Wholesale digital legal currency payment system to reconstruct financial market: Interpretation of Fnality white paper (below)

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


In 2016, the author participated in an international central bank meeting in London, and two important things happened at the meeting.

The first thing is that the Bank of England announced at the meeting that the number of pounds they are preparing to issue is the first monetary reform in 320 years, which will change the financial world, monetary policy, and banking system. In the history of money, this is a new era. I remember when a European Central Bank scholar sat next to him. He was particularly excited when he heard it. "My grandfather didn't meet it. My grandfather's grandfather didn't meet it, but I met it. It's really a time!" In fact, I already know that the UK is preparing to issue a number of pounds, but at the scene I heard that the Bank of England thought it was a major reform in 320 years, and it was as shocking as other central bankers.

The second thing is the Bank of England's digital legal currency academic lecture "The macroeconomics of central banks issued digital currencies". The Bank of England did not open the paper at the meeting. The author had already read this paper before he even came to the UK. This was written by two Bank of England economists (John Barrdear and Michael Kumhof), both of whom are well-known scholars and formerly a professor at Stanford University. They spent a lot of time and energy building an economic model to discuss what kind of monetary policy the pound should need, and the UK economy would jump sharply because of the number of pounds, and only a few pounds would make UK GDP grow by 3%.

At the time, the author thought that this article was an article that changed history, because this is the world's first academic paper on the macroeconomics of digital currency (it seems that this article does change history). As a researcher, the author knows that publishing such an article will definitely leave a name for the history. Because the author of the article will also make a report at the meeting, the author predicts that he will stand up and applaud in his speech, and he claims that they have done a great job!

However, the scene at the time was completely unexpected. At that time, Bank of Canada personnel presided over the meeting. When the Bank of England economists finished speaking, they asked, "You model is very good, but how to implement it?" Of course, this question should not be asked by economists because they Not an expert in implementing technology, the Bank of England economist certainly did not answer this question.

The Bank of Canada personnel also went on to say that this theory is useful if the digital pound plan cannot be implemented. It is highly probable that after implementation, because many of the assumptions in the paper are unlikely to be true, the model will be different. These theories are only preliminary theories and may have nothing to do with later practice systems and effects. Because if there is no way to implement it, these theories are just theories, and they can only be referenced.

This is too much for the author!

We also know what happened later. In 2018, the Bank of England announced that it would abandon their digital pound plan. At the beginning of 2018, the new digital currency model appeared in the form of wholesale, which is quite different from the model proposed by the Bank of England in 2016. Later, at the end of 2018, the Bank of England, the Bank of Canada and the Central Bank of Singapore jointly issued a report (hereinafter referred to as the report of the three central banks) [15] to discuss the payment system based on the wholesale digital currency (wCBDC), which has very detailed details. The implementation, rather than the theory that may not be put into practice.

The Bank of England is still making progress! In 2019, the synthetic digital currency (sCBDC) model appeared again. The digital currency model in this white paper has improved and has more details than the wCBDC model in the 3,10 central bank reports.

In this way, the UK has not actually given up the digital currency, but the Bank of England no longer fully dominates the digital currency plan. The Bank of England has taken the lead, and has turned to formulating policies to push the market to build an ecosystem to complete, but this ecology must include central banks and commercial banks.

Because of this arrangement, the Bank of England no longer talks about the progress of their digital currency, but only some of the policies of the digital currency, such as the report of the three central banks [15]. And because it is open to the public to engage in digital legal currency, the Bank of England and these stable currency companies maintain some distance. Because not just Fnality, other companies can also do similar digital currency projects.

The Fnality white paper [19] is based on the development of the three central bank reports, the first half focuses on the basic theory [3], while the latter half focuses on ecological applications.

The latter part of the text still conveys important information, such as the traditional national financial system, the central securities depository CSD can be completely replaced by the blockchain. This is an egg for the readers of the Fnality white paper, and we also give it to readers who can patiently read the long translation with comments.

dFMI and early intervention cases

The combination of DLT technology and USC provides a unique opportunity for the financial services industry.

The first element of this opportunity is "distributed." The use of DLT is an alternative to the current environment, which leads to settlement activities concentrated in the huge financial market infrastructure, with all the dangers of monopolistic behavior and institutional inertia.

