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Zou chuanwei: the impact of block chain on payment and clearing system is seen from Libra and DC/EP

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Detailed comparison of Libra and people's bank of China DC/EP, and a simple analysis of block chain application in financial transaction post-processing.

We are at an exciting stage in the development of human currency.
Wanxiang block chain

This article was Shared by Dr. Zou chuanwei (wanxiang blockchain and PlatON economist) on April 16 in the 9th issue of online open class [live broadcast room] of honeycomb college: the impact of blockchain on payment and clearing system -- a case study of Libra and DC/EP. Add wanxiang blockchain assistant WeChat (fengchaoxueyuan) to join the learning group to timely know the time of live streaming courses and live streaming entrance. B can also pay attention to the "wanxiang block chain", pay attention to the latest open class [studio] information.

The topic of my speech today is "the impact of blockchain on payment and clearing system -- a case study of Libra and DC/EP".

This is the most important question in fintech right now. The facebook-led Libra project has been in the spotlight since it was proposed in June 2019. In October 2019, the G7 used the Global Stablecoin to summarize the new currencies and payment instruments represented by Libra. On April 14th the financial stability board (FSB), commissioned by the G20, released a consultation report on "regulatory and supervisory challenges arising from global stability currency arrangements".

On April 16th Libra published version 2.0 of its white paper, shifting its focus from a basket of currencies to a single currency. Libra's turn is expected. Libra should have underestimated the difficulty of anchoring a basket of currencies. Anchoring a basket of currencies means: first, cross-sovereign currencies have a greater impact on the international monetary system; The second is that the economics problem is much more difficult because there is a constant rebalancing of the basket of currencies, and there is a complex interaction between rebalancing and Libra prices. Third, multiple currency areas should be subject to supervision at the same time.

Historically, anchoring a basket of currencies has been nice in theory, but hard to succeed in practice. Anchor order money is much simpler in economics and regulation. When Libra moves to an anchor currency, it is much simpler, both in terms of regulation and economics, and the government regulatory framework is clear, which is sure to accelerate. Libra's anchor order for one currency will more clearly strengthen the position of a strong currency. For example, Libra anchored to the dollar, because of the open nature of the block chain, will allow more people outside the United States to participate in dollar-denominated economies by holding Libra, thus accelerating the "dollarization" of countries with unstable currencies and strengthening the position of the dollar.

The people's bank of China has been studying digital legal tender, known as DC/EP, since 2014. On April 15, it was reported that DC/EP began testing in jiangsu, xiongan, chengdu and shenzhen, and the DC/EP wallet has four main functions: digital currency exchange, wallet management, digital currency query and wallet attachment. It will also support a variety of transaction methods such as code scanning, remittance and touch.

Outbreaks can accelerate DC/EP progress. First, in the epidemic situation, cash may carry the virus is a problem of great concern to the whole society, so the people's bank of China has strengthened the management of the cash collected from the epidemic prevention and control areas. DC/EP does not have this problem, and the "dual offline" payment function of DC/EP is more advantageous. Second, the geopolitical situation will be more complex after the outbreak. DC/EP provides new ideas for the new situation of RMB internationalization after the outbreak. Third, digital money may meet the special requirements of monetary and fiscal policy in response to an outbreak, such as monetary policy at zero interest rates and "helicopter money" fiscal stimulus. The peterson institute for international economics had research on the subject in March and April. Although this issue has not been discussed in China, the emphasis on legal digital currency abroad will push DC/EP from the side.

We are at an exciting stage in the history of human money. How do you make sense of all this new complexity of money and payment instruments? How do they work? What are their possible effects?

My speech is divided into four parts: one is to explain the issue and the origin; Secondly, account paradigm and Token paradigm of payment system are discussed. Third, the Libra project; Fourth, the analysis of the people's bank of China DC/EP; Fifth, a simple analysis of the application of block chain in the post-processing of financial transactions.

The raising and origin of the problem

Many readers are familiar with the evolution of money from precious metal to sovereign credit, a profound change in the value base of money. Due to space constraints, I won't go into this in depth, focusing instead on the payment and clearing infrastructure.

The earliest "official" banknote in the world was jiaozi, a banknote that circulated in sichuan province during the northern song dynasty (FIG. 1). Song taizu recovered the gold, silver and copper COINS from sichuan and sent them to the central government, casting iron COINS to replace them, and prohibited bringing copper COINS into sichuan. Iron money became the main currency of sichuan at that time. But because iron was cheaper than copper, and the iron money was of lower value and higher weight, merchants often had to carry it in wagons, which was very inconvenient to use. People tend to deposit iron money in the "jiaozi shop", in exchange for notes, and in daily life as a transaction. The simplicity of the intersection actually implies an important idea of financial infrastructure - immobilisation - where certificates represent assets and certificate transactions replace them. The question is, can credentials be digitized? I'll come back to that later.

Figure 1: intersection

Eleven years ago, satoshi nakamoto wrote in a bitcoin white paper:

"A purely peer-to-peer -peer version of electronic cash would allow online payments to be sent directly from one party to another without going through A financial institution Part of the solution, But the main benefits are lost if a trusted third party is still required to prevent double spending Timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of work."

It can be seen that he envisions bitcoin as a peer-to-peer electronic cash, with transactions independent of financial institutions, technical guarantees such as workload proofs, hash functions and digital signatures that will not be "double-spent" and historical records will not be tampered with.

Ten years on, what problems has bitcoin solved and what hasn't? Bitcoin introduces blockchain concept. Bitcoin is the first application of blockchain and, in a sense, the most successful application so far. Block chain has several points: 1. Data structure of block and chain; 2. 2. Consensus algorithm; 3. Governance mechanism under decentralization; 4. Open and anonymous; 5. Non-censorship; 6. Transaction is settled; 7. Programmable; 8. Transactions naturally cross borders. However, high price volatility prevents bitcoin from becoming an effective payment tool (figure 2). At the moment, the market sees bitcoin more as a kind of digital gold, and gold has long been out of circulation and no longer serves as a currency.

Figure 2: the dollar price of bitcoin

A variety of methods to stabilize the price of cryptocurrency have been tried in the field of blockchain. At present, it has basically converged to issuing stable currency with legal currency assets as reserves. Tether/USDT and its predecessor, Realcoin (launched in 2014), took this approach. As the largest and most widely used stable currency, the USDT, though far from compliant, has proved that this direction is feasible and in high demand (figure 3).

