Gu Yanxi: Libra, Pandora's Box of Central Banks

Libra will provide a financial market infrastructure (FMI) on a global scale and issue and distribute stable currency on it. Such a FMI and digital currency is a brand new financial system that is independent of the existing financial market. Given the global influence of Libra Association members, this has forced central banks to take seriously the impact of Libra and develop their own response strategies. More critically, Libra is forcing central banks to coordinate their monetary policies to cope with Libra and other private stable currencies that will emerge from there.

First, everything originates from bitcoin

The birth of Bitcoin in early 2009 can be said to be the origin of the big bang in the digital asset world. Bitcoin not only directly generates a digital virtual asset, but also produces a more efficient clearing network for the circulation of digital assets. The consensus mechanism in Bitcoin design has also had a profound impact on the subsequent development. The consensus mechanism not only continued in the development of blockchain technology in the later period, but also affected the development of the late organizational model. Bitcoin has had a profound impact on the application of blockchain technology in the financial sector in these three areas.

Ethereum is the next milestone in the development of encrypted digital assets. It provides a low-level blockchain that allows smart contracts to run automatically. Smart contracts not only have more complex attributes, but they also support features. This provides the basis for customizing various digital financial products with smart contracts. The exchange of value on the blockchain is no longer limited to financial products with a single attribute such as currency, but can include more complex financial products such as stocks and accounts receivable. In the era of Ethereum, the consensus mechanism began to be applied to the social organization model. The DAO is an attempt by the Ethereum community to adopt a voting consensus to determine the direction of Ethereum's technology development. Although the development of The DAO was not smooth, this consensus-based organization inspired the later organizations.

Since bitcoin was originally designed as a currency, the first application that people thought of was the new transmission carrier with blockchain and smart contracts as currency. Although Bitcoin has many design highlights, its basic attributes have caused its value to fluctuate greatly, so it is not suitable as a substitute for real-world currency. In the past few years, various projects have begun to explore the development of more suitable digital currencies on the blockchain. At present, the mainstream mode in this respect is the mode of issuing digital currency by way of legal currency mortgage. From the first Tether to the recent USDC, GUSD and TUSD, etc., the ERC20 standard was used to develop digital stable coins in Ethereum. In addition to the digital stability coins developed by these startups, financial institutions are also experimenting with this. UBS's USC Stabilization Coin project and JP Morgan's JPM Stabilization Coin project are all efforts in this regard.

In terms of the organization of these encrypted digital currencies, more companies are beginning to adopt a membership or alliance-based organizational model. For example, the company CENTER, which promotes the USDC stable currency, adopts this organizational model. Fnality, which promotes USC stable currency, is also a form of alliance between financial institutions. In view of the global nature of encrypted digital assets, the adoption of a consensus-based organizational model is more conducive to the promotion of products on a global scale.

The development of digital stable coins to date has not caused serious concern from central banks. The stable currency developed by the startup is mainly used in the trading application scenario of encrypted digital assets, which is the market scale of hundreds of billions of dollars. This volume is negligible relative to the total amount of money and assets in the real economy. The digital stable currency developed by financial institutions is mainly used for settlement between institutions. Such a stable currency is more like a tool than a currency. The spillover effects of these stable currencies are not large and therefore will not have an impact on the existing financial system. In general, these stable currency projects are either very small in scope or limited in impact, so they have not attracted the attention of central banks. However, due to the vast user base of the Libra project and the influence of members of the Libra Association, especially the disruptive nature of the blockchain technology used by the Libra project, the central banks have to pay attention to the digitization process of the currency and adopt corresponding Coping with the strategy. For the central banks of various countries, the emergence of Libra is like opening the box of Pandora. From now on, central banks will have to face the fundamental changes they have brought to the existing financial world.


Second, the challenges brought by the Libra project

The Libra project consists of three basic components: an underlying financial infrastructure (referred to herein as the Libra Clearing Network), a Libra stable currency issued and distributed on top of this infrastructure, and the Libra Association, an organization that supports the project.

The Libra Clearing Network is built using distributed accounting technology, so it supports direct transactions and settlements between accounts. This clearing network supports the operation of smart contracts. Smart contracts can be used to customize digital stability coins and other financial products. This clearing network is not fundamentally different from other blockchain networks in terms of the technology used. Two of the specific features are its consensus mechanism and the language in which smart contracts are compiled. The consensus mechanism is the HotStuff consensus mechanism proposed by VMWare a few months ago. Its language for compiling smart contracts is the Move programming language that Facebook invented for this purpose. In addition, according to the Libra white paper, a notable feature of this network is its plans to move from the current licensing chain to the public chain.

Libra Stabilizer is a new financial product developed on top of such a financial infrastructure.