Note that Fnality does not consider blockchain or DLT to be "decentralized." Use the term "distributed".

The second element is the "book book." In today's process, the entire life cycle involves a lot of handover and coordination. Although in many cases transactions are electronically executed, post-trade processes force us to re-confirm, re-direct and coordinate.

With the advent of new technologies, we have the opportunity to design a new ecosystem that provides more room for interoperability between different platforms involved in the settlement process. Interoperability refers to the ability of an infrastructure to communicate with other infrastructure;

  • Payment vs. Payment (PvP) settlement, transactions between the US dollar system and the British pound system, without reintroducing settlement risk;
  • The settlement of the payment (Delivery vs. Payment, DvP) and the securities transaction part are paid out by a separate fund pool.

Here Fnality first mentioned the term "ecology".

Now Fnality is more concerned with PvP. A single pool of funds is a major factor in the success of the future world. We have foreseen in the past that there is a central “liquidity cake” in which many of the cash needs will inevitably decrease.

All of these elements are components; it is a challenge to mix them in the way they produce tomorrow's financial market infrastructure. Those who come into contact with Fnality as early as possible have the opportunity to shape the future while preparing their own organization for the future.

our opinion

Having and building this system will have some economic rewards. More importantly, the actual use of the system to support the new transaction life cycle will have great practical value. Financial institutions can maximize utility through early engagement.

Fnality believes that this new payment platform has an "economic return," and financial institutions can maximize their effectiveness through early engagement.

Delivering the Future: The First Fnality Use Case

As mentioned above, Fnality focuses on application cases, and this chapter talks about the application cases they think are the first to be done.

Legacy Infrastructure is a challenge in most large financial institutions. Recently, multiple agencies have been exploring and studying the potential of blockchain/DLTS to address these challenges and optimize their processes. As a member of Fnality, financial institutions will have the opportunity to shape the future of tokenization while optimizing internal and external systems. In fact, USC provides two essential elements to capture the benefits of tokenization: a single liquidity (Chapter 4) and the possibility of easy interoperability with other DLTS and traditional platforms.

In 2029, your finance manager will be able to walk into the office and freely use USC's "single pool of liquidity" to meet all her needs: from simple "P" for payment settlement to DVP or PVP. "P".

Bridge Platform: Fnality Interoperability Approach

Fnality's genes are interoperable. By providing flexible interoperability protocols, Fnality will support atomic switching operations across multiple platforms: from multiple USC chains (eg USC-EUR and USC-GBP chains) to other DLT platforms (eg on USC and superbook-based platforms) Between USC and Ethereum, including with legacy systems (for example, between the USC chain and the central bank's RTGS).

Here, Fnality is too optimistic, and does not see the existence of serious systemic risks: 1) The super-book is a pseudo-chain, in the future the real chain will not interact with the pseudo-chain, because the future risk is large, need to pay more margin; 2) Most people talk about Ethereum as a public chain. No financial institution is willing to put high-value transactions on the public chain, and its privacy is very poor.

Helps the settlement of the machine chain: USC as the P branch in the atomic tokenization DvP

This flexibility allows Fnality to unlock multiple use cases: from tokenized DvP to exchanges across USC chains and other platforms. The USC interoperability method is platform-independent and guarantees that “if and only if” receives an irrefutable proof of delivery from the “other party”, for example when acting as a “distributed bridge” between “P” and “D” in the DVP. Payment is settled.

One possible change from the foreground to the background process is to shorten the billing cycle. Why is the past process so troublesome? During the settlement cycle, financial institutions need to measure and monitor Credit and Counterpart Risk (CCR) and provide asset support. We looked at the high-level CCR data of members of the Fnality consortium.

Obviously, the CCR figures in the annual report cover the entire business, but even so, there is great potential for designing the token-based world; for every 1% reduction in CCR, the lifetime yield is close to $300 million.

