The Block and the financial technology company Apifiny released a report to analyze the current status of international settlement and introduce the practice of distributed ledger technology of major central banks in the field of international settlement.
Original title: “Check it out: The Status of International Settlement”
Written by: Ryan Todd
The blockchain media The Block and the American financial technology company Apifiny jointly released an industry report entitled “Under The Hood: The State of International Settlement”, which analyzed the current status of international settlement. The Apifiny Asia Pacific team compiled this report in Chinese, and the authorized chain news was first published.
Exchanging goods in a digital environment is a tricky business.
In the digital environment, even if a counterparty is found, there are still risks in the actual execution of the transaction. In the worst case, one party to the transaction may even break its promise and run away with the assets of the counterparty. Fundamentally speaking, the risk is due to the lack of “atomicity” of the transaction: In a typical exchange, one part of securities settlement or payment settlement may succeed, while the other part may fail.
This lack of atomicity is problematic. In this case, it is difficult for entities to conduct transactions with untrusted parties. This kind of problem will eventually lead to reliance on institutionalized trust and finding intermediaries to perform this function.
Settlement refers to the act of transferring ownership (settlement) in accordance with the basic agreement between the parties. As far as asset securities settlement and payment clearing are concerned, settlement is already a mature function.
As far as securities settlement is concerned, most transactions are currently processed through the Central Securities Depository (CSD). The agency has a central ledger record indicating “who owns which assets”. Transfers and settlements are based on a set of multilateral rules and are processed through the Securities Settlement System (SSS). The settlement and settlement process after the transaction handles trillions of dollars Activities provide a key function for the entire capital market.
According to the latest data from the Bank of International Settlements (BIS) Red Book in 2018: If we use the holding value as the measurement standard, the largest CSD/SSS system is Fedwire Securities Services (US$80 trillion), and if we use the delivery value as the measurement Standard, the most active settlement securities delivery system is Euroclear Bank (600 trillion USD).
In its current form, post-trade infrastructure means that once the transaction is executed, it will go through the entire process of clearing and settlement.
Recording changes in ownership requires the establishment of a series of databases between all parties to record the “state” of ownership. Since each transaction party has its own database, these data must be constantly checked against the central register. If a single record can be used to replace these layered databases, it will theoretically greatly improve efficiency.
“Distributed Ledger Technology” (DLT) has emerged as one of the characteristics of Bitcoin, and many financial institutions have explored the use of DLT to improve the process of securities and payment settlement. Compared with a purely centralized CSD/SSS system, different DLT architectures and design choices can provide different degrees of decentralization.
Although SEC (United States Securities and Exchange Commission) Chairman Jay Clayton speculated in the webinar that “all stocks may be tokenized.” However, DLT-based settlement may have the greatest opportunity in “non-standardized instruments”, such as various debt instruments, private securities, and contracts in other countries.
One of the core advantages of DLT-based settlement is the “atomic exchange” function, which allows users to exchange digital assets atomically. Therefore, all transactions either succeed or fail. If it fails, all funds will be returned to the original holder.
Through atomic swap, users can trade encrypted assets with untrusted counterparties without taking the risk of capital. On Bitcoin and blockchains that have a scripting language based on Bitcoin, atomic swaps are usually constructed using Hash Time Locked Contracts (HTLC). This is a smart contract: if the secret is leaked within a certain time window, the funds will be sent to one address, otherwise the funds will be sent to another address.
HTLC-based exchanges are most commonly used for cross-blockchain asset exchanges. This feature has existed since the first version of Bitcoin, enabling users to create transactions that are invalid (unspent) for a certain period of time. In a general sense, HTLC allows both parties to the transaction to establish an effective “custodial” transaction, which can realize atomic transactions or exchange assets without the risk of capital loss. There have been some early attempts to use HTLCs to implement cross-chain atomic swaps between different blockchains, which may improve interoperability between different platforms.
In addition to “atomicity”, the industry is exploring other settlement advantages of DLT-based systems: including system flexibility/security, longer availability/uptime, standardized messaging standards (provided that they can be interoperable Run on the ledger) and data transparency.
But in the world of DLT-driven post-trade settlement, how much can these efficiency improvements be? In fact, it is difficult to say.
In 2018, according to McKinsey’s statistics, the scale of global capital market revenue-driven costs was approximately US$600 billion. Operational and technical costs together account for approximately 20% of revenue-driven costs, totaling US$120 billion. As companies continue to modernize, outsource overseas, and look for small-scale efficiency improvements, the strong interest of financial institutions is turning to another area: the need to upgrade traditional infrastructure.
In theory, migrating financial infrastructure to a new stack (such as DLT-based solutions) can significantly reduce compliance and regulatory costs, but in reality, considering the technical expenditures incurred to achieve these functions, whether the industry is The net positive impact on profits is not clear.
