Payment System Architecture Based on Wholesale Digital Currency (W-CBDC): Interpretation of Fnality White Paper (I)


In 2018, everyone was paying attention to the value of digital tokens. By 2019, everyone focused on JPMorgan Chase Bank's stable currency and Facebook Libra, especially since Libra released a white paper, most people around the world. At the same time, Libra is studying. At the same time, many central banks around the world are also studying digital currency (CBDC), and some have announced the issuance of digital currency, including the People's Bank of China. But there was a stable coin that made a sensation when it came out, but it quickly disappeared, because Libra had too much influence and overshadowed the stable currency. But in fact, this is a plan that has been studied by many central banks for three years. This is the USC (Utility Settlement Coin) stable currency, issued by the British company Fnality.

If you are unfamiliar with Fnality, you can refer to the article "Reconstructing the Global Financial System Based on Wholesale CBDC Digital Currency" [1]. Fnality is preparing to issue USC, including digital dollars, euros, yen, pounds, and Canadian dollars (note that there is no RMB).

Those interested in digital currency today should study USC first, not Libra, because USC is the result of discussions and research by the Fnality team in the UK with a number of central banks and banks including the Bank of England, the Swiss National Bank, the Bank of Canada and the Bank of Singapore. Based on the results of several central bank research results. Whether you agree with their claims, you can learn from them. This article is a translation of the USC white paper, and we have added a lot of comments for the reader's understanding. Because the content of the white paper is based on the results of three years of research by many central banks, the content is rich. Many of the design ideas are difficult to understand some design principles if there is not enough relevant background knowledge. Therefore, the annotations are many, and the white papers are released twice.

This white paper was released by Fnality and gives us a lot of new ideas. The white paper has absorbed a lot of knowledge from the cross-border payment research report issued by the Bank of England, the Bank of Canada and the Central Bank of Singapore in 2018 (hereinafter referred to as the report of the three central banks). The three central bank reports mention the pain points of the current financial system and the root causes that cause them, and the solutions to these pain points.

The white paper is also optimistic about the blockchain. It believes that the blockchain is a major innovation in financial technology. However, unlike some previous reports, it only promotes it. It proposes industrial pain points and solutions, pointing out that these solutions can accelerate payment transactions and save A lot of expenses, as well as enhanced government regulation.

This white paper proposes a transnational stable currency (USC), but at the same time has national ID cards, establishing a pool of funds across the central bank, providing a benign interaction between the central bank and the central bank, the central bank and the bank. Such an interaction mechanism can prevent a country's financial crisis from spreading to another country during a financial crisis; it can also support currency liquidity in peacetime. This is an important topic that the author discussed at the beginning of 2016 and when a British banker visited the Bank of China. The banker said that he was in a central bank when the financial crisis occurred. At that time, their central bank was very anxious, and other central banks were also in a hurry. . However, there was no such mechanism at the time, so that they saw the financial crisis of a country, passed it on to the second country, and then passed it on to the third country… This has been transmitted to all parts of the world, and there is no way to stop it. Unfortunately, our proposal was not adopted at the time.

Today this problem still exists in some areas, even more serious than in 2016. So such a mechanism is very important for the central bank, and Fnality provides such a mechanism. This is something Libra can't provide.

This white paper proposes that the same currency (stable currency) is used on the exchange, rather than multiple currencies, to speed up cross-border transactions. And the use of a shared pool of funds, supported by the participation of the central bank, is equivalent to the establishment of a virtual multinational transaction bank. In this way, even if some central banks or banks do not open the door, cross-border transactions can still be carried out, running 365 days a year, trading 24 hours a day, without rest, and under the financial supervision of participating countries. Fnality believes that this stable currency model and the International Digital Monetary Fund (IMF) proposed a model of synthetic digital currency (sCBDC) established by the central bank and the private sector, and is also a wholesale digital currency model approved by many central banks. Such wholesale digital currency is also completed in cooperation with commercial banks. This can be opened to non-bank institutions in the future.

Most of this white paper talks about payment transaction design, the actual system design is not disclosed, but from the simple narrative of the white paper, the design of the Fnality system can be seen. This design is smart, but it also makes a big difference in the current payment process. It’s like the car was in the past, now it’s a car, and the urban transportation plan is bound to change.

The white paper has no author name and is published in the name of the company. Published in June 2019.


Looking ahead, imagine that you will be responsible for the bank's cash and liquidity management in 2029.

As a cash and liquidity manager, you have been working in the industry for 25 years or more, experienced financial crises, participated in many optimization projects, streamlined intercompany settlements, rationalized current accounts, and handled notorious exchange issues. Over the years, you have been hoping for many hopes, dreams and ambitions to change the complex world you live in, creating a simple and efficient operating environment that provides instant cash and liquidity management information.

You walk in the morning and see the big screen on the wall showing the cash balance on each currency you operate. In addition to this, the progress of all transactions and settlements in each currency is shown.