Figure 3: USDT dollar price

On the one hand, the block chain is regarded as the financial infrastructure, and the characteristics of transaction namely settlement, clearing programmable, de-trust, openness and anonymity are brought into play. On the other hand, economic mechanism will be used to link Token to the value outside the chain, Token is the digital certificate of legal tender. In practice, both the use of blockchain and the mechanism of economic value linkage have taken many forms.

Payment systems: from account paradigm to Token paradigm

A payment system is a set of tools, processes, and rules for transferring money between two or more traders. Payment is divided into wholesale payment and retail payment. Wholesale payments occur between financial institutions, securities and foreign exchange transactions between financial institutions, transactions between financial institutions and CCPS, and financing between financial institutions. Retail payments relate to purchases of goods and services by consumers and businesses, including peer-to-peer (P2P), peer-to-peer (P2B), business-to-business (B2P) and business-to-business (B2B).

Both wholesale and retail payments have a front end and a back end (figure 4). The front end includes: one is the source of funds, such as bank accounts; Second, the service channels that initiate payment, such as retail payment App; Third, payment instruments. The back-end includes: clearing, which refers to the transfer of payment instructions and reconciliation process, and sometimes also includes the transaction confirmation before settlement; Second, settlement, refers to the transfer of funds to release two or more parties from the repayment obligations.

Figure 4: payment system

At present, the payment system is well developed, which is mainly reflected in two aspects -- the availability of transaction accounts and the convenience of cross-border payment. Blockchain is used in payment systems mainly to alleviate these two deficiencies, which involves a paradigm shift in payment systems. Payment systems (and even financial infrastructure) are divided into account paradigm, represented by the bank account system, and Token paradigm, represented by the block chain. These two paradigms are quite different, but both can be used to carry financial assets and transactions, presenting very complex substitution and complementarity in many application scenarios.

1
Legal tender secondary bank account system

Individuals, enterprises and government departments open deposit accounts in commercial Banks, while commercial Banks open deposit reserve accounts in central Banks. Fiat money exists in the financial system's liabilities (figure 5). The base money is the liabilities of the central bank. Among them, cash is the central bank's liability to the public, and deposit reserve is the central bank's liability to commercial Banks. Deposits are liabilities of the central bank to individuals and businesses. In modern economies, cash (which does not depend on accounts) accounts for a small proportion of the money supply, with most of the broad money supply in deposits. Currencies such as reserve requirements and deposits have gone electronic.

Figure 5: secondary bank account system

In cash transaction, both parties of the transaction can deliver as long as they confirm the authenticity of the cash, without the need for a third party trusted institution. This is similar to Token trading. Transfers and remittances involve bank account operations (figure 6). For example, a peer - to - peer transfer involves synchronously adjusting the balance of both parties' savings accounts at the same bank. In addition to adjusting the balance of both parties' deposit accounts at their respective Banks, the inter-bank transfer involves the settlement between the two Banks. Settlement among commercial Banks requires adjustments to their reserve account balances at the central bank.

Figure 6: currency transactions

Cross-border payments involve more complex bank account operations. Figure 7 is adapted from the Bank of Canada, Bank of England, and Monetary Authority of Singapore, 2018.

Figure 7: cross-border payments

Let's say two countries, country A and country B, and their currencies -- currency A and currency B. Both currencies have payment systems established by their respective central Banks (RTGS in figure 7, the real-time full payment system for the wholesale payment scenario). For example, the RMB is the large micropayment system and the cross-border payment system (CIPS), and the usd is the federal electronic funds transfer system (Fedwire) and the New York clearing house interbank payment system (CHIPS).

Let's say that Alice, A resident of country A, has A deposit in currency A in bank A1 in country A. She's going to pay Bob, a resident of country B, who has a deposit account in B currency at B2, a bank in country B. The problem is that there is no direct business relationship between bank A1 and bank B2. Therefore, it is necessary to introduce correspondent bank, namely, bank A2 and bank B1 in figure 7. The correspondent bank ACTS as a bridge between bank A1 and bank B2, but extends the cross-border payment chain.

Under the agency banking model, cross-border payment is conducted in the following steps. First, in country A, Alice's a-currency deposits in bank A1 are transferred to bank A2 (via the a-currency payment system). Second, funds are transferred from bank A2 to bank B1. Agent Banks open accounts with each other. For example, from the perspective of bank A2, the account it opened in bank B1 is called "nostro account" (in B currency), that is, the deposit of foreign trade account. The account opened by bank B1 in bank A2 is called vostro account (currency A), that is, inter-bank deposit account. The transfer of funds from bank A2 to bank B1 is done by adjusting these account balances. Currency exchange requires a continuous connection to the settlement system (CLS in figure 7). Finally, funds are transferred from bank B1 to bank B2 (via the B currency payment system).

Two points to make: first, contrary to popular belief, SWIFT is an inter-bank messaging system that handles the flow of information in cross-border payments. Money flows through the bank account system in cross-border payments. Second, some blockchain projects believe that SWIFT is the main reason for the high cost of cross-border payment. Not so. According to a 2016 study by McKinsey & company, the average cost of a cross-border payment made by an American bank through a correspondent bank is between $25 and $35, more than 10 times the average cost of a domestic payment. Of this, 34 per cent came from liquidity locked up in correspondent bank accounts because it could have been used for higher returns, 27 per cent from Treasury operations, 15 per cent from foreign exchange operations and 13 per cent from compliance costs.

We know that bitcoin transactions are peer-to-peer and naturally cross-border. There is no fundamental difference between a Chinese bitcoin being sent to an American and a Chinese bitcoin being sent to another Chinese. So can cross-border payments move towards a peer-to-peer model, independent of the system of correspondent Banks? (figure 8)

Figure 8: comparison of cross-border payment patterns

2
The Token of the paradigm

Token is essentially a state variable defined within the blockchain (figure 9). Tokens defined by the same rule are homogeneous and can be broken up into smaller units. Asymmetric encryption guarantees the anonymity of the Token holder. Tokens can be transferred between different addresses. Blockchain consensus algorithm and tamper-proof feature can ensure that Token will not be "double-flowered". The total amount is the same in Token transfer -- the gain of address of party a is the loss of address of party b. Status (ledger) updates are completed at the same time as trade confirmation, with no settlement risk. Confirmed transactions are open online and cannot be tampered with. Block chain within the Token transaction, without relying on centralized trust institutions.

Source: ethereum white paper

Figure 9: Token and its transaction

Figure 10 summarizes the mainstream blockchain design from the perspective of economics. The current mainstream block chain system, whether public chain or chain alliance, no matter adopt represented by COINS UTXO model is represented by the etheric fang account, whether or not a scripting language with Turing completeness or whether to support intelligent contract, no matter whether to directed acyclic graph (DAG) structure such as non-mainstream block chain structure, conform to the description of figure 10 in economics.