Transactional instruments usually only have market risk caused by short-term price fluctuations, but the “buy and hold” derivatives trading portfolio also has stochastic credit risk driven by market risk factors, which stems from the credit status of counterparty only during the period. The change, CCR usually refers to the risk of a counterparty default before the final clearing of the transaction cash flow. When a party to the transaction defaults, if the transaction or transaction combination of the bank and the counterparty has a positive economic value, the bank will suffer economic losses. The credit risk of the traditional credit business is one-way, and only the loan bank has credit risk, the borrower There is no credit risk. In contrast, CCR is usually two-way. For any party to the transaction, the market value of the trading contract may be positive or negative, and fluctuates with the change of the underlying market factor during the trading period. Before the cash flow is finally liquidated, both parties to the transaction may be subject to the risk of the counterparty defaulting so that the unrealized gain cannot be realized.

Trade Finance

The focus of multiple DLT projects is to create a new, token-based and more efficient environment for trade finance. For example, ING and HSBC created a DLT-based Letter of Credit (LCS) platform. The project digitizes paperwork and makes the process faster and more efficient (from less than a day from 7 to 10 days). However, if there is no local settlement on the blockchain, the benefits of DLT are not fully functional: this is what USC will provide. So, what happens if you want to settle DvP transactions through USC? Suppose your transaction is stored in the DLT Trade Finance Platform:

1. Trade Finance DLT Platform: will provide a secure receipt of goods

2. USC Interoperable Smart Contract: Recording trade finance receipts and waiting for cash delivery

3. Your Finance Manager: Funding USC Interoperable Smart Contracts

4. Ultimate: Interoperable Smart Contracts transfer cash receipts to the trade finance platform, where goods and cash are simultaneously released and finalized on USC and the Trade Finance DLT platform. The agreement ensures the atomicity of the operation, thereby eliminating credit risk in the process; with or without events.

"If there is no local settlement on the blockchain, the benefits of DLT are not fully functional," this is the key.

Set up foreign exchange PvP with USC

Let us consider what your financial manager often faces today. You must settle a one-day GBP/EUR trade: with Bank B for £0.88 million to €900 million, Bank A and Bank B pre-arranged agreements to settle these payments through USC (SSI Standard Settlement Instructions). How will this be carried out?

1. SSI expansion: Bank A and Bank B will expand the message through SSI information for settlement with USC under the pre-arranged USC settlement agreement

2. Payment Instructions: Both you and Bank B will send MT300 (or MT202/210) messages to the USC wallet, this is your multi-currency processing interface.

3. Interoperability: USC Wallet will submit a transfer request to USC Pound and USC Euro Ledger

4. USC Token Transfer: The USC Euro and GBP ledger will verify the transfer request and simultaneously transfer the USC from Bank A to Bank B in each book, and vice versa.

5. Final settlement or rejection: Your wallet will notify you of the final settlement (MT910 message) or settlement failure

The key is that credit risk or “Herstatt risk” risk (foreign exchange settlement risk, also known as “Hurst” risk) is reduced because the euro and the pound are settled instantly. As a cash and liquidity manager, the settlement is instant and your screen shows your real-time available balance.

Hearst risk refers to the risk of foreign exchange transactions caused by the difference in settlement time across time zones. For example, the exchange rate between the euro and the US dollar, the European market time ahead of the United States, so must pay the euro first, after a period of time, the New York currency market opened to get the corresponding dollar. This risk is very low in the Fnality system.

Helps improve the unliquidated derivatives (Derivatives)

In the unliquidated derivatives world, the existence of USC may have two effects. USC will provide near-instantaneous settlement potential, and it also means changing the way margins are handled. Today, the standard way for bilateral non-liquidation of margin is to look at the entire portfolio and then calculate the VM payment in one currency. This forces the parties to use the Collateralise-to-Market approach, leaving long-term risks on the balance sheet. However, if the portfolio is split into currency and the funds are transferred on the same day, the bank can use the Settle-to-Market approach to reduce the exposure of derivatives. This difference is exponential. In its second quarterly report for 2016, UBS pointed out that for every 1% reduction in derivatives risk, it will benefit $60 million for the lifetime. USC may not be the only way to achieve this goal, but it will make it possible.

our opinion

USC will provide your finance manager with a single pool of liquidity. The flexibility of the Fnality platform allows it to meet any pure payment, PvP or DvP needs. The priority use cases we identified are identical to those identified in the broader industry study.