Whether it is money market transactions, long-term deposits or securities settlements, each currency has only one current account balance to manage all of your payment needs. As a cash and liquidity manager, you will immediately notice that you need US dollars to complete all of today's transactions. On your trading screen, you can see an acceptable price for the overnight USD trade, and in less than a minute, the near-leg of the trade has been settled. Your cash flow expectations and settlement realization will be close to zero and your credit risk will be eliminated. Your screen shows your higher and lower billing balance.

If the reader is not careful, it may not be found that the white paper came up with an idea at the outset: "Each currency has only one current account balance to manage all of your payment needs." The significance behind this is amazing, which will change the current banking transaction process, and the system design is very different from the traditional system, and it is different from many blockchain application architectures. This will have an impact on system performance, which we will analyze later.

Looking forward to the next 10 years, we need a little imagination. From such a long-term perspective, we remind us that change is not done overnight. As part of the future settlement environment, the innovation we need has come or is close at hand. Tokenisation (Chapter 2) is already underway. Chapter 3 explains how USC (a “utility settlement currency”) works and fully understands the potential of the new digital exchange (Chapter 4). . In fact, as we said, the USC project is involved in ongoing discussions with existing exchange organizations to achieve this opportunity. We have a very clear vision and hope that USC will become a universal payment method in the digital space (Chapter 5). We know how a trading bank or correspondent bank will evolve (Chapters 7 and 10). Central banks and regulators can also play a role in changing the rules of currency circulation. We are well aware of the need for a broader range of capabilities that can hold overnight USCs (Chapters 8 and 9).

The financial services industry contributes a lot to GDP. Gary Gensler of the Massachusetts Institute of Technology recently correctly pointed out in an article published on Coindesk that if the industry accounts for 7.5% of GDP, how efficient is it for ordinary people? important.

DLT and USC on the financial platform are likely to become disruptive technologies in the financial market, reshaping end-to-end processes and bringing new ways of economic coordination. We believe this is an exciting and important journey.

The token train has left the station

"Digitalization will make most traditional financial companies irrelevant by 2030." This is a recent title of the Gartner survey report. In all industries, distributed ledger technology (DLT) and tokenisation are seen as part of future technology solutions, especially in the financial services arena.

Tokenization is an emerging standard for new and traditional assets. ICO has as many startups as it supports. The power to use DLT or blockchain is not just in the retail sector, it has also entered the institutional market. In the existing market, some “serious” participants also announced their intention to establish a new business in the wholesale market:

WeChat picture_20191006170504

All of these initiatives bode well for future processes that will be faster and cheaper. But all these advanced ideas lack one thing: a means of payment that can "chain" transactions.

“All these initiatives are indicative of future processes that will be faster and cheaper,” which is the first element of our proposed new four elements of currency competition. [7]

On the commercial retail side, it is quite easy to accept cryptocurrencies such as Bitcoin or Ethereum, or use the new Open Banking Standard (PSD2) and use the API to debit customers from commercial bank accounts. However, none of them is suitable for institutional business; the use of cryptocurrencies has market risks and volatility, and is not supported by the central bank.

There are also many people who are trying to create a equivalent of a legal currency on a distributed ledger, a secured token, the most likely of which is Tether.

Recently, ICE, Microsoft and Starbucks announced cooperation in the same field, and IBM's World Wire and Stellar also announced cooperation. There are other so-called "stabilized coins".

All of these tokens will help pay on the DLT, meeting the needs of “payment means” and “account means”, which are two of the three major characteristics of the currency. However, one of the three characteristics is missing; they all involve at least one, and sometimes three forms of credit risk, depending on the number of intermediaries: the first is institutional risk, such as Tether does not allow auditing To prove the relationship between tokens and collateral in circulation. The second risk comes from the bank partner behind the token. The third is the underlying asset. For example, Tether deposits its dollars in a Middle Eastern bank that deposits its funds in a commercial bank in the United States. Therefore, whether they are a reliable "value storage means" is questionable.

Like us [9], Fnality criticizes the fake stable currency, its value is unstable, the book is not open, auditing is not allowed, and the spirit of the blockchain is violated.

These “stable coins” are not mobile; users will find that they cannot immediately switch from one token to another. Maybe the broker will help you change ICE to US dollars and IBM to US dollars. It's just maybe, and of course it's a fee, plus some "Surge pricing."

However, there is currently no convincing alternative, so there is no doubt that these “stabilized coins” will grow like weeds and breed like rabbits.

our opinion:

Whatever our perception of DLT and ICOs, there is a motivation to use this new general-purpose technology. There is currently no means of payment at an appropriate institution size. Financial institutions (FIs) need to address this issue quickly. If progress is slow, financial institutions will have to struggle with huge bases and fragmented liquidity. Either subvert the market or be subverted.

"If progress is slow, financial institutions will have to fight against huge bases and fragmented liquidity." This is also the new currency competition we have been raising. [6] Either subvert the market or be subverted by the market, which is a strong signal from Fnality.

What is Fnality and USC?

