Gu Yanxi: Libra, a side attack on the securities industry

First, the current securities industry market structure

At present, the structure of the securities market worldwide is basically the same. There are multiple stock exchanges in a securities jurisdiction. The exchange provides a matching service for securities transactions. After the completion of the securities trading order, the exchange will transfer the order to the securities clearing company. The clearing company will record the transaction data to ensure that the corresponding securities and money records are transferred and transferred to the corresponding account. Within the same securities jurisdiction, usually only one clearing company provides clearing and settlement services for stock exchanges within its jurisdiction. Such a company is a DTCC in the United States, and it is listed in the Chinese style.

Retail users start securities trading accounts at brokerage firms. Transfer transaction funds from the bank to these securities accounts. The securities company opens a trading channel for the retail user to connect to the exchange. Retail users trade on these exchanges through these channels. The correctness of the final transaction record of the retail user is guaranteed by the clearing company. A voucher commercializes its own account to unify all of its user data in a clearing company for liquidation. The broker then separates the money with the user. This is the so-called secondary clearing arrangement.

Second, the rapid development of encrypted digital currency exchanges

The emergence and development of encrypted digital currency exchanges over the past few years has seen the possibility of digital assets trading on a global scale. Such assets can be traded to users worldwide on an encrypted digital currency exchange. Trading users trade directly on these digital exchanges without the intermediary of a broker. Due to this feature of trading assets and trading users on a global scale, these digital currency exchanges have experienced explosive growth. This shows that digital asset trading is actually an arrangement that can break through the existing securities market and achieve more efficient transactions.

Third, the fundamental flaws of the encrypted digital currency exchange

Although these encrypted digital currency exchanges have developed rapidly, their inherent market structure and operation are unreasonable due to lack of supervision, so the inherent risks are very large. One of the risks is that there is no separation between the transaction and the asset. The exchange holds the user's assets at the same time, but there is no effective mechanism to ensure that the exchange does not misappropriate or misappropriate the client's assets. Such problems have long been resolved by compliant securities market arrangements. But now it appears in the field of trading of encrypted digital assets. Given the rapid development of this industry, the risk of user assets will therefore increase. Since encrypted digital asset transactions are spontaneously formed in the market and are cross-supervised, there is no effective regulatory entity to regulate them. In solving this problem, in addition to the means of supervision, blockchain technology provides a technology-based solution to this problem, which is a solution that uses centralized matching transactions and distributed clearing.

• Depth | How digital currency changes financial ecology
• Read all the G7's regulatory response to Libra
• The value of BTC holdings in this country may exceed the gold reserve

Fourth, the application of blockchain technology in the securities industry

When the value of blockchain technology is recognized by the market, various industries are trying to apply it in their respective fields. The earliest consensus of the securities industry on the application of blockchain technology is to apply it to the post-trade clearing field. To this end, in 2016, high-profile startups have emerged in this area. In the US is Digital Asset Holdings. In Europe it is SETL. But the solutions for these two companies are still targeting the traditional securities market. Their application is an application of accounting methods and does not change the way electronic representation of securities is represented.

While blockchain technology is being applied to the existing securities industry, the way in which money and assets are digitized is also rapidly evolving. The way in which funds are used as financing tools for fundraising and secondary market transactions is welcomed by the market. The rapid development of ICO on a global scale has also brought new enlightenment to the development direction of the securities market. Under the regulatory requirements of the SEC, the market began to gradually adopt the securities pass for fund raising and trading. In the US securities market, various related institutions such as marketing platforms, securities-based license-customized platforms and ST-exchanges that provide financing and trading services within the scope of compliance have emerged. The business model adopted by ST Exchanges is centralized trading and distributed clearing. tZERO, Templum, and OpenFinance Network all adopt this model. Because the document-based pass is itself a digital form, it can be managed by the user himself in the chain. Therefore, ST-based financing and trading services can support the storage, circulation and trading of digital assets on the blockchain. According to the current US securities laws, the types of assets that can be supported in this way are only alternative assets, and the requirements of investors are also very high. So this way is still a small asset area now. But on a global scale, it has begun to establish a compliant digital asset exchange in accordance with this model. The Swiss Asset Exchange SDX has been established in Switzerland. In the United States, two companies have also begun to apply to the SEC to register a new digital stock exchange. SDX uses distributed accounting technology Corda as the underlying settlement of its digital securities. TZERO and Templum are among the two companies in the United States, and the underlying technologies of both companies are using blockchain technology. So these compliant digital asset exchanges use a combination of centralized and distributed clearing.

In terms of technologies that support distributed clearing, SDX uses Corda, and tZERO has designed an intermediate layer that can access different blockchain technologies at the bottom.

These companies are at the forefront of the industry in adopting new technologies, but they still operate in existing securities jurisdictions. This in turn makes it impossible to take full advantage of the global advantages of digital assets and blockchain technology. Therefore, I believe that a digital asset exchange that is very likely to emerge in the future is an exchange established jointly by global compliance brokers. The exchange operates in a centralized and distributed clearing model. Such an exchange can therefore support more digital assets in this listed transaction and a wider range of trading users. Such an exchange can thus combine the advantages of the current operation of the encrypted digital currency exchange on a global scale, while at the same time ensuring the security of the user's assets through technical means.

5. Libra's opportunities to improve the securities industry

The success of such an exchange has many factors to decide together. The correct structure and mode of operation of the securities market is one of them, in addition to the number and uniqueness of the products that come to the listing, and the number of users and the volume of transactions that can participate in the exchange. In addition, trading products and trading users affect each other. Libra provides a multifaceted advantage base for such an exchange.

First, the Libra blockchain supports smart contracts to customize financial products, so digitally can be used to represent securities on the network. The Libra blockchain also provides basic technical support for the clearing and settlement of securities.

Second, Libra Stabilizer provides the most convenient tool for global users to trade on this exchange.

Third, members of the Libra Association will bring a large number of potential trading users to the exchange on a global scale. So Libra has laid a very good foundation for such a global exchange in the underlying infrastructure, digital stability currency and users. So some innovators in the securities industry around the world can also consider building a globally safer digital asset exchange on top of such infrastructure provided by Libra. Such a digital asset exchange would be superior to existing cryptographic digital currency exchanges and separately operated digital stock exchanges within each securities jurisdiction.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!