Fnality believes that almost all financial activities end with payment, and providing an efficient payment infrastructure is paramount.

9. The potential of the New Digital Exchange

The exchange is the starting point for the value chain, which continues to exist through CSD (Central Security Depository) and CCPs (central counterparties) and may include RTGS payment systems. Today, a transaction through this value chain requires a lot of coordination. Due to the delay between the trading day and the quotation date, there is operational risk (OpRisk) at every point in the chain. There are now mandatory procedures. Eliminate credit risk exposure during this period.

Central Securities Depository (CSD) means that the central registration and settlement institution manages all securities entering the system by electronic account system, including unified management of investor securities accounts, implementation of securities custody system and conduct with investors. Deposit equity-related equity distribution, etc., to eliminate the flow of physical securities caused by various reasons.

The Central Counter Party (CCP), also known as the common counterparty or the joint settlement counterparty, refers to the institution that is involved in the securities trading between the buyers and sellers in the settlement process and becomes the “buyer of the buyer” and the “buyer of the seller”.

The Real Time Gross Settlement (RTGS) is an interbank electronic transfer system established in accordance with international standards, which specifically handles the cross-bank transfer business initiated by the payer's bank.


Figure 1: USC is just a means of payment

Just as exchanges imagine how they will use DLT as a new general-purpose technology, we believe that they will not only add some incremental process changes, but also some marginal efficiency.

The exchange may only want to use USC as a means of payment (see Figure 1). Each party instructs their custodians – just like today, every custodian is instructing CSD. Just like today, CSD interacts with DCP through USC. This is new, but there has not been much progress. USC allows for improvements to today's processes; USC acts as a central pool of funds, simplifying cash management once many settlement applications use USC.

In this way, the settlement method is better, although not necessarily faster or cheaper, this process is largely the same as today.

We see that exchanges can actually have more room for improvement; combine the roles of exchanges and CSD into one, turn to T+0 settlement, or more accurately, “T instant” settlement. This completely eliminates the need to establish a CCP. From the recent changes in the OTC derivatives market, we see an opportunity to proceed from the “Certainty of Clearing” standard, and the clearing broker promises to liquidate the transaction. USC can of course be used to ensure that the buyer who placed the order has available funds. In terms of sales, the seller may have to own the stock before issuing a sell order, or as an alternative, use USC to guarantee the value of the things being sold.

"Combining the roles of the exchange and CSD into one, turning to T+0 settlement, or more accurately, 'T-instantaneous settlement,' completely eliminates the need to establish a CCP." This is very powerful!

This is also the big change in the financial system predicted by the European Central Bank in 2016 due to the blockchain. And this change is not due to bitcoin, but because of the high-speed and risk-free payment system like Fnality.


Figure 2: USC Supported Order Submission

On the chain:

1. USC is available to both buyers and sellers;

2. When submitted to the exchange, the retained funds are part of the order;

3. USC can add a net function to find out which net is zero; it cannot be fined when T+0 is settled.

The above process is exactly the same as the one proposed by the author in the 2016 IEEE System Article of Financial Blockchains [20]. This process is the basis of the Panda model, using ABC/TBC (account chain and trading chain). In the above picture, the exchange is TBC, and the USC chain is ABC.

ABC guarantees the existence of funds (financial chain) or the authenticity of securities (securities chain), TBC guarantees transaction integrity, and 3 chains cooperate with each other. The most important functions of CSD are completed, only exchanges and payment systems are needed, and CSD is not required.

Some readers ask, what if the counterparty does not comply with the ABC/TBC contract? Our answer to this is always a fine, the same as the answer above Fnality. Both parties to the transaction must have a deposit. If the contract cannot be made, the deposit is automatically confiscated by the smart contract. For this reason, before a chain is connected to other chains, the completeness of the other chains must be evaluated. If the other chain is a pseudo-chain, there are only two choices, one is to refuse the connection, the other is to increase the margin of the other party many times and add many real-time prevention mechanisms. Because the pseudo-chain will increase the system risk, especially in the wholesale digital legal currency system, the transaction is large. In the Fnality system, there is only one current account, the transaction speed is extremely fast, the settlement is timely, and the funds are guaranteed by the central bank. Once the pseudo-chain is broken and the problem is discovered, huge funds have disappeared.