In 2015, USC was seen as a research project, a bank consortium that wanted to explore the infinite possibilities of DLT and the world of tokens on the blockchain and understand their potential impact on the world.

Since 2015, the consortium has expanded to 16 institutions: Barclays Bank, Bank of America, CIBC, Commerzbank, Credit Suisse, Deutsche Bank, HSBC, ING, KBC, MUFG, Santander, SMBC, State Street, Swiss Silver, Wells Fargo, CME/NEX. Among them, 12 banks belong to the G-SBS Group and consist of the 30 most important banks in the world.

But this is only the beginning. In May 2019, members of the USC consortium made the next investment in Fnality International (Fnality) with the aim of achieving the USC commitment.

The full name of USC is the Utility Settlement Coin. The idea used to be, and still is, to create a peer-to-peer digital cash asset to ultimately settle the tokenized value transaction. Of course, it must be in multiple currencies and run across platforms. The settlement asset will be a numerical unit representing the collateral claim in the form of legal tender held by the central bank, which will have the right to ensure that local settlement in each jurisdiction is considered final and cannot be overturned by the court.

The consortium members sponsored the USC project to explore the way forward. Several high-level expected results or targets have been developed for the project, which is considered a step towards potential strategic investment. These goals include: having central bank support, technical feasibility, and understanding how the bank integrates with the new platform.

After the strategic investment round, Fnality returned to life, continued to promote the project, and put the USC into production within 18 months.

Note that Fnality has been working on the program since 2015 and has worked with a number of central banks and banks to find a number of problems over the past three years and to come up with practical solutions to these problems. But the white paper does not elaborate on system design, nor the details of the project, it should be for confidentiality purposes.

The following three articles are the main sources of thought in this white paper. Although they are not written in the white paper, if you look at the articles cited by it, you know that this is indeed the source of their ideas. At the same time, central banks are also actively pursuing measures they believe should be taken in the field of distributed ledger technology.

In March, 1018, BIS CPMI's paper on Central Bank Digital Currency (CBDC) [12] focused on the “wholesale market” (the Wholesale Markets), the article mentioned “introducing wholesale digital currency, it is traditional Compared with the central bank reserve, it becomes an interbank payment system that can potentially improve settlement efficiency and risk management."

In 2018, BIS proposed "Wholesale Digital Law Currency" (W-CBDC) – a wholesale central bank digital currency) [12], which is a token between banks. Unlike Libra, Libra can be said to be a retail token. These two types of tokens have different solutions and different solutions. Although they are all stable coins, they also have legal currency support, but the path difference is very large. Many central banks, including the European Central Bank, have said that wholesale digital currency should go first. Readers have found that many central banks in Europe are against Libra, but no central bank accuses Fnality. This shows that Fnality is not the enemy of the central bank, but also a friend of the central bank.

The concept of “wholesale” focuses on “inter-bank payment systems” rather than consumer payments, and can “enhance settlement efficiency and risk management”, which is consistent with our speed, safety, and regulatory elements [7]. 2. In November 2018, the Bank of England, the Monetary Authority of Singapore and the Bank of Canada issued a very detailed discussion paper: “Cross-border interbank payments and Cross-Border Interbank Payments and Settlements: Emerging opportunities for digital transformation [13]. This provides multiple ways to establish W-CBDC.

According to the BIS W-CBDC model, the central banks of the three countries (the Bank of England, the Bank of Canada, the Central Bank of Singapore) pointed out the problems of the current financial system and proposed solutions. This white paper is most affected by the reports of the three central banks. But the solution proposed by Fnality is not exactly the same as the report of the three central banks. Fnality uses blockchain technology, and the three central banks report has not yet decided whether to adopt it.

3. In December 2018, the Swiss federal government published a paper: "Swiss Distributed Book Technology and the Legal Framework of Blockchains – Overview of the Financial Industry" (Legal Framework for distributed ledger technology and blockchain – An Overview with a focus on the Financial sector) [14]. The paper mentions USC (note: there are three references to USC in this paper) and clearly states:

1) It is necessary to pay the token and create it will be the task of the private sector;

2) Delivering a payment (Delivery vs. Payment, DvP) requires such a payment token;

3) They can imagine the currency of the central bank.

The Swiss report supports the use of tokens in financial markets and suggests that it is up to the private company, not the central bank, to carry out the token business. This is consistent with the first principle of the three principles of digital legal currency [4]. The Swiss report mentioned USC, saying that Switzerland has already had discussions with the Fnality team, which has the participation of Swiss banks.

It is clear that the Fnality team has been discussing with central banks for a long time, tracking the central bank's thinking, and using technology to solve specific problems, not just how great the propaganda technology is.

The above three reports, among which the three central banks report the most important. Later we will also point out some of the techniques of the Swiss Stock Exchange used in the Fnality system.