At the same time, the cost of investment in network security and other technologies will only continue to increase, putting further pressure on DLT technology expenditures. All in all, many financial institutions have adopted a wait-and-see attitude, often handing over this work to competitors with more technology investment budgets, and some early companies that are exploring DLT settlement and cross-border payment solutions.
So, when can we expect to see the official implementation of the DLT-based settlement system?
The Depository Trust Company (DTCC) is a provider of security services such as clearing, settlement and custody for the US cash securities market, processing approximately US$2 trillion in transactions each year. In the first episode of The Block’s podcast The Scoop, DTCC CEO Mike Bodson predicted that it may take 10-15 years to fully shift existing infrastructure to innovative technologies such as DLT.
Bodson believes that although other technologies, such as machine learning and cloud computing, have brought a considerable return on investment, traditional technologies and infrastructure are difficult to completely eradicate.
But this has not stopped the major stakeholders from advancing a series of research and experiments. Many central banks around the world played a key role in these pilot experiments by providing and operating public payments and market infrastructure: at the same time, they acted as “guardians” in the security and integration of the system, leading the public in this regard.
One area of technological innovation that the central bank is interested in is: on DLT-based systems, can fiat tokens (batch CBDC) reduce settlement risks, provide 24*7 uptime, broaden interoperability with other settlement systems, and reduce Cross-border payment, etc.
The following are some well-known central bank-led DLT settlement experiments:
“Stella Project”
The Stella project is a joint research project carried out by the European Central Bank and the Bank of Japan. Its purpose is to explore the opportunities of DLT in financial market infrastructure, payment and securities settlement. The project found that delivery (the final transfer of securities from the seller to the buyer) and payment (the final transfer of funds from the buyer to the seller) can be achieved under the following conditions:
- Run in DLT environment
- Occurs between two separate ledgers
- Using the HTLC technology on the ledger can technically realize synchronous settlement across ledgers.
“Ubin Project”
The Ubin project was originally a cooperative project between the Monetary Authority of Singapore, the Singapore Banking Association and some international financial institutions, with the purpose of exploring how to use DLT for clearing and settlement cases. The first two phases of the Ubin project focused on technical capacity building in the context of domestic payment networks. The next two stages focus on the interoperability of blockchain-based networks in delivery-to-payment (DvP) and cross-border payment-to-payment (PvP). These four stages proved the technical feasibility of the project. The final phase was completed in July 2020, focusing on the operating model and testing the commercial viability of blockchain-based payment networks.
Jasper project
The Jasper project was launched by the Bank of Canada in March 2016. It is the first prototype of an Ethereum-based inter-bank transfer system. It was developed to test the impact of DLT solutions, including wholesale through the use of central bank tokenized digital depository receipts Central bank digital currency (W-CBDC) settlement. The Jasper project evaluated the scalability and flexibility of DLT, especially the finality of settlement, transaction throughput, privacy, and liquidity costs. The later proof of concept allowed immediate settlement and DvP, which proved the possibility of settlement after the transaction was completed on the DLT platform.
The motivation of central banks to research and try blockchain-based settlement systems mainly depends on the relative strength of traditional financial and payment infrastructures within each economy.
For emerging market economies (EMEs), the latest BIS survey found that the most important factor for studying DLT-based wholesale settlement and payment applications is to improve domestic payment efficiency and financial stability. In addition, smaller emerging market economies, if they have not established wholesale or running real-time gross settlement systems (RTGS) for their currencies, may favor these factors more.
Looking to the future, to make the tokenized version of currency as a viable secure settlement asset for wholesale applications, including cross-border payment and secure settlement use cases, it may be necessary to expand the DLT-based system equivalent to the established set for the real-time gross system The clear legal structure of the framework.
The central bank explores the motivation of DLT-based settlement systems
Legal considerations such as payment law, contract law, settlement finality regulations, bankruptcy law, and conflict of laws system, etc., were compiled without taking into account the wholesale token system based on DLT, which may cause legal loopholes. In other cases, due to the lack of a central intermediary agency, issues surrounding governance and operational risk management still need to be resolved.
In addition to legal clarifications, the commercial viability of these DLT-based systems needs to be proven before they can be expected to be more widely implemented in the settlement system.
The Block is a blockchain media, founded in 2018, headquartered in New York, spanning 7 time zones, covering the world’s 24/7 cryptocurrency and blockchain industry fields, with “We are the first report in the field of digital assets , Will also be the last report” for the purpose.
Apifiny is a financial technology company that is using blockchain technology to create a new Internet of financial services. Apifiny connects centralized financial institutions with decentralized networks to reshape the global liquidity, trading and settlement value chain. Apifiny’s API unifies fragmented global trading and settlement systems, removes time, geographic and currency barriers, and enables financial value to flow at an unprecedented speed anywhere in the world.
Roxe is a global light settlement network that enables exchanges, payment companies, consumers, banks, and central banks to transfer money and digital currencies with other Roxe network members within seconds. Apifiny enables its partners to provide its end customers with ultra-fast remittance, payment and foreign exchange products supported by Roxe. For more information, visit the website .
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