In fact, CSD also provides many other features, these features are still needed, which we will discuss later. Before submitting an order, USC is used to fund the buyer, and the securities are provided by the major financial providers. Once the order is executed, it attempts to settle. Because the settlement is T+0, the CCP role is no longer needed. “Netting” will mean that certain orders may not be settled for a period of time; they may be aggregated or netted. Penalties for unresolved will need to be included in the rules manual. Supporting “market makers” and other “active traders” requires more thinking.

The claim here is that with the equivalent function of USC and the seller, the certainty of settlement is guaranteed because the buyer has funds and the seller either has securities or borrows securities.

Operational efforts to support transactions and settlements will change dramatically; the definition of an exchange position is a CSD position. There is no doubt that people can challenge this vision with a lot of “what if”, but the direction and potential are obvious.

To cope with the above challenges, you only need to put the blockchain on the exchange. Because the main function of CSD is to provide a credible securities repository, and this function can be replaced by a blockchain.

our opinion

The new exchange will be able to offer peer-to-peer transactions and can use USC to facilitate settlement. This will bring a new way of economic coordination. Financial services companies have the opportunity to reshape their end-to-end processes. This is a major improvement in institutional technology.

The Bank of England said the financial system was changed because of changes in payment technology. This is also important information that Fnality provides in this chapter.

Since 2015, CSD has been discussed in the blockchain era.

In fact, including the CSD community now recognizes that blockchain can provide many CSD features. So the Fnality white paper basically follows this trend, thinking that CSD can be part of the exchange, so the system can be more simplified. Other organizations and systems related to the exchange, Fnality/USC should also be linked to them.

In the context of such exchanges (including CSD) and Fnality/USC links, the entire stock trading transaction, settlement and clearing process may be completed in less than 10 seconds, assuming each transaction includes each use zone The blockchain takes one second, the transaction preparation takes 3 seconds, and the subsequent processing can take 3 to 4 seconds.

This way the entire financial world will be permanently changed! Perhaps everyone does not know that in foreign countries, CSD light is more than tens of millions of dollars through the verification fee of the regulatory unit. Another company this year has to temporarily stop its newly developed CSD verification process because it does not have enough funds. Such a large and important system is now considered to be able to perform most of the functions using the blockchain, and the structure and process have changed.

The following picture is a proposal for 2016. It is believed that most of the functions of CSD will be replaced by blockchain in the future.


Source: Oxera and RISE Financial Technology

After four years of discussion and research, the CSD community changed their perception of DLT (including blockchain). Instead of treating the blockchain as a threat to its existence, they see it as a (potentially) more efficient way to handle existing services and provide new services.

CSD can play an important role in blockchain-based settlement systems. As the custodian of the code, CSD can oversee and assume responsibility for the operation of the relevant blockchain agreement and any associated smart contracts.

Another group of 30 CSDs in Europe and Asia is studying possible ways to "join" the development of a new digital asset hosting infrastructure. CSD will try to find out how to apply its experience in protecting stock certificates to security solutions for encrypted assets.

1. Notary function: including asset tokenization and private key storage;

2. Securities ownership records;

3. Governance;

4. Trusted gatekeeper: authorization and management;

5. Other: Includes proxy voting system, selective company behavior, coordination, and cross-border collateral circulation.


The role of the middleman

In today's ecosystem, direct access to payment systems is limited. The widespread use of these systems requires those who do not have direct access to use intermediaries; current accounts or correspondent banks and custodians.

Figure 2 shows the standard process for payment. From left to right, financial institutions have designed processes to send instructions in a timely manner, and then each payment through two key processes of the current account: credit check and payment queue.

Ideally, current accounts will avoid credit risk, but this is a complex challenge; external payment systems impose rules to ensure a day's settlement is going smoothly. These rules are about the throughput of volume and value, usually backed by differentiated pricing, and the cost of late transactions may be several times that of early settlement transactions.

These regulations basically force current account providers to provide customers with intraday overdrafts. These overdrafts are one of the factors that determine the speed of payment requests from the correspondent bank (B in the figure) to the external world C.