Wholesale CBDC model description

According to the reports of the three central banks, several participating jurisdictions, through their respective central banks or global multilateral institutions, agreed to create a “Universal Wholesale Digital Law Currency” (UW-CBDC) (U is Universal General, W is Wholesale Wholesale). The UW-CBDC will be supported by a basket of currencies issued by the participating central banks, but each central bank is responsible for its own digital currency. It will be issued through specially created exchanges to allow the issuance and redemption of such UW-CBDCs.

Converting a jurisdiction's currency to UW-CBDC will create an exchange rate between that currency and UW-CBDC. The participating central banks jointly decide how to manage this issue.

Banks can use these UW-CBDCS and other banks to resolve peer-to-peer cross-border transactions.

The W-CBDC platform can be designed to operate 7×24 and operate in parallel with existing RTGS platforms, using UW-CBDC to trade between banks and central banks in the same jurisdiction and between banks across jurisdictions.

Our view :

Fnality International is launching a solution that is designed to meet the specific needs associated with settlements that are determined by central banks and CPMI and even considered by governments.

Fnality's commitment

Today, in financial institutions (FIs), the liquidity available is like a big cake, it has to be cut into pieces, and each piece is actually transferred to a number of “cash accounts”, these are current accounts (Nostros) And Custodians.

Usually, banks have too many current accounts and custodians. In the most recent period, a USC consortium member had more than 200 current accounts with only one dollar account branch.

Daily cash management is more of an art than a science, which is quite inaccurate in this regard. Settlement is not 100% predictable, so the balance is volatile, which means that “bank cash” on the balance sheet is high. Oliver Wyman's latest report, "Intraday liquidity: Reaping the Benefits of Active Management," makes the cost of intraday liquidity very clear: 10% of a typical 100 billion liquidity reserve of a large bank 30%. It costs 100 basis points, which means at least $100 million a year.

Therefore, it is worthwhile for the treasurer to focus on the design of the settlement infrastructure, because every 1% reduction in the liquidity buffer will result in a lifetime benefit of $10 million.

Fnality uses "a pool of liquidity to meet all payment needs", while at the same time proposing "cancel the separate account of the current account and the custodian". With USC, liquidity has changed from a big cake that has to be sliced ​​to a small cake (no longer being sliced), reducing the cost of liquidity. In the figure below, they estimate that the small cake is 60% of the big cake (the difference between 60 million and 100 million), which is a 40% savings.

There are several side effects:

First, the liquidity pool is large and the cost can be high. When external financing is required, the cost of the liquidity buffer is between 50 and 150 basis points, depending on the difference between the long-term financing cost and the current repo rate.

Financial institutions then rely heavily on their current accounts and custodians to provide intraday overdrafts. These overdrafts can be quite unstable, even at the end of each day, the balance is almost flat for most of the time. The agency bank and the custody business must bear the cost of providing liquidity.

The widespread use of CLS in foreign exchange settlement has indeed helped improve the liquidity of current accounts. Despite this, there is still a lot of foreign exchange needed to settle the settlement, and the party to CLS's net financing and financing transactions, the so-called import and export swaps, also needs to be settled. These transactions help to increase the size of intraday overdraft demand.

Continuous Linked Settlements (CLS) is the standard for global settlement of foreign exchange transactions, and is also the settlement method for reducing foreign exchange settlement risk by conducting simultaneous net settlement. CLS users must fund their short positions through their correspondent or correspondent banks. Payments need to be completed within a certain time, which requires “timed payment”. In general, the parties charge these timing payments based on value.

The above is the practice of the traditional CLS, but in the Fnality environment, because the participating stable currency has the corresponding legal currency in the central bank, as long as there is a stable currency, it can be settled. And because the liquidity of the day uses a large pool (a pool of one currency), the liquidity problem is much smaller than before.

"One pool of liquidity serving all payments needs"

On the Fnality platform, all available funds are stored in one place to meet all payment needs. We anticipate that settlement will become less artistic and more scientific, depending on how we change the model.

WeChat picture_20191006170716

Here, the key elements are "Atomic Settlement" and "Interoperability". For example: You are ABC Bank, holding 100 shares of Apple, you must deliver 60 shares and get $12,500. The combination of these two elements will allow your trading platform to retain the 60 shares of Apple stock you want to sell and then communicate on the Fnality platform to determine if the buyer has funds to pay. If it is determined that the communication protocol completes the final step of interoperability and ensures that the payment and assets are transferred simultaneously, there is no settlement risk.

This technology exists today, but in a limited form; the Swiss Central Securities Depository (CSD) is interoperable with the Swiss RTGS system, which provides Swiss francs for securities settlement DvP. The European securities settlement platform TARGET2 Securities (T2S) is similar but not identical, as the securities settlement uses a separate account with T2.

Switzerland is a country often mentioned in this white paper.

The CSD and RTGS mentioned here are important national systems. If the system is stopped, a large part of the country's economic activities will stop.

In Section 3, the three citations are based on reports from the central bank or the government, indicating that the Fnality framework includes the central bank system. Here again the Swiss National Bank.

