Gu Yanxi: Global flow of digital assets and financial infrastructure promote each other

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Digital asset exchanges use distributed accounting technology as the financial market infrastructure. From a technical point of view, the digital assets generated on it may be circulated and traded on a global scale.

Original title: “Mutual Promotion between Global Flow of Digital Assets and Financial Market Infrastructure Construction”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry

Bitcoin is the origin of the Big Bang in the development of the digital asset world. Bitcoin was designed as a kind of electronic cash, but it is not linked to any legal currency or physical assets. It is completely a technological product. The underlying network that supports the circulation of Bitcoin is global. Anyone can join the Bitcoin network, or provide accounting to get Bitcoin rewards, or directly use Bitcoin in circulation on the network. When Bitcoin is traded in the market, Bitcoin becomes an asset priced in fiat currency, and therefore it has value.

The emergence of Ethereum is a milestone in the development of the digital asset world. People can customize various digital products based on smart contracts. As long as these digital products are traded in the market and have market pricing, these digital products become assets. Ethereum has become the underlying network that supports the circulation of these digital assets.

The use of tokens for financing that emerged in 2017 and 2018 has further promoted the development of the market. With the emergence of more and more tokens in Bitcoin, Ethereum and the market, the corresponding underlying infrastructure to support the circulation of these encrypted digital currencies has begun to be established. This includes trading platforms. At the same time, the market began to provide exchange services between legal currency and encrypted digital currency. In order to meet this demand in the market, USDT came into being. USDT has become the basic transaction medium for global encrypted digital currency transactions and has played a role in digital currency.

With the implementation of regulatory measures for token financing in regulatory jurisdictions around the world in 2018 and 2019, the tokenization of assets has begun to be carried out in a compliant manner in some jurisdictions. For example, in the US market, tokens are used to represent alternative assets such as real estate and private equity funds. In order to satisfy the circulation and transactions of tokenized assets, under the premise of compliance, platforms that provide related services have appeared in the US market, such as token generation platforms, trading platforms and marketing platforms. In the past two years, companies have even begun to directly apply for the establishment of a U.S. securities exchange. Therefore, in the US market, basic financial market services that provide full life cycle management of digital assets are taking shape.

When the market recognized the potential value of blockchain technology, more efforts began to improve it so that it became the underlying technology of the real financial market infrastructure. The improved technology above it is now called distributed accounting technology. Distributed accounting technology retains some important features of blockchain technology, such as accounting through consensus and transaction records that cannot be tampered with. But at the same time, there have been better improvements in the consensus mechanism and privacy. Distributed accounting technology is therefore suitable as the infrastructure of the financial market. Through the development of the past few years, some distributed technology bottom layers that can be used as financial market infrastructure have appeared in the market, such as Corda.

A basic component of the financial market infrastructure is currency. Among the various innovations promoted by blockchain technology, digital currency is a major development product. USDT is the first digital stablecoin against the US dollar in the market. After it, more compliant digital stablecoins began to appear. The emergence of Libra has pushed the development of digital currency to an unprecedented height. In the original design of Libra, the goal of its stable currency is a digital stable currency that flows around the world, or even surpasses the existing legal currency. However, in the face of opposition from major financial regulatory regions around the world, it adopted a compromised but more feasible strategy, which is to issue a series of digital stablecoins based on existing legal currencies. It now appears that Libra will introduce its stablecoin to the market. In view of the influence of Facebook and other members of the Libra Association on a global scale, it is expected that the Libra stablecoin will be used globally.

The most important thing for the construction of new financial market infrastructure is that the emergence of Libra directly promotes the development of CBDCs of major central banks in the world. CBDC issued by central banks of various countries will become the main trading medium in the financial market. CBDC will have very good improvements in terms of interoperability and transaction support. At the same time, more importantly, the launch of CBDC also means the emergence of corresponding underlying technical facilities. And this underlying technology is very likely to be distributed accounting technology. From the perspective of technological development, in addition to distributed accounting technology, it is impossible to have another brand-new technology to support the issuance of CBDC.

In terms of financial business processes, the exploration of DeFi applications is also continuously developing. In the past two months. The application of DeFi has exploded. The essence of DeFi is to automate financial business processes and complete some basic business processes without the need for financial intermediaries, such as mortgage loans, stable currency generation and automatic market making transactions. Blockchain technology itself and the application of DeFi will replace many current financial intermediary services. These functions are all basic components of the financial market infrastructure. Therefore, the future financial business will be carried out in different ways based on a completely different financial market infrastructure.

In terms of realizing the global circulation of digital assets and the construction of financial market infrastructure, the model of the Swiss digital asset exchange is worthy of reference. First, it uses distributed accounting technology as its financial market infrastructure. Therefore, from a technical point of view, the digital assets generated on it may be circulated and traded on a global scale. In terms of digital currency, it is likely to adopt its Swiss franc digital stable currency, or a CBDC issued by the Swiss Central Bank. Therefore, in terms of transaction media, it is also superior to the existing legal currency circulation form, and can actually be circulated and used conveniently on a global scale. In terms of digital financial products, it will rely on various new digital financial products generated by its exchange members instead of traditional equity products. So in terms of trading products, it will also meet the needs of the market. Realize the increment of the trading market instead of competing in the existing market.

The business purpose of the Swiss Digital Asset Exchange is to provide full-cycle services for the generation, circulation, trading and settlement of digital assets. In order to achieve this goal, it has driven the development of the financial market infrastructure of the Swiss financial market. Now the CBDC of the Swiss Central Bank is testing the issuance and circulation on the same financial market infrastructure of the Swiss Digital Asset Exchange. I believe that in the future, the Swiss Digital Asset Exchange will also gradually implement various applications of DeFi into its business processes, including lending and market making processes. The goal of the Swiss Digital Asset Exchange is to provide financial market infrastructure services to the world. In order to achieve this goal, it has adopted correct execution strategies in terms of technology and product selection. In the future financial markets, Switzerland will therefore have greater influence.