Libra is not fundamentally different from other blockchain projects in terms of technical mechanisms. Ethereum is now the world's default public chain. All the stable coins so far have been developed and distributed on the basis of Ethereum. The blockchain at the bottom of the Libra project is a new blockchain bottom layer that is far from being comparable to Ethereum in terms of market influence. And because it is a technical bottom that is completely different from Ethereum, it faces greater challenges in marketing. However, the Libra Association, one of the three components of the Libra project, is the biggest distinguishing point between this stable currency project and the existing stable currency products, and is the biggest driving force for this project .

The Libra Association is a non-profit organization registered in Switzerland. It will consist of 100 members worldwide. Facebook is a company established by Facebook for this association. Calibra is one of the 100 members. The Association's current membership of more than 20 include members of the financial industry and financial applications industry such as Visa, Mastercard, PayPal, Swipe, Uber and Lyft. Facebook itself has 2.7 billion registered users in many countries around the world, plus the members of the association's global users, and their industry leadership in related fields, this association is a huge push to promote Libra worldwide. power. This organization is member-based, operates in a democratic decision-making manner, treats all members equally, and each member can conduct business on top of this stable currency and clearing network. Therefore, this is very attractive to members of the association. This association recruits new members worldwide. New members are also expected to be the main industry leader in the various popular currency markets. Therefore, as this stable currency and the clearing network that supports its circulation gradually expand into the various legal currency markets, it will certainly compete with the existing legal currency, impacting the local financial market base and the financial and economic environment on which it operates. . This situation is what the central banks have to face.

Third, the prisoner's dilemma of the central bank

The emergence of the Libra project has forced central banks in various countries to seriously consider their own currency digitization policies and adopt corresponding countermeasures to grasp the trend of digitalization of money and assets. If a central bank continues to maintain its existing monetary and financial system, but other central banks even work together to take corresponding measures, then the central bank will certainly fall behind in the process of digitizing this currency and assets, becoming a global An isolated island in the financial industry. In order to avoid this situation, each central bank will take this challenge seriously and work with other central banks to develop corresponding countermeasures.

Fourth, the central bank is not willing to change the status quo

The view that the central bank is unwilling to change the status quo seems to be unfair to the central bank, but the central bank's role is to maintain the stability of the financial market, and the stability of the financial market is an important basis for social stability. Therefore, not only the central bank, but also the governments of various sovereign countries do not want to have major changes in the financial market . The risks brought about by the changes may lead to economic and social instability.

When blockchains and encrypted digital assets emerged, some central banks attached great importance to this technology and tested the feasibility of issuing digital sovereign currencies internally, given its huge potential for impact on existing monetary and financial markets. However, because the new monetary form and the underlying blockchain technology that supports its circulation have an excessive impact on the existing financial market, the various risks it can cause may not be predicted in advance, so the central banks are very Being cautious can even be said to be very conservative.

The digitization of money is more than just a change in the currency carrier. Also born with Bitcoin is a blockchain technology that supports direct circulation between accounts and accounts. If central banks issue digital currencies and use blockchain technology as an infrastructure to support the flow of new digital currencies, then this will bring fundamental changes to the existing financial markets. Because the existing financial market is based on a centralized computing model. Each agency records its own data. When transactions between institutions occur, a central accounting system, the clearing company, is used to ensure that the records of both parties are consistent and correct. If blockchain technology is introduced, when a transaction occurs, the two parties directly record each other, and the blockchain technology ensures that the accounting is accurate. Therefore, there is no need for a centralized clearing system to record such transactions. Since the existing financial markets are operated in such a centralized accounting system, the business processes and regulatory systems above this market structure are also based on this, if the central bank adopts blockchain technology. Supporting the circulation of its digital currency, such a market structure will undergo fundamental changes ( liquidation companies, the first victims of the blockchain era , commercial banks, victims of the blockchain era ). The various organizations, processes, and legal systems above them also need to be changed accordingly. This is a huge risk change for any sovereign country. So far, there has been no real progress in the implementation of digital currency by central banks in various countries.

However, the emergence of the Libra project has forced all central banks to consider the digitalization policy of the corresponding currency. Due to the global influence of the existing members of the Libra Association and future members ( Libra will invite WeChat Payment and Alipay to join the Association ), the global promotion of Libra Stabilizer and Libra Clearing Network is a high probability event, globally The process of digitizing money will certainly accelerate. This forces central banks to consider adopting appropriate coping strategies.