Token, intelligent contract and consensus algorithm are all within the consensus boundary. There is an inseparable relationship between Token and intelligent contract. Consensus algorithm ensures the trust environment within the consensus boundary. The information in the blockchain that has nothing to do with the Token's state or transaction is outside the consensus boundary and within the blockchain boundary. There are two kinds of interaction inside and outside the block chain: one is that the information outside the block chain is written into the block chain; The second is the mutual transaction or correspondence between Token and the assets or rights outside the blockchain. The Token, which represents assets outside the blockchain, is the key to understanding the application of blockchain to financial infrastructure.

Figure 10: Token paradigm for blockchain

The following properties of Token and its transactions are key to the application of blockchain to financial infrastructure (table 1) :

Table 1: where the Token paradigm meets the financial infrastructure

Token is a piece of computer code in its existing form and has no intrinsic value. So, what is the source of Token value? Token is usually translated into a Token or representation in Chinese. The sign or representation itself has no value, and the value comes from the assets it carries. The use of Token to carry real-world assets (so-called "assets on the chain") is essentially based on laws and regulations, and the economic mechanism outside the block chain is used to link the Token with the value of an underlying asset. This process cannot be separated from centralized trusted institutions (table 2).

Table 2: use tokens to host assets

There are three rules that must be followed to host an asset with Token. The first is the issuance rule: the centralized trusted institution issues tokens based on the 1:1 relationship of the underlying asset. The user gives 1 unit of the underlying asset to the centralized trusted institution, and the centralized trusted institution issues 1 unit Token to the user. Second, redemption rule: the user returns 1 unit Token to the centralized trusted institution, and the centralized trusted institution returns 1 unit of the underlying asset to the user. Under the constraint of the above two rules, the centralized trusted institution ensures the two-way 1:1 exchange between Token and the underlying asset. The third is the credibility rule: the centralized trusted institution must regularly accept the third-party audit and fully disclose information to ensure the authenticity and adequacy of the underlying assets as Token issuance reserves.

Under the constraint of these three rules, 1 unit Token represents the value of 1 unit of underlying asset. When there is secondary market transaction in Token, the Token market price will deviate from the value of the underlying asset, but the market arbitrage mechanism will drive the price to return to the value. Once the three rules are not strictly followed, the effect of the market arbitrage mechanism will be weakened, and the Token price will be decoupled from the value of the underlying asset (not necessarily completely).

Some friends may ask, why develop the Token paradigm when the account paradigm is so developed? There is a big difference in privacy protection between the two. Opening an account generally requires approval and is therefore highly selective. Personal bank and payment accounts in particular have to meet strict authentication requirements. Financial accounts generally infer the owner from the name of the account, but the amount of assets in the account is only visible to those with the relevant authority. However, the collection and use of personal information under the account paradigm can easily become an invasion of personal privacy. Blockchain is highly open to users. Anyone who generates a pair of public and private keys based on the digital signature algorithm can own the address in the blockchain. Addresses have good anonymity, but the number of tokens in the address and Token transactions between addresses are visible throughout the network and cannot be tampered with. Trading with tokens is like wearing a veil of anonymity. While this helps protect address owners' privacy, it also makes it harder to police KYC (" know your customers "), AML (anti-money laundering) and CFT (counter-terrorism financing). In short, both paradigms have their advantages and disadvantages.

3
The application of Token paradigm in the field of legal tender

Figure 11 is the "flower of money" model proposed by the Bank for international settlements for Central Bank Digital Currency (CBDC). Figure 11 compares CBDC with cryptocurrencies, bank accounts, from multiple dimensions: account-based or token-based, inter-agency only or generally available, central bank-issued, point-to-point, and so on.

Figure 11: the BIS "flower of money" model

Table 3 focuses on the application of Token paradigm in the field of fiat currency and classifies it according to two dimensions. The first dimension is whether the issuer is a central bank or a private institution. The second dimension: whether the target audience is wholesale (for institutions only) or retail (for the public).

Table 3: application classification of Token paradigm in legal coin domain

There are four key concepts: 1. Account tight coupling vs account loose coupling. Account loose coupling and Token paradigm are basically synonyms, but Token paradigm need not be realized by block chain; 2. 2. Central bank issue vs private institution issue; 3. Single currency reserve vs basket currency reserve; 4. Wholesale vs general target. But no matter which kind of application, there are three elements: 1. The user interface, that is, how the user owns and USES it; 2. 2. Issuance and stabilization mechanism; 3. Transfer mechanism.

Table 4 compares the use of blockchain by these applications, and it is not hard to see that there is a lot of room for flexibility.

Table 4: different applications of blockchain

Libra

1
Operation mechanism

The first is economic: Libra is a synthetic currency unit based on a basket of currencies (50 per cent of the dollar, 18 per cent of the euro, 14 per cent of the yen, 11 per cent of the pound and 7 per cent of the Singapore dollar). Libra any single currency, although not anchor will still reflect low volatility, low inflation and global universal acceptance and interchangeability (fungibility).

The second is reserve assets: Libra issues are based on 100% fiat currency reserves. The reserves will be held by investment-grade custodians scattered around the world and invested in bank deposits and short-term government bonds. The proceeds from investments in the fca reserve will be used to cover system operating costs, ensure low transaction fees and pay dividends to early stage investors (i.e., "Libra alliance"). Libra users do not share the proceeds of investments in their fiat currency reserves.

The third is the issuance and price stability mechanism: the Libra alliance will choose a certain number of authorized dealers (mainly compliant Banks and payment institutions). Authorized dealers can directly trade with the legal reserve pool.

Fourth, the underlying technology: Libra block chain belongs to the alliance chain. Libra plans to initially recruit 100 verification nodes to support 1,000 transactions per second to cope with normal payment scenarios. One hundred verification nodes form the Libra alliance, registered as a non-profit organization in Geneva, Switzerland.

Fifth, the governance structure: the governing body of the Libra alliance is the council, which is composed of member representatives. Each verification node can appoint a representative. All decisions of the Libra coalition are made by the board of governors. Major policy or technical decisions require a two-thirds majority vote.

FIG. 12 a retrospective test of Libra's exchange rate against the dollar and its volatility based on data from 2011 shows two things: first, most of the time, a unit of Libra is worth less than a dollar; Second, because of the diversification of the basket, the volatility of Libra against the dollar is lower than that of its constituent currencies, averaging around 3.2% (annualised). For comparison, the volatility of bitcoin prices over the same period was around 77% (annualized).

