Gu Yanxi: Two Compliance Roads from Legal Currency to Digital Currency

It is well known that cryptographic digital currency has various advantages over legal currency. I think that the future of encrypted digital currency will exist in two forms (see my article, predicting the direction of stable currency from monetary theory ). One is the digital currency issued by each central bank based on its credit, often referred to as CBDC. The other is a digitally stabilized currency that is generated in a distributed manner based on the digital assets being mortgaged. The second way is to follow the tradition of distributed and automatic operation of Bitcoin and Ethereum, but at the same time it is based on actual assets and interests in the real world. The value therefore has a solid foundation, not the same as Bitcoin and Ethereum, whose value is actually the result of market consensus.

The future digital currency system is more reasonable and fairer than the existing legal currency system, and more efficient. Digital currency is more liquid, and competition between different types of digital currencies is therefore stronger. Like other products, the global monetary system concentrates on a few digital currencies that circulate globally. Such a system would curb the motivation and ability of many emerging countries to issue their own currency. This will help the global economy to develop more evenly and contribute to the stability of society on a global scale. In addition, the competition between digital currencies in the global market will, like the competition between commodities, force each digital currency to strive to improve its own quality. A government like Venezuela, which irresponsibly shirks its currency, will be eliminated faster by the market.

Even at present, the demand for stable currency in the market is very strong. And this intensity is far beyond the expectations of the average person. For example, MakerDAO's recent efforts to increase its stabilizing costs indicate that the market demand for stable coins is very strong. However, the current mechanism for generating stable coins in the market is still scattered and very early in development. For example, there are only a few service providers in the United States that provide stable currency. They are all based on the same amount of stable currency issued by the mortgaged dollar. Due to the low profitability of this issuance method, it is estimated that the business scale will not be very large. The demand for stable coins in the market is far from being met in this way.

One of the expectations in the market is that some central banks are expected to issue digital currencies directly. But I think this possibility is very small. Because the currency of a country is not only the basis of the economic life of this country, but also the basic foundation of this social stability. The collapse of many regimes was the result of the indiscriminate currency, which led to a sharp depreciation of the currency. The stability of money is therefore the most crucial to the stability of a society. For the central bank, if there is no strong market demand or obvious benefits, the digital currency will not be easily issued.

The digitization process of money is best carried out under the premise of compliance, from the local part of the society, to the circulation within a limited scope, and then gradually promoted and used throughout the society. This process is definitely an ongoing process of competing with existing forms of money.

The process of digitizing money and assets is essentially a process of digitizing new and existing currencies and assets. This can be analyzed in a two-dimensional quadrant. One dimension is the existing form and the digitized form, and the other dimension is the currency and assets of the new and existing stocks. According to this dimension, we can analyze the process in which the quadrant is the easiest to advance digitization. For currencies and assets, the cut-in quadrants are completely different. For money, the most viable way is definitely to move from stock to digital. And this conversion process must be done within the scope of existing regulations. Such a systematic conversion can only be accomplished within the scope of existing regulations. The two main areas in which this conversion takes place are payment and securities trading. Although these two areas are different application areas, the approach is not the same, but the two are the same in terms of the underlying technology and the stable currency. And the two ways of cutting in will eventually bring together a common ecology.


In the field of payments, this process is a process from the customary use of legal currency to the customary use of digital currency. Two important factors in this regard are the digital currency as a medium and the underlying clearing system that supports its circulation.

The digital currency that is the first to be used in the payment industry is the digital currency generated based on the legal currency mortgage. Such digital currency is usually linked to the current one currency, such as the US dollar. And the process of generating this digital currency needs to comply with relevant regulations. For example, these stable currencies in the US market usually deposit the mortgaged dollars into banks with custody qualifications, and will hire third parties for regular audits. Because of this process compliance, users can issue the same amount of digital currency based on US dollar mortgages, thus completing the process of moving from legal currency to digital currency.

In the field of payment, if there is no corresponding reform of the underlying clearing system, that is to say, transforming the current centralized clearing system into a distributed clearing system, the benefits of using stable currency for payment are limited for both parties to the transaction. . In the current payment business, the cost of liquidation has become increasingly prominent, and it has increasingly become a major cost in the payment process. If a point-to-point transfer settlement can be achieved, the cost of both parties to the transaction will be lower, which will prompt the parties to use this payment method. Other payment methods such as credit card and bank card transfer will be gradually reduced. The use of digital currency is therefore higher, and the conversion to digital currency is gradually realized. The implementation of this clearing system also needs to be a process of compliance. In the US market, there are currently several such clearing systems. From the ACH system between banks in 1974, to the clearing system of credit card companies Visa and MasterCard, to the PayPal clearing system that emerged in the Internet era. In the era of blockchain, there will be a clearing system based on distributed accounting technology. World Wire, IBM's collaboration with the stellar system, may have spawned such a clearing system. World Wire is currently serving transfers between different currencies between multinational banks. However, the original intention of the stellar system design is to serve individual users, so it is very possible to develop a function that supports personal direct transfer payment based on the stellar system. Now there is another huge system integrator from IBM that provides related technical support services. Their combination should have a better chance of establishing such a clearing system than the original PayPal.

