The Evolution of Financial Market Infrastructure: From Digitalization to Tokenization

Abstract

This paper examines the historical development and cross-sectional heterogeneities of Financial Market Infrastructure (FMI). From an evolutionary perspective, we review and compare FMIs in the US, Europe, and China. We identify an emerging trend in which the development of FMI is transitioning from digitalization to tokenization with the rise of Distributed Ledger Technology (DLT). Digitalization reinforces centralization, while tokenization promotes decentralization, posing complex challenges to regulatory framework which is also part of FMI. We then specifically analyze DLT-based FMI in the bond market, evaluate different models of tokenization, and propose a heterogeneous consortium blockchain solution.

Cryptocurrency and Financial Stability

“…Global ambitions such as Bitcoin and Ethereum weaken the dominance of USD in the international financial market even more. Recent geopolitical conflicts between Russia and the West also promote the role of cryptocurrencies in the international payment system to surpass financial sanctions (Zhou and Guo, 2023). Along this trend, other fiat currencies are facing greater opportunities if they can grasp the market gaps ripped open by cryptocurrencies.…”

“…In mid2010s, China started to explore potential application of blockchain in a more traditional context-Central Bank Digital Currency (CBDC). Guo and Zhou (2023) acknowledge that the central bank's traditional currency issuance will face new challenges in the face of information technology development. And the central bank's issuance of cryptocurrency may point in the direction of future development.…”