Figure 12: Libra versus the dollar exchange rate and its volatility

2
Libra in monetary terms

As a synthetic currency unit based on a basket of currencies, Libra, like the IMF's Special Drawing Rights, is a super-sovereign currency. Zhou xiaochuan, governor of the central bank, has made a profound statement on the super-sovereign currency.

In the issuance process, Libra is based on a 100% reserve of fiat currencies. Since Libra represents a basket of currencies that already exist, it has no money creation function. The only way to expand the issuance of Libra is to increase the reserve of fiat currencies. If Libra is widely circulated and there is deposit and loan activity based on Libra, is there money creation? We don't think so. This depends on whether deposits derived from Libra loans (i.e., "50 Libra deposits from enterprises" at the bottom of figure 13, which belong to the account paradigm rather than the Token paradigm) are considered as currency. But to be sure, Libra stands for a basket of currencies that have no real monetary policy and are far from being de-nationalised.

(enterprise deposits 50 Libra in bank)

Figure 13: library-based deposit and loan activities based on Libra

Libra has a store of value. However, due to the currency network effect and the fact that there is no commodity or service priced in Libra, the functions of Libra's medium of exchange and unit of account will be limited in the early stage of development of Libra. For example, consumers who buy Libra in a country may have to convert Libra into local currency during the payment process. This can affect payment efficiency and experience.

Libra can promote financial inclusion. According to the Libra alliance, all you have to do is put a Calibra digital wallet on your phone to have and use Libra physically. Libra trading fees are low. Libra alliance members have a rich industry background and a deeper understanding of users' needs, which can help integrate Libra flexibly into multiple aspects of users' lives and improve users' convenience of using Libra.

A number of stable cryptocurrencies (such as the USDC) have emerged in the lower right area of Libra's table 3 (" private sector issue + retail "). These stable cryptocurrencies are mainly used in cryptocurrency exchanges, not really into ordinary People's Daily life. Whether Libra can be a real payment instrument remains to be tested by the market. One limitation that cannot be ignored is the performance of the Libra alliance chain. 1, 000 transactions per second surely cannot support the daily payments of hundreds of millions of people. The Libra alliance chain has plans to switch to a public chain. The public chain is more open, but its performance is more limited.

The biggest issue now facing Libra is currency substitution: can it replace currencies in countries with unstable political and economic conditions and failed monetary policies, such as high inflation, to achieve a "dollarization" effect? This raises complex questions about monetary sovereignty.

3
Libra's risk analysis

Since the Libra alliance does not disclose the rebalancing mechanism of the Libra currency basket, the management mechanism of the reserve pool of the French currency and the two-way exchange mechanism between Libra and the constituent currencies, it is difficult to accurately analyze the market risks, liquidity risks and cross-border capital volatility risks faced by Libra. Once detailed information is disclosed, we can analyse the risks in these categories and assess the corresponding prudential regulatory requirements. In particular, the rebalancing of the Libra currency basket is the biggest challenge in the design of the Libra economic mechanism. What is more certain at present is the following 4 risk points.

First, if the Libra FCF reserve pool implements a relatively aggressive investment strategy in pursuit of investment returns (such as investing a high proportion in high-risk, long-maturity or illiquid assets), it may not have enough highly liquid assets to cope with when Libra is faced with concentrated and large redemptions. The Libra coalition may have to "fire the sale" of its reserve assets. This can weigh on asset prices and worsen the liquidity and even solvency of the Libra system. Without the support of a central bank's lender of last resort, a run on Libra could cause systemic financial risk if it gets big enough. As a result, Libra's fiat currency reserves will be subject to prudential supervision, in the form of bond types, credit ratings, maturities, liquidity and concentration requirements.

Second, the Libra reserve is held by investment-grade custodians who are distributed around the world. But investment grade does not mean zero risk and the custodians chosen by Libra should meet certain regulatory requirements. Libra is equivalent to a "synthetic CBDC" if one or more central Banks are included in the custodian of the Libra reserve.

Thirdly, Libra naturally has the function of cross-border payment. The use of Libra will be cross-border, cross-currency and cross-financial institutions. Libra will have complex implications for cross-border capital flows and will be subject to prudential regulation because of the risks.

Fourth, if library-based deposit and loan activity is accompanied by money creation, Libra should be regulated for its impact on the implementation of monetary policy. But Facebook and the Libra team made it clear during hearings in congress that Libra would not be lending or saving.

The biggest problem in economics is how to manage a basket of currencies. A basket of currencies is perfect in theory, but there is no precedent for success in practice. The exchange rate of Libra can be understood from three different perspectives: market exchange rate, which is formed by market transactions; The theoretical exchange rate reflects the value of a basket of currencies; The implied exchange rate reflects the value of the reserve pool of fiat currency corresponding to each unit of Libra. The adequacy of Libra reserve can be measured from two levels: "cent type adequacy" and "overall adequacy".

The condition of "overall sufficiency" is equivalent to that the implied exchange rate is not lower than the theoretical exchange rate. At this point, the theoretical exchange rate will become the anchor of the market exchange rate. Although the market exchange rate can deviate from the theoretical exchange rate fluctuations, the arbitrage mechanism to generate and redeem Libra will make the market exchange rate converge to the theoretical exchange rate. The "total sufficiency" condition can remain unsatisfied for some time. But if there is a speculative attack on Libra, the continued redemption of Libra will further widen the gap in the reserve pool of fiat currency and depress the implied exchange rate, making the attack "self-fulfilling". Arbitrage mechanisms and "fire sale" of some fca reserve assets amplify speculative attacks. In extreme cases, Libra issuers may have to adjust the composition of the basket, which is logically analogous to a fixed exchange rate floating after being attacked. These are the main reasons for Libra's announcement on April 6th that it was switching from an anchor basket to an anchor basket.

4
Libra faces compliance problems

Libra involves multiple countries and currencies, which meet the compliance requirements of relevant countries. For example, there is already a regulatory framework for stable cryptocurrencies in the us and the eurozone, which will apply to Libra. The relevant us regulations include: 1. The financial crime enforcement network (FinCEN) monetary service business (MSB) license under the us Treasury; 2. 2. Operating the money transfer license of the state concerned; 3. Dollar reserves shall be deposited with Banks protected by the FDIC; 4. The authenticity and adequacy of the us dollar reserve shall be regularly audited and disclosed by third parties; 5. Regulations on KYC, AML and CFT.

