ASAP: The Equivalent of a Seven-Layered Model for Finance?

ASAP: The Equivalent of a Seven-Layered Model for Finance?

Access, Service, Asset, Platform

Over the past few months, in Scotland, Scottish Enterprise has brought together a task force that focuses on bringing together academic, industry and public sector expertise and that focuses on the future of the digital economy. This future economic development will aim to move our world from our paper-based approaches and truly integrate digital trust into every part of our lives. In my academic career, I have seldom been so excited about the opportunities this will bring for innovation, our economy and the lives of our citizens — and in the building of an economy that is truly fit for the 21st Century. At its core must be new platforms for trading, openness and auditability.

Introduction

A while back, I read a paper which defined a seven-layer model for Financial Cryptography [here]. For this, the paper outlines a seven-layer model for finance and which takes its inspiration from the 7-layer model used in networking:

So, while this covers finance, what about digital assets? In our traditional banking system, we trust our bank to define our ownership of wealth, issue us with our funds, and transact on our behalf. With this, there are account numbers and an associated ledger, and the bank keeps a running total in this ledger, and thus decides whether we can spend something or not. It’s an old system that harks back to the days of bank books and pens. But, what about the ownership of my car or my house? Again, there’s (hopefully) a piece of paper that defines that I own these, or that a bank has loaned money on these.

Tokenized assets

Within a monolithic approach of assets, we merge the asset in with the application. For example, the ownership of my car is merged with a database in the DVLA:

The only way I can prove I own my car is by checking the DVLA’s car ownership database. A proper digital asset, though, should be able to be decoupled from its application data source and ported onto differing platforms (Figure 2). The linkage of an asset to an application that provides a ‘lock-in’ of the asset, and where it is difficult to transport the asset to another application.

Overall, we can have a range of tokens, such as payment tokens (eg Bitcoin), security tokens (such as those related to physical assets), and utility tokens (those which can be exchanged for a service, such as for bus travel) — Figure 3. We must then be able to define ownership of a token, define a mechanism to transfer it to another person, and also have mechanisms for allowing the token to be stored by a custodian.

ASAP

Why can’t we have cryptographically signed tokens for these, and where there is some verifiable proof that we own something of financial value? Well, in a tokenized economy, we can define ownership, delegation and transfer of an asset, and where these digital assets become the anchor point of our financial status. For this, the IMF (International Monetary Fund) have published a white paper with four layers: platform; asset; service and access (Figure 4) [1].

This new model splits the functions of a traditional bank, and which will support organisations which specialise in providing each of the layers. Within an open platform, for example, we can have different providers for each layer. With this model, we can now have a platform that digital assets that can exist on and can be trusted across different organisations. These digital assets can be as simple as cryptographically defining the ownership of an asset, or as complex as trading with a central bank digital currency (CBDC).

The challenges, of course, relate to our existing finance infrastructure, as these still focus on paper-based approaches to trading, and often have strongly devolved trust relationships. These are often bound to different governance and regulatory frameworks — and rather than being designed as single entities, are an entangled bundle of differing architectures, protocols, technologies and design patterns. The ASAP model, at least, gives us a starting point to harmonize systems — and in a way that the OSI 7-layered model did for the Internet.

Building on a solid foundation

As someone who has studied, and taught with, the ISO OSI (Open Systems Interconnect) 7-layer model, I find that it is an approach that allows you to abstract networking and Internet connections within different layers.

For networking, we can view the Ethernet data frames at Layer 2, IP packets at Layer 3, and segments in Layer 4. We can then define that systems communicate within an application layer. This, thus, allows for systems to be interconnected with a layered approach, which also simplifies the overall infrastructure. We can design, test and debug in whichever layer is best for our abstraction level.

With the guidance of the ISO 7-layer model, we have built the Internet on the physical and data link layers. And so, perhaps we need to make sure that all our finance systems are built on a cryptography layer. This will give us core proof that the foundations of our finance industry have built on a solid base, and not just derived from the legacy of the previous generation. Only with properly implemented cryptography, distributed ledgers and Merkle Trees can we really be sure that we are building on a solid foundation.

A new foundation for finance

If we are to properly move into an information age, there must be minimum standards applied at the lowest layer. For this, every transaction should be encrypted, every transaction should preserve privacy, every transaction should be digitally signed, every transaction should be accounted for, and the complete state of the financial infrastructure of local and global systems must be known at every instance of time.

The tools and the know-how are there, and a future system will know — almost to the minute — the current state of every transaction which happens within each financial infrastructure, and where every state is known.

We, too, in an era of GDPR, need to make sure that this lowest layer — the foundation layer — respects privacy and consent, while providing all the mechanisms that are required by the upper layers … governance, accounting, rights, and so on.

With this, we will be able for innovative companies to properly build on the solid foundation and focus their efforts on their core expertise. For many, this can be likened to the days when the mighty Big Blue (IBM) ruled over the computing industry. IBM built every part of their system and forced the standards across the industry. The 7-layered OSI broke that monopoly, as it allows different manufacturers to integrate into specific layers, and make sure that the systems could interconnect. The move toward distributed ledgers and in the application of cryptography is thus the moment that the finance industry will build its new foundation.

One area that I think the finance cryptography model differs from the OSI model is the requirement to expose things from layers which are not directly above or below the current layer. In the OSI model, for example, the application layer (Layer 7) does not see any of the data link layer details (Layer 2). But, in a finance cryptography model, it is important to expose details from other layers, in order to create an integrated system:

The debate is over

The debate is over, now let’s just get on with it. Financial organisations which can move the fastest in building this, and making should their foundations are solid, will be the organisations which will benefit most. Those who do not change will become a fossil of the 20th Century.

Our whole infrastructure around finance needs to change — governments, auditors, accountancy and legal services — and we now need to build a robust infrastructure, as our financial infrastructure could come crashing down in a single instance. This needs to stop being a technical debate around blockchain and cryptocurrencies and be one built around society rebuilding its world around digital technology. This has been the fastest era in our existence, and it needs to be built properly.

The speed and scope of hacks these days could cause our global finance infrastructure to crash in seconds, so we need to improve our foundation and thus support our future generations to make full use of the foundation we have built for this.

Many will define the “FinTech industry” as a company that creates finance-related applications, but, for me, properly innovative FinTech companies are aiming to disrupt existing methods and thinking and build on a proper foundation of trust. They should thus have little in the way of baggage from the past and will be building with the latest software engineering methods (Node.js, Python, Cassandra, GitHub, Docker, and so on), cryptography and distributed ledger methods.

So, forget the whole Bitcoin/cryptocurrency debate, and focus on building our data world, in the same way we built the Internet. In a decade, this new world will exist, and we will look back on our existing systems in the way we look back at 56k modems in a world of Gigabit switches. Those who stick with the equivalent of 56K modems in this data-focused world will not exist in 10 years’ time.

The concepts of simple check-sums, transactions coded with numbers and characters, and auditing that can take months need to be retired as quickly as we can make it. We also can’t rely on governments to make this change, as they have little idea as to why the change is needed, so companies need to get on and innovate like they have never done before.

If you are interested in what’s involved in this foundation, here’s the wonderful Merkle Tree:

Conclusion

Welcome, to a new world!

References

[1] Victor Budau and Herve Tourpe, ASAP: A conceptual model for Digital Asset Platforms, https://www.imf.org/en/Publications/WP/Issues/2024/02/02/ASAP-A-Conceptual-Model-for-Digital-Asset-Platforms-544387