2. Trading

Another path of compliance from legal currency to digital currency is the encryption of digital currency and ST transactions. Some of the encrypted digital currency exchanges currently running in the US, such as Coinbase and Gemini, are registered as Money Services Business, and some are also licensed by the New York State BitLicense. Because these exchanges operate within the scope of compliance, they can use banking services. Their users are therefore able to convert fiat currency into digital currency and digital assets. Because the value of digital assets represented by Bitcoin and Ethereum is the result of market consensus, they cannot attract a large amount of legal currency in the market to be converted into these encrypted digital currencies. In the trading world, the next large-scale channel for converting French currency into digital currency should be ST trading. In the current US market, ST-based financing can be carried out under relevant regulatory laws. Although the regulatory restrictions in this area are still very strict, it still greatly limits the development of ST. But after all, this STO process can be carried out within the scope of compliance, so there is a channel for compliant conversion of legal currency into digital assets. The replacement of stock-based financing by ST-based financing is an inevitable trend (see my article, why does STO definitely replace IPO? ). The global market has reached a consensus on this, but it is only a matter of time of development. In the current US market, market demand for ST-based financing is beginning to emerge, especially in the real estate equity category. Relevant institutions that provide financing services in the market are also constantly appearing. Therefore, both the supply and demand sides of the US ST market are constantly developing. The relevant regulatory policies in the United States will certainly be modified accordingly to suit this market demand. After all, one of the three responsibilities of the US SEC is to promote the formation of capital in the market. On the international front, Canada has opened an exchange based entirely on blockchain technology, the Canadian Stock Exchange. The Swiss Exchange plans to launch SDX, a digital asset exchange based entirely on blockchain technology, in 2019, focusing on trading digital securities. Since these exchanges are conducted within the scope of compliance, users can convert their legal currency into digital currency for use, thus completing the conversion from legal currency to digital currency.

As with the payment process, in the securities sector, the migration from legal currency to digital currency also requires the migration of the underlying clearing and settlement system, from a centralized clearing and settlement system to a clearing and settlement system based on distributed accounting techniques. Migration. Only the common use of clearing and settlement systems based on distributed accounting technology can fully realize the value of digital currency in the field of securities trading. In fact, since the value of blockchain technology has just been discovered, the consensus in the market is the most direct application of blockchain technology in the securities industry, that is, post-trade clearing. Therefore, in 2016, there have been high-profile companies that have focused on this aspect of the solution. It is Digital Asset Holdings in the US and SETL in Europe. In 2018, people became more aware that blockchain technology can use ST to represent real-world assets and interests, and can use ST to finance and trade. So now it is the blockchain technology to complete the entire process of digital assets from generation to circulation. So the current ST market is actually applying blockchain technology to this complete process, and it is done within the scope of regulation. Therefore, users can use their legal currency in the bank in the ST market in a compliant manner. Although the technologies used by various countries and companies on this development path are different and the stages are different, the trend of managing the entire life cycle of encrypted digital assets based on blockchain technology is very obvious.

3. The integration of payment and transaction

As mentioned above, the transition from legal currency to digital currency will be conducted in a compliant manner in both payments and securities trading. Although this process takes place in two different business areas, the migration in both areas will eventually shift to the same technology and market. The future digital asset world must be a digital financial network ecosystem (see my unified series of exchanges and banking ecology , the structure of digital financial network ecology , and the path to digital financial network ecology ). This ecology must be supported by the underlying blockchain technology to support the generation, circulation and payment of digital assets. I think the future is like this, and the current development process must be a process of close integration of payment and securities trading scenarios (see my article, How do squares bypass the legal currency settlement? ). If an alliance starts with this and adopts the corresponding DAO-based organizational principles (see my previous article, the next blockchain-based cross-border financial alliance ), then such an alliance has a large Under the premise of compliance, the probability is the first to realize the goal of digital financial network ecology, and at the same time, the migration of legal currency to digital currency is completed.

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