After the Great Financial Crisis (GFC), regulators focused on day-to-day liquidity, and they have been focused on measuring bilateral credit lines. Although these rules are developed at the national level, they are generally similar in each jurisdiction; the highest intraday overdraft received and given is driving liquidity buffering, under the Basel III framework. Part of the pillar 2.

Any optimization in the payment system (point 5) or CSD, as we have seen all of the rationalization of the T2S commitment, is downstream of the credit process (point 4) and does not provide relief. This will increase speed but will not reduce credit risk.  


Figure 3: Current payment process

Today's approach has been optimized for "just in time processing." Some analysis of UK CHAPS system traffic indicates that by 8 am, 80% of all traffic is known. The USC team did some models to see how fast the USC would be if the USC had a deal after the start of the interest date. 84% of payment orders can be settled without any liquidity because they are offset to zero.

Here, Fnality's view is "instant processing", which can be settled when settlement is done. The Bank of England said the financial system was changed because of changes in payment technology. This is also important information that Fnality conveyed in this chapter.

This is the same as the design principle of the Tiande financial blockchain. It can be processed when it is processed in time. For example, when building a block, net settlement is made within the block to reduce the need for liquidity. The Bank of Canada, the European Central Bank and the Bank of Japan are also doing this, but they are doing net settlement outside the blockchain.

With the same logical extension, if the transaction is known, we see the possibility of providing an interest-bearing date prior to settlement, potentially affecting each bank's need to maintain liquidity requirements in the disk.

Fnality not only provides a simplified payment process and cash management. As a scale, it will also create the right conditions to achieve large-scale optimization of liquidity use in the market. If we can reduce the use of liquidity funds, then there is reason to recommend a reduction in liquidity buffer funding requirements under Basel III.

our opinion

The combination of the Fnality platform and DLT will centralize the financial markets and simplify cash and liquidity management. Eliminating many separate accounts in current accounts and custodians makes the operation simple and requires less liquidity.

The word "centralization" has reappeared here. The technology mentioned here is the single fund pool and single current account mentioned earlier.

Transaction Banking business; cheap goods no longer exist?

A transaction bank is a collection of banking products and services provided by a bank to a corporate customer. Corresponding to the transaction bank is the traditional Corporate Banking. Traditional corporate banks focus on business and products, and develop business strategies and plan bank structure around these two points. Transaction banks are more concerned with the concept of “customer-centric” and use this as the focus of transformation. The bank builds banking capabilities in the full financial process and in the trade process.

The transaction banking department usually provides commercial banking products and services to enterprises and financial institutions, mainly including cash management and trade finance services. From a specific business perspective, it generally includes cash management (especially payment settlement), trade finance (especially supply chain finance), trusts and securities services. The indirect access model brings the standard of current accounts and the standard way in which the transaction bank compensates for the services provided. This standard, which we can call "The Transaction Banker's Bargain," includes revenues for ticketing, business payments with substantial profits, and spreads between borrowing interest. In return, the Transaction Bank has approved a large number of Intraday Credits, some Overnight Credits, and supports any customer credit balances and equity, even if these balances are considered Non-Operating Deposits (NOD) ).

Here we first talk about the fact that the former trading banks can easily earn the customers' money, and the trading banks get very high profits with very cheap products. Let's talk about the three factors that changed this situation.

The three factors of the Unholy Trinity – the low interest rate environment, the burden of new regulations and the challengers of the commercial payment business have led to changes in “cheap goods”.


9 Intraday credit and liquidity are key factors. Intraday liquidity is a fee that has so far only been charged under special circumstances; for example, a timed payment to CLS or a margin for liquidation. However, for the daily payment business, this is a business with no clear charges.

At the same time as Basel III calculations, regulators also introduced Liquidity Coverage Ratio (LCR). This requires banks to hold equity related to liabilities. The balances that banks receive from their financial institution clients are considered “hot money”, which is non-operating deposits (NOD). In order to meet the LCR requirements, banks are almost forced to leave assets in the central bank. In some jurisdictions, LCR requirements can be waived.