Note that the Fnality framework is not a series of independent concepts, but is tied together (a shared fund pool + settlement of atomic + interoperability + CLS + central bank support) to become the Fnality framework, each of which is indispensable . But the white paper does not provide technical details.

Note that there is no USC stable currency mentioned here, because these are just the Fnality concept, and Fnality+USC is the complete concept.

Fnality will achieve this within the Global Scale. With the development of asset tokenization and new markets, the use of USC will be a means of reducing the size of Liquidity Cake. Just 10% improvement will have a huge impact on your liquidity and the ease and speed with which you manage cash. Real improvements require standards and Fnality to provide a common pool of liquidity.

Please note that the white paper says “will achieve this goal globally”, indicating that this will be a global project. Anyone today "creating a digital currency that runs only locally" will face strong competition from global digital currencies. Libra is an example. Before the Libra white paper was released, few people discussed stable currency. Many financial practitioners also said that blockchain technology is not important at all, even the technology of the country. But after August 2019, almost everyone thought it was important and the beginning of a new international currency competition. The United Nations 2019 Digital Economy Report also listed the blockchain as the first important technology in financial technology.

Reducing liquidity and managing cash is equivalent to completing transactions with less capital (flow pool), while other funds can be used elsewhere to promote economic development.

Is stable currency another option?

There have been a lot of discussions about stable coins, maybe too much. Through Big Blue, IBM announced that its World Wire product has the ability to stabilize the currency, and in mid-2019 it seems to be a good time to consider how the banking pipeline system will be affected.

Basically, stable coins should be able to maintain their value, generally maintaining a 1:1 correspondence with underlying assets such as French currency cash. According to its actual situation, even if the issuer is a bank, there are various risks.

Stabilizing coins should “maintain a 1:1 correspondence with underlying assets such as French currency cash”, indicating that the Fractional Reserve system is not adopted to reduce financial risks.

On March 23, 2018, Olaf Ransome discussed these limitations in detail in a LinkedIn article on "The Risk of Stabilizing Coins", see: /

our opinion:

The combination of Fnality and USC will centralize financial markets and simplify cash management. The cancellation of separate accounts in current accounts and custodians provides the simplicity of operation and the overall need for less liquidity.

Please note that the white paper is here to say "centralization". For a long time, in the blockchain world, the term "centralization" seems to be the devil. However, the author directly said that centralization is very important. The centralization should be open and centralized. For example, can the central bank be decentralized? The Bank of Canada also holds this view in its 2017 report and believes that the central bank is the right currency center.

From a scientific perspective, the centralized liquidity buffering mechanism is the most effective. If a fund pool is placed in two accounts, each of which is 50%, when 60% of the funds are needed, the two accounts alone are not enough to support, but if they are placed in one account. As mentioned earlier, there is only 200 accounts in one institution, so the liquidity is greatly reduced. Distributed or decentralization does not mean that there is no center. This is an important concept that we have been talking about for five years and a big misunderstanding in the blockchain world.

Here is the "cancel the separate account of the current account and the custodian", not cancel the current account and the escrow account. This puts the pool of funds in a large account (rather than being scattered across many small accounts) and supports a lot of liquidity.

The role of central banks and regulators

In our view, the central bank plays a pivotal role. It is not just a simple regulatory agency. It actively makes USC a risk-free settlement asset through its RTGS system, ensuring that collateral and fiat currency cash are safely stored. In a dedicated account held by members. Cash collateral is then tokenized and used for chain settlement.

In order to achieve higher operational efficiency, whether in coordination or in terms of liquidity, the rational path in recent years has been to merge into fewer and fewer financial market infrastructures (FMIs) and to force market participants to participate in some centralized processes. . Compulsory exchange liquidation is a representative of such regulatory enforcement.

This concentration has caused concern among regulators who are now worried that the current solution to these problems will face increasing systemic risks, both in finance and in technology. Two agencies are responsible for setting standards for financial market infrastructure: Basel Committee On Payments Markets Infrastructure, CPMI and IOSCO (International Securities Commission). These standards are defined in the Financial Market Infrastructure Principles (PFMI).

In May 2018, the two organizations published a report on the implementation of PFMI monitoring in CCPs. Among the 19 organizations surveyed, risk management and recovery programs are considered to be areas of concern.

The Bank of Canada was the first central bank in the world to use the PFMI to assess the blockchain application in the central bank (2017). Later, the European Central Bank and the Bank of Japan also used PMFI, and many well-known blockchain systems failed to pass the PFMI assessment. We also use PFMI to evaluate the blockchain system in China and to discuss the impact of PFMI on the blockchain and its applications. [10]

Regulators have implemented new rules aimed at mitigating risks in certain areas of financial services and created new risks elsewhere; central clearing will undoubtedly increase transparency, but at the cost of concentrating risks on institutions that are too large to fail. There is a famous case in which a major CCP stopped accepting Italian government bonds because of the concentration of risks; “If there is a problem, we have Italy”.

