of more types of mortgage assets, the USC commodity currency will have stronger attributes and the central bank's credit currency properties will decrease. The USC itself will gradually evolve into an independent digital currency.

Third, the business organization model

In terms of business organization model, Fnality is also taking a new step in the new business organization model. The mainstream business organization to date is a centralized, self-operated model. This model is the natural result of the development of the market. The application of centralized computing systems further strengthens this model. But as the economy develops to this day, more problems in the market require cooperation between institutions. Only through such cooperation can we maximize the common interests of the institution. For example, the remittance business between banks is an example of this. Blockchain technology now provides a technical foundation to support the completion of this business. In terms of business organization, financial institutions are also required to participate in this business, and each participating organization can benefit from this cooperation. Fnality is a joint venture of several banks and its technical services will continue to be provided by Clearmatics. The decision management aspect of this company will definitely be decided by the sponsoring company.

In fact, this mode of cooperation in the financial market already exists. For example, the company I have served before, the US option settlement company OCC is jointly established by the first five options exchanges in the United States. OCC provides services to both exchange shareholders and clearing members. The exchange and clearing members jointly manage the OCC and benefit from OCC's operational success. The emergence of blockchain technology provides a stronger underlying technical support for this collaborative business model. This alliance with the blockchain foundation supports business models that not only appear in the financial industry, but also in other industries. In this respect, the World Wire Alliance led by IBM is also in this form. I think more of this business model will emerge, and the general economic model will be used to bind the interests of the participants more strongly.

In short, Fnality will provide a more effective solution for legal currency transfers between participating banks in the near future. But its significance is by no means limited to this. The underlying technology that it builds to support the flow of digital financial assets and the USC used in this network will provide a solid infrastructure for the future of digital financial services. Its model of cooperative management in commercial organizations is also widely adopted and will become a major organizational form in the future financial market.

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