Clifford chance has conducted a comprehensive review of compliance issues faced by Libra: 1. According to Howey test, will Libra be considered as a security under us securities law? 2. If Libra is considered a virtual currency, the CFTC will likely have the authority to regulate fraudulent and manipulative behavior. 3. Due to the existence of fiat currency reserves, Libra may be regarded as a pooled investment scheme in the eu and subject to corresponding regulation. 4. Data privacy issues related to Libra users and transactions. 5. Tax regulation.

People's bank of China DC/EP

1
Speculation on DC/EP design

On oct 24, 2019, President xi jinping pointed out in the 18th collective study session of the political bureau of the CPC central committee that "the application of blockchain technology has been extended to digital finance". The key to understanding Digital finance is to understand the people's bank of China DC/EP (Digital Currency/Electronic Payment). However, so far, the people's bank of China has not published a file system to elaborate on the DC/EP design. After combing and comparing these open channel information, DC/EP should have the following core characteristics:

One is to replace M0, based on 100% reserve issuance. Digital money does not pay interest and does not perform other social and administrative functions other than the four functions of money (measure of value, means of circulation, means of payment and store of value). To ensure that digital currency issuance and withdrawal do not change the total amount of money issued by the central bank, there is an equal exchange mechanism between the deposit reserve of commercial Banks and the digital currency. In the withdrawal stage, the central bank increases the deposit reserve of commercial Banks by an equal amount and cancels the digital currency (figure 14).

Figure 14: issuance and withdrawal of digital currency

The second is to follow the traditional central bank-commercial bank binary mode operating framework (figure 15). The central bank issues digital currency to the commercial bank's business library, and the commercial bank is entrusted by the central bank to provide the public with digital currency access and other services, and works with the central bank to maintain the normal operation of digital currency issuance and circulation system.

Figure 15: binary mode of digital currency

Third, the expression of digital currency. A digital currency is in the form of an encrypted numeric string representing a specific amount issued and guaranteed by the central bank, containing the most basic number, amount, owner and issuer signatures, etc. (figure 16). Among them, the number is the unique identification of digital currency, the number cannot be repeated, can be used as the index of digital currency. Digital currencies are programmable and can be attached to user-defined executable scripts.

Figure 16: expression structure for digital currency

Fourth, digital currency registration center and certification center. The registration center not only records the digital currency and the corresponding user's identity, but also completes the ownership registration; It also records the flow and completes the registration of the whole process of digital currency generation, circulation, checking and dying. Based on the traditional centralized method, the registration center is a new concept of digital coinage center. Certification center is an important part of controllable and anonymous design of digital currency. PKI (Public Key Infrastructure) can be used for authentication of financial institutions or high-end users, and IBC (Identity Based Cryptography) can be used for authentication of low-end users.

Fifth, the loose coupling mode of account release + centralized management mode. Digital currency is less dependent on accounts for transactions, and can be as easy to circulate as cash, while still being controllable and anonymous. Controllable anonymity means that digital currency only discloses transaction data to a third party, the central bank, but the transaction history and usage of digital currency cannot be tracked even if commercial Banks and merchants cooperate without the owner's own wishes. Digital currency holders can directly apply it to a variety of scenarios, facilitating renminbi circulation and internationalization. In contrast, bank CARDS and Internet payments are based on tightly coupled accounts.

Sixth, the application of distributed ledger. Digital currency registration centers do not use distributed ledgers. In DC/EP, the distributed ledger is used for the confirmation and registration of digital currency, and it provides a website for external confirmation and inquiry of digital currency through the Internet, so as to realize the function of digital currency online detector. This has two benefits. On the one hand, the core distribution registration system is isolated and protected to the outside world, and at the same time, the advantage of distributed ledger is used to improve the data and system security of right confirmation inquiry. On the other hand, since the distributed ledger is only used for external query access, the transaction processing is still completed by the issuance registration system, so the bottleneck problem of transaction processing in the existing distributed ledger is effectively avoided.

Number seven is system independence. Digital currency is universal and ubiquitous, able to complete transactions on a variety of transaction media and payment channels, and can utilize existing financial infrastructure. Theoretically, bank deposit money, electronic money can reach the boundary of the payment network, digital money can also reach.

Based on the digital currency prototype system of the central bank introduced by yao in 2018, my speculations on the DC/EP design are as follows:

One is the account loose coupling =Token paradigm. Judging from the people's bank of China's public disclosure, DC/EP does not use the real blockchain as Libra does. Although DC/EP is not Token in blockchain, it is similar to Token in blockchain in key features such as non-double flower, anonymity, non-forgery, security, transitivity, separability and programmability. Therefore, DC/EP still belongs to the Token paradigm rather than the account paradigm.

Second, DC/EP USES a centralized ledger based on the UTXO pattern. The centralized ledger is embodied as a digital currency issuance registration system, maintained by a central bank, and is centralized, without the need to run consensus algorithms, so it is not subject to blockchain performance bottlenecks. Centralised ledgerbooks can be organised by hash functions and Merck trees, but because they are maintained by the central bank, there is little difference between doing so and not doing so. More importantly, the credit of the central bank is significantly higher than that of commercial Banks and other private institutions, so it is not necessary to introduce the distributed trust mechanism represented by the block chain in DC/EP, so it makes sense for DC/EP to use the centralized ledger. Of course, a centralized ledger based on the UTXO pattern can also be considered a "degenerate" blockchain (or a one-node blockchain). In addition, the block chain may be used to confirm the rights of digital currency registration, plays a secondary role.

Third is the DC/EP wallet. Users need to use the DC/EP wallet, the core of which is a pair of public and private keys. The public key is also the address in which the digital certificate of RMB is stored. This digital certificate is issued based on 100% RMB reserves. Users can see the addresses of other users, but do not necessarily know the identity of the address owner. The central bank knows the correspondence between the address and the user's identity through the digital currency registration center it manages, but it doesn't have to be a strong real-name system.

The fourth is the DC/EP transaction. Users can initiate inter-address transfer transactions through the wallet private key. Rather than broadcasting the DC/EP transfer transactions into a peer-to-peer network, which miners then pack into blocks and run the consensus algorithm, as in public-link Token transactions, the central bank records them directly in a central ledger.

Fifth, DC/EP implementation strategy: first domestic use, then cross-border payment.

This outbreak will make DC/EP more important. First, in the outbreak, the possibility of cash carrying the virus is a major concern of the whole society. For this reason, the people's bank of China requires that the cash collected from the epidemic prevention and control key areas be sterilized with ultraviolet light or high temperature, which is usually stored for more than 14 days before being put on the market. The cash in non-epidemic areas should be kept for more than 7 days after disinfection. However, DC/EP does not have this problem, and the "dual offline" payment function of DC/EP is more advantageous. Second, DC/EP will provide new ideas for the new situation of RMB internationalization after the epidemic.