As financial market infrastructure faces increasing risks, more and more resources are needed to ensure security, stability and resilience, which forms a monopoly power. The situation of CCP is a vivid lesson. An old industry slang is that you can't get rid of the risks, only transfer; there is no fundamental change in the post-transaction process, which means that there are still many risks in the system.

our opinion:

Regulation now sets the necessary boundaries and obligations for all entities involved in the trading life cycle. Today's world includes isolated settlement sites and already established settlement cycles. These require the necessary Cost of Compliance. DLT provides a new form of market coordination that will allow current constraints to be avoided, and now costs are no longer needed.

Here is a central idea of ​​the blockchain. The financial system is no longer "isolated" but "connected", or more correct, "link". Because of isolation, it causes high compliance costs. This is also the reason why we propose a "consensus economy." There is a consensus mechanism for digital currency so that there is a consensus economy, and there is almost no reconciliation after a consensus mechanism. There is a consensus mechanism that has a consensus economy. The consensus economy is that you and I agree to put it on the ledger. There are four characteristics:

1. You and I agreed at the same time, not that you agreed yesterday, and today I agree that we agreed at the same time.

2. I know your data (and it is consistent with my data), and I know that you can't modify the data that exists there.

3. You know my data (and it is consistent with your data), you know that I can't modify the data that exists here.

4. Any party joining the consensus mechanism also got the same result.

Fnality and USC – the key to success

The combination of DLT and USC can make a significant difference in the end-to-end processing of financial markets. To make these new tools work, one more element is needed: regulatory support.

The Fnality platform will coexist in multiple currency businesses, each with independent financial market infrastructure support. How the regulator treats the USC and maintains consistency across jurisdictions is the third thing that needs to be done.

Today, settlement is closely tied to the operating time of national payment systems and CSD. Imagine you are a European bank with a Euro balance and some activities in US dollars. Today, once the European financial market infrastructure is closed, if you need dollars, you have to rely on the credit market, your euro balance cannot be used to help you; in the simplest solution, you rely on your dollar account to give you credit. This is also a credit risk for US banks.

The above paragraph is a conclusion in the reports of the three central banks. They found that one problem in the current payment system is that the central bank and the bank have different opening hours. See the following figure (the original picture is from the reports of the three central banks):

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According to the reports of the three central banks, UW-CBDC does not rely on domestic RTGS. But the exchange's platform and participating banks need 7×24 operations.

UW-CBDCS enables peer-to-peer cross-border payments between banks.

• In order to achieve this, there must be some mechanism for customer due diligence or KYC checks between banks to exchange peer-to-peer payments.

• In this model, a simultaneous settlement mechanism can be established to minimize settlement risk.

Payment time is also a problem, and the three central banks also have an analysis, as follows,

WeChat picture_20191006170938

With the Fnality platform, it is possible to operate almost 7×24 hours a day, connect the market, make collateral more useful, and eliminate credit risk. Imagine that you are the same European bank with a USC Euro intraday balance. Later that same day, you want to settle the transaction in US dollars. You can now exchange USC Euros as collateral for USC USD and settle on the USC platform; there is no settlement risk, no credit risk – whether you or your counterparty.

This frame design was proposed by the three central banks. The picture below is a picture of the original texts of the three central banks, which is the wholesale digital legal currency (W-CBDC) plus a common stable currency.

WeChat picture_20191006170954

In this white paper, the stable currency is USC and the architecture is Fnality. We can clearly see that the design idea is derived from the central bank. In the previous article [8] we mentioned, “So if these central banks audit, it is equal to review whether the original proposal is really feasible,” because of Fnality and The main idea of ​​the USC is derived from the reports of the three central banks in 2018. When the Bank of England (or the Bank of Canada) approves the Fnality project, isn't it the approval of the ideas it puts forward?

But Fnality is more conservative than the three central banks, and there is no reserve. In the report of the three central banks, it is mentioned that wholesale central bank deposit reserves comparable to traditional central bank reserves can be used.

The three central banks report that these benefits will not only be used in payment applications. If non-bank institutions can also participate directly in settlement, revenues will increase further, including facilitating the use of new technologies for asset transfer, certification, record keeping, data management and risk management. This CBDC mechanism can also be used on securities trading, so there is no need to provide facilities through commercial banks or other service providers, as this can help reduce counterparty credit and liquidity risk in the financial system.

This shows that the wholesale digital legal currency system can be used in many financial applications, not just stocks, but also in real estate, art, and oil trading. But it also shows that the business of commercial banks will be reduced. This is consistent with the results of the IMF report in July 2019. We are ambushing on ten sides, commercial banks really have to be embattled? – Interpretation of the 2019 IMF's "Rise of Digital Money" report Have a detailed discussion.

The three central banks also believe that this mechanism can help central banks monitor financial activities. This is consistent with the view that we have always mentioned that digital currency can help with regulation, which is also an element of digital currency.