Liquidity Coverage (LCR) refers to the ratio of high-quality liquid assets reserve to net outflows of funds in the next 30 days; the standard of this ratio is not less than 100%, that is, high-liquid assets should at least equal to the estimated net capital The outflow, or the net outflow of funds in the next 30 days, is less than zero.

Introducing Liquidity Coverage (LCR) as a regulatory indicator to measure whether an organization can maintain a barrier-free and quality asset at a reasonable level to meet its regulatory liquidity stress scenarios. Liquidity requirements for a 30-day period. It is generally believed that if it is sufficient to support 30 days, then management and supervisory authorities will have sufficient time to take appropriate action to order the bank's problems in an orderly manner. 5

Some trading bankers want to "reset the price of cheap goods" and charge for liquidity. Although they are tied to their hands and feet, they have considerable starting disadvantages. The new pricing may trigger RFPs from customers, and although people have already understood the changing cost environment, it is more likely that customers will still find a supplier that will not charge for the day.

Since bargains no longer exist, trading banks must think of ways to make money from other places. But this may not be easy, so there may be only one way: to reduce costs and reduce the need for liquidity, which is what Fnality does.

our opinion

Bargains from trading bankers no longer exist. The current market structure is hindering banks from getting paid for the valuable services they provide; liquidity. Fundamentally changing this structure will allow trading banks to move to market-based roles so that they can focus on established financing disciplines, paying for liquidity values ​​rather than transactions, which pay only for bills .

in conclusion

Financial services are generally changing, but the changes do not happen overnight. Many initiatives have been launched in the DLT environment, some are successful and some are failing. However, all initiatives lack a basic element: the payment link has not yet been clarified. Our vision is that USC is the payment link that every bank needs, to legalize the currency, and to become a payment method that can directly “chain” credit-free settlement transactions.

Here Fnality mentions their ambitions. “USC is the payment link that every bank needs.” This market is very large.

Fnality and USC will provide operational efficiencies—a single liquidity pool to serve all your needs—and reduce liquidity needs, along with more flexible cross-currency operations, and drive industry-wide operations toward 7×24 operations.

In short, the question is not whether this change will happen, but when and with whom. Today, “subversion or subversion” is the cornerstone of all digital innovation. Fnality offers the possibility of a cost-effective, customer-centric, interoperable peer-to-peer network that reshapes capital and financial markets.

Mark Carney, the former governor of the Bank of England, is right. The recent financial reforms began with the payment system. The Bank of England is the first central bank in the world to start researching digital currency, and here we can see through some of their trade-offs.

Phase 1: Enlightenment (2015-2017)

They adopted a large central bank system, expanded the central bank's system to expand banking business and directly cooperate with merchants, in order to confront and supervise third-party payment systems. In their view, this is a viable solution because they saw that the Bitcoin system can trade at such a fast speed, and these transactions are completed without supervision, so they think that the blockchain technology behind Bitcoin It is sure to be able to quickly establish a digital legal system.

But the digital currency model RSCoin they proposed is actually using Bitcoin to evade the regulatory data structure. It is impossible for the big country central bank to use any model to evade supervision, which I mentioned in the 2016 article. In addition, due to policy, the bank structure has to be changed so much that they need close cooperation between financiers, monetary experts and technical experts. But the central bank is not a technology unit, but a monetary policy institution. It’s probably not enough for them to work on digital currency projects alone.

The second stage: the direction change direction (2018-now):

So after 2018 they just focused on the policy. The report of the three central banks in November 2018 is an important turning point for the Bank of England. It will no longer raise the central bank system, and will no longer mention the central bank issuing digital legal currency. Instead, it will formulate rules for inter-bank payment systems. The problem solved and the scale is much smaller than the original!

Does this mean that the Bank of England has decided to make the digital currency project small? We think the opposite is true, this is bigger!

All the subversions are not starting from the big ones, but starting from a small point, and doing this little thing to the extreme, you can start a real revolution. As Mao Zedong said, "The fire of the stars can be used to poke the original."

In recent times, Google is a good example. What Google is doing is to do the search for this "little thing" to the extreme. The search for this technology was developed 50 years ago, but it has to wait until Google comes out to be the ultimate. Because there are good search engines that change the way people work, many jobs have been changed or replaced by Google search engines, and Google's ecosystem has also been established.