Figure 17 shows the capital flow in DC/EP:

Figure 17: capital flows in DC/EP

2
Effect of DC/EP on payment

In a certain sense, DC/EP has an isomorphic relationship with the third-party payment after "disconnection" (figure 18 and table 5). If DC/EP is good enough in terms of technical efficiency and business development, from the perspective of users, DC/EP and third-party payment after "disconnection" should theoretically bring the same experience. Therefore, for users, DC/EP and third-party payment have a mutual substitution relationship in the application. For example, according to the report, the staff of various district authorities and enterprises and public institutions in xiangcheng district of suzhou, who are paid by the big four state-owned Banks, will complete the installation of the central bank's digital currency (DC/EP) digital wallet in April, and 50 percent of the traffic subsidy in May will be paid in digital currency.

Figure 18: fund flow of third-party payment after "disconnection"

Table 5: comparison of DC/EP with third-party payment

In addition, there are the following similarities between DC/EP and third-party payment after "disconnection" : 1. Both of them are for General users, especially retail users, so they are so-called "General Purpose". 2. Both are centralized and based on the dual model of central bank-commercial bank. Both have complex implications for the money supply and the money multiplier. 4. No interest is paid on digital currency, and no interest is paid on the balance of users in third-party payment institutions (yu 'ebao products are not applicable to this situation).

The difference between DC/EP and third-party payment after "disconnection" is also obvious. First, after "disconnection", the third-party payment is based on the account of the third-party payment institution and the reserve fund account of the third-party payment institution in the central bank, which is the account tight coupling mode. Digital currency is based on the digital currency issue registration system managed by the central bank.

Second, third-party payments are based on accounts, which are associated with identity, so they are not anonymous. Digital money is controllable and anonymous. This makes a difference in privacy protection.

Thirdly, the balance of the user in the third-party payment institution is a kind of payment tool. Third-party payment transfers are limited to users using the same third-party payment agency. For example, WeChat payment users and alipay users can not direct transfer transactions. Digital currency belongs to M0, which has legal compensation in any situation.

Fourth, DC/EP plays an obvious role in replacing cash, and has strong policy implications for the central bank to monitor the flow of funds, as well as anti-money laundering, anti-terrorist financing and anti-tax evasion. DC/EP programmability creates room for intelligent macro-control, such as "forward guidance" on monetary policy, which Mr Yao specialises in analysing. It should be said that the application of digital currency programmability is an important part of digital finance. Third-party payment mainly replaces payment tools such as bank CARDS and checks, without strong policy tool significance.

3
DC/EP and RMB internationalization

The impact of DC/EP on RMB internationalization is mainly reflected in cross-border payment based on digital currency. Before 2015, there were mainly two modes of RMB cross-border settlement: agent bank and clearing bank. In 2015, the RMB cross-border Payment System (CIPS, Cross - border Interbank Payment System), as the "highway" of RMB internationalization, RMB cross-border provide across time zones and offshoring fund settlement and settlement business (figure 19, quotations from the people's bank Payment and settlement department of research planning in July 2018 the yuan cross-border Payment System (CIPS) main function and the business management ").

Figure 19: RMB cross-border payment system (CIPS) architecture

These cross-border payments are based on bank accounts. To this end, overseas Banks need to have RMB business, and overseas enterprises and individuals need to open RMB deposit accounts. While DC/EP only requires the user to have a DC/EP wallet, which is much lower than opening a RMB deposit account. Digital RMB trading is naturally cross-border, and DC/EP can effectively expand the use of RMB outside China. At this point, DC/EP has similar logic to Libra.

Overseas Banks, companies and individuals can obtain digital renminbi in two ways. The first is to exchange renminbi held by them to domestic Banks, enterprises or individuals. This is essentially an extension of the digital currency distribution system through cross-border payment networks. Second, through the exchange of foreign currency into digital renminbi. This implies a requirement for the convertibility of the renminbi. The digital RMB obtained by overseas Banks, enterprises and individuals will flow back into China through cross-border trade, investment and financing, financial market business, etc. (figure 20).

Figure 20: DC/EP and cross-border payments

While cross-border payments, including DC/EP, can facilitate renminbi internationalization, cross-border payments are a necessary condition, not a sufficient condition, for renminbi internationalization. RMB internationalization cannot be separated from a series of institutional arrangements. Currency internationalization has three dimensions: trade settlement currency, investment currency and reserve currency. International currency should meet the following requirements: 1. 2. Currency stability is reflected by low inflation rate at home and stable exchange rate at home; 3. Relying on profound and extensive cross-border trade scenarios; 4. High acceptance outside China; 5. The domestic financial market is mature and highly open; 6. The domestic legal environment is perfect, especially in terms of property rights protection. These requirements go beyond cross-border payments.

Block chain is applied to post-processing of financial transactions

Global stability currency and central bank digital currency are used in financial transaction scenarios as well as payment scenarios. While the financial transaction scenario has received less attention, it is far from trivial, and the key to understanding it is the application of blockchain to the post-processing of financial transactions. Research into this question helps answer the question: what is the principle behind issuing and trading securities on blockchain? How can central bank digital currency be used in financial transaction scenarios? What form will blockchain take in mainstream finance?

Post-processing of financial transactions involves the process from the completion of the transaction to the final settlement. The core is the clearing and settlement of securities and funds. Securities are tradable financial assets that are issued to raise funds from investors; Funds refer to electronic payment instruments such as central bank currency (excluding cash) and commercial bank deposits; Final settlement is the point at which securities and funds are irrevocably and unconditionally transferred. Post-processing of financial transactions deals with both securities and capital. If money is also processed in blockchain, post-processing of financial transactions naturally involves central bank digital currencies and global stability currencies. The bank of Japan's Stella project in cooperation with the ECB, the Singapore monetary authority's Ubin project and the bank of Canada's Jasper project all include experiments on the application of blockchain in post-processing of financial transactions. Not only that, the Token paradigm of blockchain is used to replace the account paradigm as the Token paradigm of blockchain is used to process securities and capital following the same economic logic.

Much valuable work has been done in this area. In 2015, nasdaq stock exchange launched Linq, a private equity trading platform based on blockchain technology. In 2016, the preparatory group of the Shanghai clearing house and the preparatory group of the digital currency research institute of the people's bank of China jointly developed the prototype system of the digital bill trading platform with several commercial Banks, and realized the registration and circulation transaction of the whole life cycle of the digital bill based on the block chain and the settlement function of the digital currency based on the DvP. In 2018, the world bank issued bond-i, the world's first Bond created and managed using blockchain.