With Fnality, all members have an account in each currency and the ability to hold balances in each currency. This overnight holding capacity needs to be approved by the central bank. Compared to today's situation, this is a small improvement. The inaccuracy of today's settlement has led to the balance of current accounts and custodians; any bank without a central bank account eventually has a balance with a commercial bank. These balances typically require local institutions to have a capital-supported leverage ratio denominator requirement, and these balances are usually ultimately placed in the central bank to meet high quality liquidity assets (HQLA) requirements.

USC is about utilities and settlement. It is not a panacea for the world, allowing anyone to switch commercial bank risk to central bank risk. Fnality is also transparent. There are also reasons to allow non-bank institutions to hold USC coins; real money accounts, such as asset management managers, and even shadow banking members, such as hedge funds and potential companies for their financial operations, which also face settlement-related challenges. . Supervisors are always able to see who holds the USC currency in real time.

If the overnight balance is not allowed, this will slow down the settlement and give the bank another liquidity burden. Those who own the central bank's local currency account will have to act as service providers without access and act as liquidity providers, similar to what they do today for CLS-related needs. These challenges will be similar to the well-known problems in the three-way repo market, and the pressure to resolve the repo problem has put tremendous pressure on banks.

If financial institutions are allowed to hold USC overnight, even with some caps, they can speed up settlement and reduce the credit risk and settlement risk inherent in the current structure.

There is no system structure in the white paper, but Fnality provides a system architecture diagram (see below). According to the figure, each currency is hosted by its own central bank, but allows interaction with other banks, and by interacting with these banks and other central banks, participating banks can handle different legal currencies. According to Fnality, each currency has its own blockchain system, so each cross-border payment is a cross-chain transaction. This is similar to the ABC/TBC and Panda models that the author proposed in 2016.

WeChat picture_20191006171011

But Fnality did not explain how participating banks are deployed. Is commercial banks involved in the central bank's chain? If this is the case, they can ask to participate in the chain of all central banks, because each bank can hold a variety of digital currency. This privacy is not good, the central bank may not agree, because all participating banks may be able to see central bank activities. This can be handled with other privacy protocols, but these privacy protocols are slower.

If the bank does not participate in the central bank's chain, and each bank needs to have its own chain, this model is the Panda digital currency model proposed by the author in 2016.

our opinion:

FNALITY & USC has the potential to be a powerful force in the settlement field. To make it efficient, USC needs to be an asset, and financial institutions can hold all USC currencies overnight. This will bring significant relief to the bank's balance sheet. Today's balance sheet is caused by the side effects of non-profit deposits needed to drive settlement.

In terms of system design, their views are exactly the same as ours. It is a chain that only does one job. This is the principle of software engineering (two or more jobs in one chain will make the chain design complex and inefficient) [9] . They use a chain to deal with a currency. The US dollar, the pound, the yen, the euro, and the Canadian dollar all have their own chains. All transactions are cross-chain transactions, similar to the ABC/TBC (account chain, transaction chain) architecture and the Panda digital currency model proposed by the author.

Each central bank only processes its own digital legal currency, so that it can maintain the sovereignty of each country and interact with other central banks and banks. This is also the system proposed in the report of the three central banks.

USC changes to cross-border payment systems

The approach proposed by USC is intended to simplify and reduce billing, counterparty and system risk. First, the system runs differently. To make cross-border payments, customers must first send money to Bank A. According to the USC plan, banks seeking cross-border transactions transfer the required amount to the central bank. Upon receipt, Fnality issued the same amount of USC to Bank A, Bank A and Cross-border Bank B both using USC currency transactions, because the blockchain system was used, and all were guaranteed by their respective central banks, no risk, real-time transaction settlement. After the transaction, Bank A informs the customer that the transaction is completed and the customer receives the local currency for the exchange. Although the system may seem complicated, Fnality CEO Rhomaios-Ram believes that this process is likely to be almost instantaneous.

From the customer's point of view, this is 3 transactions:

1. The currency is exchanged for USC coins;

2. Cross-border transactions with USC coins;

3. Use USC coins for the French currency.

There are no central banks (national or foreign) in the entire process, and there is no risk. Moreover, Bank A exchanges USC coins for legal currency for customers, and Bank B does not know that customers exist. Bank A uses the blockchain for cross-border payments and also uses blockchains to trade with customers. The number of transactions has increased.

USC is a wholesale digital legal currency, and digital legal currency only reaches financial institutions (banks). This principle also appears on current accounts. “Cancelling separate accounts for individual accounts and custodians” is an application of this principle. This simplifies the complexity of financial application systems. Banks use USC to complete transactions, which brings system design changes that affect overall system performance.

If the current account has customer account information, and it is also in the blockchain, then the blockchain system must become super huge. For example, one bank has 400 million customers and the other bank has 100 million customers. Both customers have information on the blockchain, which means that the chain needs to handle at least 500 million accounts. This is extremely stressful for most of today's blockchain systems, unless there is a big data version of the blockchain, such as the Tiande Big Data blockchain. However, if the two current accounts only have bank accounts, only two accounts are needed, so the complexity of the blockchain system is greatly reduced, and most of the chains can withstand. In the Fnality system, there are now only 15 financial institutions, so most chains can be solved.