Therefore, starting from a small place, the central bank will formulate regulations and promote the market to build an ecological circle to complete this great project. This is very wise! The Bank of England abandoned the big central bankism, the big digital French currency project, and instead focused on paying for this small matter, requiring the payment system to do its best. This Fnality project is designed to maximize the payment, with the highest speed and lowest risk. If the payment can be done to the extreme, a huge ecology can be established, and financial changes can start here, which will change the world and build a new global digital economy.

Such a payment system can change stock exchanges, trade finance, and even a country's important financial system CSD may be completely replaced. This is a huge financial reform caused by a small age.

Contributions by John Barrdear and Michael Kumhof

The biggest achievement of the two authors published in 2016 is that the digital currency will have an independent and influential contribution to the macro economy. Because this is a historical initiative, and the research is now a hot topic, the reference to this article will inevitably be a lot, this kind of academic achievement will definitely be named after the history. The United States and other important financial institutions later reached the same conclusion in the study of digital legal currency. Although the impact and how it affects, scholars' opinions can be very different. Of course, some economists still hold different views. They think that the digital legal currency project is only a digital project of the central bank's currency, and it does not have an independent impact on the real economy.


Photograph of the author's macroeconomic lecture on digital currency in the UK in 2016


[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 on ten sides, commercial banks really have to be embattled?” Interpretation of the 2019 IMF’s “Rising of Digital Currency” report, 2010.09.21

[3] Cai Weide, Jiang Xiaofang, “W-CBDC-based payment system architecture: Fnality white paper interpretation (on), 2019.10.06

[4] Cai Weide, Liu Lin, “Feasibility of Application of Blockchain in Financial Fields”, 2011.05.08

[5] Cai Weide, "The Three Principles of Digital Law: The Important Information Brought by Facebook Libra", 2010.08.24

[6] Cai Weide, Jiang Xiaofang, “The Bank of England declares war to third parties and digital tokens – in the form of a British gentleman”, 2010.06.27

[7] Cai Weide, Jiang Xiaofang, “The new currency competition is coming? Yes!”, 2010.0.26

[8] Cai Weide, Jiang Xiaofang, “Analysis of Four Key Elements of New Currency Competition”, 2010.08.18

[9] Cai Weide, “True and false stable coins! Blockchain needs to be regulated”, 2011.05.28

[10] Cai Weide, Jiang Xiaofang, Liu Wei, “The fourth largest pit of the blockchain (middle) – blockchain fragmentation technology is an extended solution?”, 2018.8.2

[11] Cai Weide, Jiang Xiaofang. "The fifth largest pit of blockchain (below) – talk about blockchain from the perspective of PFMI", 2011.08.16

[12] Cai Weide, Jiang Xiaofang, “Part 2 of PFMI Series: The Design of Clearing Chains”, 2019.01.05

[13] Cai Weide et al., “Panda-CBDC Central Bank Digital Currency Model”, 2016.11.05

[14] BIS CPMI, Central Bank Digital Currency (CBDC), Mar.2018

[15]The Bank of England, MAS, the Bank of Canada, Cross-Border Interbank Payments and Settlements: Emerging opportunities for digital transformation, Nov.2018

[16]The Swiss Federal Government, Legal Framework for distributed ledger technology and blockchain – An overview with a focus>[17]https://www.treasuryxl.com/news-articles/csds-have-a-role-to- Play-in-a-blockchain-environment/

[18]Oxera, The debate about blockchain: unclear and unsettled?Aug.2016

[19]Fnality, The catalyst for true peer-to-peer financial market, June 2019

[20]Tsai, Wei-Tek, et al. "A system view of financial blockchains." 2016 IEEE Symposium>[21] Cai Weide, Yu Lian, Wang Rong et al. Research on application system development method based on blockchain [J] . Journal of Software, 2017, 28(6): 1474-1487

[22] Tsai, Wei-Tek, et al. "A Multi-Chain Model for CBDC." 2018 5th International Conference data-tools-id="40798">


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 Sandbox Research Dean of the Academy, Honorary Dean of the CCID Research Institute of CCID (Qingdao), President of the Blockchain Industry Professional Committee of China Asia Economic Development Association, Director of the 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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