In my previous article, I discussed in detail the development of encrypted digital finance in Switzerland and the United States. The two countries’ differences in market size, regulatory policies, and development traditions have led to different development paths in this field. It is very enlightening to analyze the development of encrypted digital finance in these two countries and the factors affecting their development.
The Big Bang origin of the development of encrypted digital finance is the birth of Bitcoin in early 2009. Bitcoin and the blockchain technology that supports its operation have led to all subsequent innovations based on blockchain technology, especially in the financial field. The launch of the Ethereum mainnet in July 2015 laid the foundation for the future development of encrypted digital finance. Various applications in the financial field based on blockchain technology and various digital financial products developed on the blockchain began to appear. The development progress of such development in various regions of the world is different.
In the US market, the application of blockchain technology and digital financial products has rapidly developed. In April 2016, R3’s Corda was announced. Quorum of JP Morgan was also issued in 2016. Also in 2016, startups that directly developed blockchain-based applications began to appear in the US market, such as the high-profile Digital Assets. This company is trying to apply blockchain technology to settlement after securities transactions. Digital Assets has received investment from some of the world’s leading financial institutions, including the Australian Securities Exchange. These developments are spontaneous in the US market.
In terms of the development of encrypted digital financial products based on blockchain technology, the way of financing with tokens is also rapidly developing in the US market. This approach reached its peak in 2017 and 2018. Because such operations violated U.S. securities laws and regulations, the U.S. SEC began to point out such violations and continued to take regulatory measures to continue cracking down on violations in this regard. Due to the supervision of the SEC, token-based financing in the U.S. market has begun to operate within the regulatory framework, that is, the security token model is used to tokenize alternative assets and traded on the broker/dealer ATS. However, due to restrictions in this regard by relevant US securities laws and regulations, progress in this regard has been very slow.
Compared with the development of digital finance in the US stock market, the development of encrypted digital finance in the US commodity derivatives business is completely different. In 2017, there were already Bitcoin derivatives trading platforms that spontaneously appeared in the market around the world, but there were no compliant cryptocurrency derivatives exchanges. In July 2017, the CFTC, which regulates U.S. commodity derivatives, issued a derivative trading and clearing license for encrypted digital assets to a startup company LedgerX, allowing it to provide bitcoin derivatives trading and settlement. In the same month, CBOE and CME simultaneously applied to the CFTC to provide trading services for encrypted digital currency derivatives. As a result, in December 2017, in the US market, the first compliant bitcoin-based derivatives trading service appeared in the world. LedgerX provides bitcoin options trading, and CME and CBOE provide bitcoin futures trading. Therefore, in terms of derivatives trading of encrypted digital currency, it can be said that the development of this aspect is promoted from top to bottom in the US market. Developed to today’s 2020, the US market is ahead of the rest of the world in terms of the trading of compliant encrypted digital currency derivatives.
In the mainstream banking field, the spontaneous applications in the US market are also very leading in this respect globally. U.S. dollar-based digital stablecoins have appeared one after another, such as USDC, GUSD and PAX. The most famous development in this area is the upcoming Libra stablecoin. Libra has pushed the development of stablecoins worldwide to an unprecedented height. Judging from the current state of development of Libra, it is very likely that it will be the first to launch a USD-based stable currency. The positioning of the Libra stable currency is on a global scale. Given the influence of the members of the Libra Association on a global scale, the Libra stable currency is likely to be a major stable currency product among various digital stable currencies worldwide. Therefore, in the field of retail digital stablecoins, the US market is also in a leading state.