Remember that in the previous section, "Every currency has only one current account balance to manage all of your payment needs." This means that only one chain of each currency is maintained. This will lead to other considerations for system design. As the number of banking figures increases by an order of magnitude, the system needs to change accordingly.

In the current Fnality system design, the runtime delay will increase. If all accounts are on one chain, a blockchain transaction can be resolved, but there is no customer information now, so 1) Bank A and its clients trade; 2) Bank B and its clients; 3) Bank A and Bank B transaction. At least 3 transactions are required, and 5 transactions may be required (after the bank transaction, and then with the customer), which I wrote in the 2016 paper, the transaction increased, the delay increased.

But overall, the overall performance is greatly improved, because the system does not need to be so large, and the system is larger and slower, because the consensus requires (n2) information exchange, communication costs are very high. When the system is small, performance is improved and hardware costs are reduced. All banks participating in cross-border transactions in a country need to have current accounts. The number of current accounts is very large, but in the Fnality system, there is only one current account, one account and one account. From tens of thousands of current accounts to become a current account, liquidity and efficiency are greatly improved.

Blockchain application system engineering

This white paper provides a very good example of a system engineering. It is also the blockchain system project that the author has been promoting since 2016. It is the blockchain system and application system engineering. The mountain does not turn to water. When the system encounters a problem, the problem will not change. Only change the system architecture to overcome the difficulty. Since the central bank must have a regulatory mechanism, and there are many customers, the speed is fast, and the financial risks must be guarded, the original system design cannot be adhered to, and the overall system needs to change.

The current account restricts the transaction and increases the cost. The less the number of current accounts, the better, so a currency is a current account, which is the minimum number, no less. Because the cross-border payment application must also have a current account, a current account is the optimal system design.

Since the payment of the other party may be risky, and the central bank does not have any risk, the bank only accepts 100% of the currency guaranteed by the other central bank, so that this risk problem can be solved once and for all.

These two solutions are very wise. In the system engineering, this design method is called design-out, which is to design a system system, so that related problems will never appear again. The Fnality white paper gives us two design-out designs and is a good example of system engineering.


[1]. Cai Weide, Jiang Xiaofang, “Reconstruction of Global Financial System Based on Wholesale CBDC Digital Currency”, 2011.10.01 [2]. Cai Weide, Jiang Xiaofang, “The ambush in ten sides, commercial banks really have to be embattled?” Interpretation of the 2019 IMF 'The rise of digital currency' report, [3]. Cai Weide, Liu Lin, "The feasibility of blockchain application in the financial field", 2011.05.08, [4]. Cai Weide, "The three principles of digital currency: Facebook Important information brought by Libra", 2010.08.24, [5]. Cai Weide, Jiang Xiaofang, "The Bank of England to declare to third parties and digital tokens – in the way of British gentlemen", 2010.0.26, [6]. Cai Weide Jiang Xiaofang, "The new currency competition is coming? Yes!", 2010.06.21, [7]. Cai Weide, Jiang Xiaofang, "Analysis of the four major elements of the new currency competition", 2010.08.17, [8]. Cai Weide, "Authentic Stabilizing coins! Blockchain needs to be regulated", 2011.5.28 [9]. Cai Weide, Jiang Xiaofang, Liu Wei, "The fourth largest pit of blockchain (middle) – blockchain fragmentation technology is an extended solution Program?”, 2018.8.2, [10]. Cai Weide, Jiang Xiaofang. “The Blockchain Five Great Pit (below)–Talking about blockchain from the perspective of PFMI", 2011.8.16, [11]. Cai Weide, Jiang Xiaofang, "PFMI Series 2: The Clearing Chain's Design Road", 2019.1.5 [12] BIS CPMI, Central Bank Digital Currency (CBDC), Mar.2018 [13]. The Bank of England, MAS, the Bank of Canada, Cross-Border Interbank Payments and Settlements: Emerging opportunities for digital transformation, Nov.2018 [14 The Swiss Federal Government, Legal Framework for distributed ledger technology and blockchain – An overview with a focus on the Financial sector, Dec.2018

About the Author

Cai Weide, Director of Digital Society and Blockchain Laboratory of Beihang University, Chief Scientist of Tiande Technology, Major Project Leader of National Ministry of Science and Technology, Director of Blockchain Internet Lab of National Big Data (Guizhou) Comprehensive Experimental Zone, Tianmin (Qingdao) International Sand Dean of Box Research Institute, Honorary Dean of CCID (Qingdao) Block Chain Research Institute, President of China Asia Economic Development Association Blockchain Industry Professional Committee, Director of North Mujin District Block Chain Committee

Jiang Xiaofang, Ph.D. student of Beihang University of Computer Science, Chartered Financial Analyst (CFA), member of Beijing Financial Analyst Association

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