Since Facebook’s release of its digital currency, Libra, will be available in 2020, questions and controversy continue. In response, Libra project leader David Marcus recently sent a sincere open letter to the US Senate detailing Libra's balance sheet composition, accepting appropriate government regulations, and user privacy protection. From the current official attitude of major countries, Libra's future prospects are still unclear.
Based on the blockchain, Libra is a stable currency, all of which are real assets, such as bank deposits, government bonds, and a basket of currencies. The real reserve and mortgage are actually the common endorsement of sovereign countries. Therefore, Libra does not have such ups and downs as cryptocurrencies such as Bitcoin; not only that, in order to maintain currency stability, Libra is produced by a non-profit Libra Association, a member organization similar to the “Central Bank”. Follow the blockchain's Byzantine Fault Tolerance (BFT) consensus mechanism, which requires two-thirds of the nodes (members) to reach consensus to determine the number of Libras produced. Specifically, Libra will only be manufactured when an authorized dealer invests legal assets to buy Libra from the association to fully support the new currency. Similarly, only when an authorized dealer sells Libra to the association in exchange for mortgage assets, Libra In order to avoid inflation, the new Libra must be purchased in a 1:1 ratio using fiat money, and the corresponding currency will be converted into reserves.
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At the same time that Libra was launched, Facebook also developed a digital wallet called Calibra. Calibra can safely store assets and make convenient payments, and its application range is much larger.
Obviously, from the central bank to commercial banks and payment instruments, Libra has almost launched a sweeping challenge or even a general subversion, and its vision of trying to become a super-sovereign currency is clear. The ambition of Facebook's "White Paper" to the world is that Libra wants to build "a simple, borderless currency and financial infrastructure for billions of people."
However, Libra may first offend the US dollar hegemony. Global companies and citizens use Libra for commercial transactions and cross-border payments, which will directly impact the dollar's world influence. The Fed will not turn a blind eye to it; in addition, even if Libra is anchored, A basket of currencies, the dollar in the basket is in an absolute advantage, and will not change in the short term. Libra can spread across the globe, which is equivalent to letting the dollar insert invisible wings, and more unimpeded cross-border penetration in the world. Non-Americans will not prevent it; not only that, Libra Association must be a very loose business organization, whether its behavior will lead to financial monopoly, and whether it will constitute a negative constraint on the monetary policy and financial governance of central banks of various countries. There is also a lot of suspense as a commercial organization, whether the Libra Association can adhere to its own moral bottom line and exclude profit-driven and ensure that there is no “currency overshoot” to maintain currency stability.
Based on the above judgments, the International Financial Stability Board stated that they would not allow Facebook to launch its planned digital currency without strict scrutiny; not only, the US House Financial Services Committee also submitted a fiercely open letter to Facebook. It is required to suspend the Libra project immediately, and the Bank of England governor is even more joking. Libra should open its brains instead of opening its doors. At the same time, the French finance minister made it clear that Libra should not be regarded as a substitute for traditional currency. From this point of view, it is really difficult for Libra to become a super-sovereign digital currency.
However, no matter whether Libra can eventually become a world currency, Facebook is undoubtedly the ultimate winner with Libra as a financial innovation. At present, Facebook has 2.7 billion active users, and according to Facebook's vision, Libra can also enjoy financial services for 1.7 billion adults who are not involved in traditional financial and banking services. Once implemented, Facebook's user resources account for 62% of the global population. According to economic theory, money as a general equivalent should first have a value scale function, one can use it to measure the value of goods; secondly it should be a means of circulation, people can use it to exchange goods; again should be a means of storage People can use it to store their wealth. Because Libra anchors bank deposits, government bonds, and a basket of currencies, it can measure the value of goods and serve as a medium for commodity exchange and as a target for access to public wealth. Therefore, even if Libra cannot obtain the identity of a global legal currency, it can fully compete in the field of goods and services in the form of digital currency like Bitcoin, and the huge user community must create more value space than any one. A digital currency is much broader and broader. Not only that, but Libra can also open the door to digital finance and the digital society like WeChat and Alipay, bringing Facebook into a new business model.
Author: China Market Association, an economics professor Zhang Rui
Source: International Finance News (July 15, 2019, Issue 03)