1
After financial transactionThe core components of the process

Only by understanding the core components of financial transaction post-processing can we analyze the necessity and rationality of the application of block chain in financial transaction post-processing. Early securities take physical form, is a paper certificate, there are bearer securities and registered securities. Named securities are the main model of physical securities, following the direct holding model. The investor holds physical securities and directly exercises the rights of the securities under his or her name. There is no custody risk (the securities held under the custody of intermediary institutions will be subject to the risk of loss). The ownership of securities is directly registered in the register of the securities issuer. Securities trading after the delivery of the need to hand over physical evidence. For example, on November 14, 1986, deng xiaoping gave John verlin, chairman of the New York stock exchange, shares of Shanghai feile audio co., ltd. that were registered securities (figure 21).

Figure 21: shares of Shanghai feile audio co., LTD. Awarded to John fallin

At present, our country and Australia already do not have physical stock, the United States, Singapore, South Korea and India wait for a country and Hong Kong area to still have physical stock, but before trade must dematerialize. Dematerialization means that because the preservation and delivery of physical securities means high costs and risks for investors, investors usually hand over physical securities to custodian institutions to hold them, which gives rise to the indirect holding mode.

To understand the mainstream mode of securities holding, it is necessary to understand the function and operation of central securities depository (CSD). CSD makes securities non-physical, makes securities become the electronic accounting account in the CSD account, and then makes securities illiquid, so that securities transactions do not involve physical delivery of paper certificates. CSD has three main functions: one is to certify, fairly and reliably maintain the records of securities issued; Second, the settlement, the ownership of the securities from the seller to the buyer; Third, account maintenance, establishment and update of ownership records of securities.

According to the Hong Kong stock exchange in 2020, the report of the securities holding system and the "transmission" market regulation of international experience, in indirect holding mode, investors through agents and brokers, (including the CSD managed institutions such as market intermediary organizations) hold securities, securities register is shown on the name of the agent in the name of the investor. The indirect holding pattern can be subdivided into a single-tier holding pattern and a multi-tier holding pattern (figure 22). In a single-tier hold model, the investor is a direct participant in CSD, and CSD manages the agent account for its participant. In a multi-tier holding model, the top tier is usually CSD, with various financial service providers (such as brokers and custodians) acting as investors' agents at each layer below.

Figure 22: the broker account architecture that holds the pattern indirectly

Different countries and regions vary greatly in their patterns of holding securities. Our country basically is direct hold mode. Investors need to open a real name securities account in China clearing (CSD in China's stock market). The opening procedure can be handled through an authorized securities company. The investor's securities account is composed of the total account (i.e., the "one code pass" account) and the associated sub-accounts. The account is real-name and has a unique identification number. China clearing is responsible for maintaining the investor's securities account information and the share register of the securities issuer. The shares held by the investors are entrusted by the securities company, and the shares held by the securities company itself and on behalf of the clients are deposited in China for settlement. Agent accounts in China are limited to foreign investors who hold shares under the shanghai-shenzhen stock connect through Hong Kong agents. And the United States and India are indirect holding mode, China Hong Kong, Singapore and South Korea and other characteristics of both direct and indirect holding mode, all have agent accounts. The existence of the agent's account reduces the information requirements for CSD, but the securities ownership information is fragmented, which makes reconciliation difficult.

The whole process of securities trading can be divided into two parts. The first is trading, or buying and selling securities, which requires a central intermediary or multiple intermediaries to match orders. For example, stock listings and matchmaking are done on exchanges. The second link is post-transaction processing, divided into clearing and settlement. Clearing is primarily a calculation of the securities and capital repayment obligations of the parties involved in the transaction, some of which are offset or offset. Clearing also involves sending transaction information to a third party to check accounts and identify whom to settle. Settlement refers to the transfer of ownership of securities and funds in accordance with the agreement. The paying side refers to the transfer of securities from the selling side to the buying side, while the paying side refers to the transfer of funds from the buying side to the selling side.

The payment side involves the payment system. The payment system has been briefly introduced. The payment system has three main methods of settlement. The first is real time full settlement (RTGS), which refers to the payment instructions for full settlement. RTGS is efficient and reduces the credit risk of all parties involved in the payment, but requires higher liquidity. The second is delayed net settlement (DNS), which is the net settlement after the offset of a payment instruction. DNS can save liquidity, but it takes a certain amount of time for the gap and settlement. There are two dimensions of settlement risk: one is credit risk, which refers to the risk caused by the default of the payee or the payee's payment service provider (mainly commercial bank) before the completion of settlement; Second, liquidity risk, refers to the risk that the recipient may delay the receipt of funds. The third is a hybrid model of RTGS and DNS. For example, if the payer's payment service provider does not have enough funds to perform RTGS, the payment system provides a liquidity savings mechanism (LSM) that compares payment instructions with other payment instructions before settling.

In almost all countries, RTGS is used for wholesale payments, and RTGS systems are usually owned and managed by central Banks. In RTGS, if a financial institution's account balance is insufficient, it may block the payment order, for which the central bank will provide the financial institution with a day credit line. DNS is usually used before retail payment.

One of the main risks of settlement is principal risk, which refers to the risk that the seller will not be able to obtain funds after delivering the securities or the buyer will not be able to obtain the securities after paying the funds because the fund payment is not synchronized with the delivery of the securities. Therefore, post-processing of financial transactions emphasizes the DvP principle -- the delivery of securities is only and only the payment of funds. There are three DvP modes: one is DvP mode 1, which refers to the full settlement of securities and funds; The second is DvP mode 2, which refers to the full settlement of securities, and the net settlement of funds after misalignment; Third, DvP mode 3, which refers to the net settlement of securities and funds after misalignment.

Based on the above discussion, figure 23 is a typical financial transaction post-processing process.

Figure 23: financial transaction post-processing flow

2
The economic logic of security Token

Security tokenization can also be understood within the framework of the three rules described earlier. Another way is to compare it to a depository receipt. The Ubin and Jasper projects used the concept of depository receipts directly in their introduction to Token of funds and securities.

Depository receipts are negotiable certificates issued and circulated in the securities market of a country, representing securities of foreign companies (called "basic securities"). Each depository receipt represents a certain number of basic securities. Depository receipts can be traded across borders with underlying securities. After the domestic investor issues an order to the domestic broker to purchase the depository receipt, the domestic broker may choose to buy the depository receipt in the domestic market, or purchase the underlying securities in the overseas market through the overseas broker and sell them to the domestic investor after the depository institution converts them into the depository receipt (1:1 issue rule). After the domestic investor issues an order to sell the depository receipt to the domestic broker, the domestic broker may choose to sell the depository receipt in the domestic market, or sell the underlying securities in the overseas market through the overseas broker, and the depository institution shall cancel the equivalent depository receipt (1:1 redemption rule). Because of the arbitrage mechanism formed by cross-border transactions, there is generally no significant price difference between depository receipts and underlying securities.