The development of encrypted digital finance in the U.S. banking industry has accelerated in 2020 (see my previous article “”). Such accelerated development is also the result of top-down promotion. A series of policies adopted by the new Acting Administrator of the U.S. Banking Regulatory Agency (OCC) is accelerating this development. In 2020, the OCC invented a statement letter twice to clarify that the U.S. banking system can provide financial services for legal companies including encrypted digital currency companies, banks can provide custody services for encrypted digital assets, and can provide stablecoin issuers Reserve custody service. These statements clarify the supervisory position in this regard and eliminate the concerns of the banking system in this regard. Therefore, banks can safely conduct business in this area. OCC’s biggest push in this regard is its plan to introduce payment licenses across the United States. Such a move is to upgrade the existing currency transfer services in each state to the national level, so as to facilitate the market to carry out this business. Such a move will also fundamentally change the current US banking market. At present, the main business of banks is to absorb deposits, loans and provide payment services. If the OCC issues a nationwide payment permit, then the provision of payment services will no longer be limited to banks. Fintech companies can also start to provide payment services. In this regard, the companies that are most likely to apply for this license first are currently providing stablecoin products. These companies use distributed accounting technology to enter the traditional banking business supported by centralized technology, which will fundamentally change the current banking market. Therefore, in 2020, the US banking industry is accelerating its development towards encrypted digital finance.
There are three major financial regulatory areas in the United States, currency securities and derivatives. The SEC, which regulates securities, has the most conservative attitude. In the current US market, the application of blockchain technology and encrypted digital assets in the securities industry is still driven by market forces and is still in a slow development process. In this regard, the development of the Swiss encrypted digital financial market is in a leading state.
Switzerland’s development in the direction of encrypted digital finance is a very planned and gradual process. Its leading institution in this regard is the Swiss Digital Asset Exchange SDX, a company focused on providing encrypted digital financial services. SDX is a wholly-owned subsidiary of SIX Group. SIX Group is led by 122 financial institutions. Among the seven financial market infrastructure licenses issued by Switzerland, SIX Group holds six of them. Therefore, SIX Group is actually a provider of basic services for the Swiss financial market. It therefore also maintains close communication with Swiss financial supervision.
SIX Group established SDX in 2018, a company focused on digital asset trading. SDX uses distributed accounting technology as its financial market infrastructure. It provides services at all stages of the life cycle of digital assets, including the generation, registration, circulation, trading and settlement of digital assets. SDX also uses digital tokens based on Swiss francs for internal transactions. Recently, the Swiss National Bank has begun testing the issuance and CBDC on the SDX infrastructure. If the Swiss National Bank issues its Swiss franc CBDC on this infrastructure, the SDX financial market infrastructure will become another parallel financial market infrastructure supported by distributed accounting technology in addition to the current financial market infrastructure in Switzerland. facility. Although the initial business was a digital asset trading business, this financial market infrastructure also supports banking, so it is expected that more financial businesses will be carried out on the same financial market infrastructure in the future.
Due to the characteristics of the SIX Group, any of its innovative activities will maintain close communication with the Swiss financial supervision, which is carried out under the conditions of the Swiss financial supervision. Therefore, it can be said that the development of Swiss encrypted digital finance is the result of the joint operation of the market and supervision, or the result of the joint action of bottom-up and top-down. Compared with the progress of the US market, the Swiss encrypted digital financial market is a very planned and targeted development.
Switzerland and the United States have different market sizes, different regulatory systems, and different institutions in the market, so they have different development paths. Obviously, the two can learn from each other, but neither party can copy the other’s development strategy. There is no difference between the two development strategies. Both are to choose a feasible development strategy that suits you. Obviously, Swiss financial regulation has a clear judgment on the impact of distributed accounting technology on the financial industry, so it also actively supports SIX Group to develop in this direction. American financial regulatory agencies, no matter how they judge the future development direction, they all need to make corresponding decisions based on the status quo and feasibility in the field under their supervision. Of course, the policies in this area are absolutely related to the decisions of the responsible persons in charge of supervision. Different leaders of financial regulation still have great powers to make different decisions. In fact, the leaders of OCC, CFTC and SEC have all adopted different measures within the scope of their own institutions. As for the timeliness, effectiveness and consequences of their measures, they can only be judged based on future developments.