Token securities can be regarded as block chain depository receipts or digital depository receipts, except that the mainstream depository receipts connect with foreign securities and domestic investors, while the block chain depository receipts connect with the account form and Token form of the same securities (figure 24). Depository institutions play a central role in the Token of securities. The depository institution shall hold the underlying securities in accordance with the provisions of the depository agreement, entrust the custodian institution for custody, and issue Token certificates on the block chain on behalf of the underlying securities.

Figure 24: tokenization of securities

The economic logic of Token money and securities is not complicated, but the legal issues are much more complicated. The bis committee on payments and market infrastructure proposes to study the legal rights of Token holders and the relationship between Token holders, Token issuers and Token's reserve assets. For example, does the Token holder have a claim on the Token issuer or on the Token's reserve asset? If the latter, does the Token holder have a claim on the reserve asset as an individual or as a whole? These will cause compliance risks and operational risks that cannot be ignored. The post-processing of financial transactions under the account paradigm has been explored and studied for a long time, and a series of risk mitigation and management mechanisms have been established, while the legal basis of Token securities remains to be studied.

3
Block chain is applied to the key mechanism of financial transaction post-processing

Block chain is applied to the post-processing of financial transactions from the account paradigm to the Token paradigm. However, paradigm shift alone is not enough to support the necessity and rationality of introducing blockchain into the post-processing of financial transactions. The key is to prove that blockchain can improve efficiency, reduce risks and retain the advantages of the current model.

In the indirect holding model of securities, a transaction involves multiple intermediaries, such as CSD, custodians (which can have multiple layers), exchanges and brokers. Each intermediary USES its own system to process, send and receive orders, check data, manage errors, and maintain its own trading records. The data standards used by each intermediary are also not uniform. All this adds up to a lot of costs and makes reconciliation between intermediaries more difficult. These problems are more evident when securities are held in multiple layers.

If clearing and books on CSD maintenance function by chain block, then the CSD and securities settlement systems, all market participants sharing a book, will bring the following benefits: one is through distributed, at the same time and share of stock ownership records to simplify and automated trading post-processing work, reduce the CSD and all kinds of intermediaries in the background check and confirm the transaction details of work; Second, shorten the settlement time, reduce the settlement risk exposure; Third, because the information related to the transaction is Shared by both sides of the transaction, it can promote automatic clearing; Fourth, shorten the custody chain, so that investors can directly hold securities, reduce the legal, operational risks and intermediary costs borne by investors; Fifth, good traceability, high transparency; Sixth, decentralized, multi - backup can improve the system security and anti - pressure. Finally, Token holders can automate the management of securities through intelligent contract programming, so as to achieve flexible functions such as risk transfer, hedging and resource allocation. The account system can also automate the management of securities, but it is implemented by a centralized account manager, while Token securities delegate the automation to the security holder.

To achieve the above benefits, Token securities must meet the following requirements: first, CSD performs the authentication function well to ensure the authenticity of information of issued securities. Second, the records on the block chain have legal effect. Thirdly, the block chain can guarantee the finality of settlement. This problem is not difficult for alliance chain, but some public chain because of the possibility of bifurcation, can only guarantee the final settlement in the sense of probability. Fourth, DvP can be realized. Fifth, it can effectively handle errors and exceptions. The feature of block chain that cannot be tampered with objectively increases the difficulty of this problem. Sixth, in the case that there may be many parties involved in the verification, to ensure the confidentiality of the transaction information. Seven are operational issues, including identity management, system scalability, and interoperability with existing processes and infrastructure.

Some projects have tested whether the application of blockchain in post-processing of financial transactions can realize DvP. The complexity of this problem is that the voucher and payment sides can be used either in Token paradigm or account paradigm, and there are four different combinations, each of which can find the corresponding item (table 6). In table 6, the full name of TARGET2 is the trans-european Automated real-time Gross Settlement Express Transfer System, which is the RTGS System of the euro. Fnality, a coalition of 15 financial institutions, plans to issue stable currencies linked to the Canadian dollar, the euro, the Japanese yen, the British pound and the American dollar.

Table 6: experiments on the application of blockchain in post-processing of financial transactions

It is worth mentioning that both the coupon end and the payment end use the combination of Token paradigm. According to yao qian's new financial market infrastructure based on block chain, in the digital bill trading platform based on block chain technology, two sets of schemes are designed for the capital settlement of digital bill. The second is on the chain clearing, that is, through the central bank digital currency settlement. The experiment found that the introduction of digital currency by the central bank greatly simplified the bill transaction process, enabling automatic real-time DvP and monitoring of fund flows. If out-of-chain clearing is adopted, the advantages of digital bills based on block chain technology will be greatly reduced, which is not different from the traditional electronic bill system. Therefore, the block chain is applied to the post-processing of financial transactions, and the digital currency of the central bank is an unavoidable problem.

There are two subdivisions in this combination (figure 25) : one is that the voucher end and the payment end use the same Token system (that is, the same block chain), which is called single-ledger DvP. For single - ledger DvP, funds and securities are recorded in the same ledger. After each counterparty confirms the order, Atomic Settlement smart contracts can coordinate clearing and Settlement, allowing simultaneous transfers of securities and funds. The Jasper and Stella projects argue that DvP mode 1, in which securities and funds are liquidated in full, is feasible in this case. Therefore, we need to see the difficulty of net settlement in a decentralized environment.

Second, the voucher end and the payment end use two different Token systems (namely, two different blockchains), known as cross-ledger DvP. For cross-ledger DvP, funds and securities are recorded in two different books, requiring some mechanism between the books to link the transactions between the two assets. There are two possible approaches. The first is for a central agency to coordinate the transfer of securities and funds on two blockchains. The second is hashed time lock protocol (HTLC). However, whether DvP can be implemented in all scenarios is still an open question. The Jasper project argues that there may be principal risk in cross - chain clearing. Stella project test found that the cross-ledger DvP using HTLC may have settlement failure and lead to two different results. The first result is that capital and securities are returned to their original holders, with neither counterparty taking on much risk but facing replacement cost risk (the risk of having to retrade due to settlement failure but current market conditions deteriorating) and liquidity risk. The second result is that both the money and the securities will go to one counterparty and the other party will take on the greater principal risk.