5. Each central bank needs to consider its own coping strategies.

Every central bank has an existing financial system, so it will not advance its currency digitization strategy in a new field. It must first consider the impact of currency digitization on existing currency flows and various parts of the financial market. How many questions should these questions be issued, such as the existing and digital versions of the currency? Should the issuance of digital currency be fully in the hands of the central bank? How do commercial banks conduct money lending business based on digital currency? How does the use of digital currency affect existing currency forms and related institutions and processes? Is it technically possible to fully track the circulation of digital currencies? How do digital currencies work with other legal currencies? Convenient redemption? How to ensure the use of digital currency is a gradual and controllable process, will not have an excessive impact on the existing financial market, and so on? Only when the central bank has a clear answer to all of these issues, and with a sound promotion plan, the central bank is likely to advance the process of digitizing its currency.

6. Possible coordination countermeasures between various central banks

Collaboration between central banks is even more important than the respective central bank's respective coping strategies. This is because the Libra project is not a regional project, it is international from the beginning. On the technical side, its underlying clearing network and the digital financial products circulating on it are supporting global circulation. In terms of the design of the stable currency, the collateral and the counterfeit currency it accepts include a variety of legal currency, rather than a single legal currency. In terms of organization, the Libra Association, which promoted this project, was established from the very beginning as a global market, so it was established in the neutral country of Switzerland. The organization of the Libra Association is also a member of the democratic open to the world. Given that Libra's promotional goals are in the various legal currency markets around the world, this naturally encourages central banks to work together to address the changes Libra brings. If an individual central bank does not cooperate with other central banks, but instead adopts countermeasures alone, this will be a very big challenge.

Given the changes in blockchain technology and encrypted digital assets in terms of technology and cooperation models, I estimate that such cooperation between central banks is likely to continue from Bitcoin to Libra, specifically in the following three Aspects.

6.1. Cooperate to form a long-established organization similar to the Libra Association

This organization will develop and implement policies to deal with Libra and the various stable currencies that will emerge from there.

The emergence of blockchain technology has given new life to member-owned business organizations. Prior to blockchain technology, such membership organizations were based on rules agreed by the members and the legal system of the location. Therefore, such organizations are usually restricted to a small geographical area or an industry in a legal jurisdiction, and it is difficult to expand globally. However, blockchain technology adopts a technical approach to ensure the implementation and execution of business rules, and does not depend on the legal system of any jurisdiction. Therefore, a member-type company established in this way is highly scalable on a global scale. Sex. The market has already had a consensus on the superiority of this organizational mechanism, so some companies that use blockchain technology and encrypted digital assets are currently adopting this organization. Such companies such as CENTRE, which Coinbase and Circle jointly support ( why does Circle and Coinbase support USDC develop into a real stable currency? ), Finity ( Fnality, a milestone in the evolution of financial market infrastructure ) initiated by UBS , and the promotion of Libra Libra Association. Similarly, I think some central banks will adopt the same strategy to form such an alliance and coordinate their mutual currency digitization policies .

6.2. Will jointly support a financial infrastructure

Blockchain and encrypted digital asset technology, starting with Bitcoin, have been international since the beginning. A user anywhere in the world can open an account in the chain and hold digital assets, and can directly trade digital accounts between accounts and accounts with other users on this chain. Bitcoin is the case, as is the Ethereum. The current technical standard for the production of stable coins in the industry is the ERC20 standard of Ethereum. Since all are based on uniform technical standards, a variety of different stable currencies can be circulated globally on Ethereum and exchanged directly between accounts. When central banks consider issuing digital currencies, they also need to consider the technical standards for digital currency production and the underlying clearing network that supports the flow of this digital currency. Given the increasingly close global economy, central banks have a strong need to adopt the same technical standards and a bottom-level clearing network that supports the circulation of digital currencies. This chain will support digital legal currency issued on a credit basis and support the organization of commercial banks. Such a financial infrastructure based on blockchain technology would be similar to Ethereum, where central banks conduct their own financial operations on top of this financial infrastructure. I think that the coordination of multiple central banks is a high probability event. It is a small probability that a central bank insists on using its own stable currency to make standards and stabilize the currency circulation network.

6.3. The digital currency will be issued on top of this infrastructure.

The main responsibility of each sovereign government is still to ensure the development of the domestic economy. Moreover, its fiscal and monetary policies cannot escape the influence of local political factors, so governments cannot jointly support a digital currency based on credit worldwide. The high probability event is the issuance of the respective digital legal currency based on the underlying chain of the blockchain that is jointly supported. This is very similar to the various digital stable coins issued on the Ethereum based on the ERC20 standard.

One thing that is very certain is that such a central bank alliance will never issue its own digital currency on the Libra clearing network. I think that the future digital currency will exist in two forms ( from the theory of money to predict the direction of stable currency development ). One is the digital currency based on sovereign credit issued by the central bank, and the other is the digital currency of the commodity attribute generated by the digital asset based on the mortgage in a distributed manner. The Libra Stabilizer is actually a derivative of the existing French currency. It is neither the credit currency of the central bank nor the commodity currency. So this current generation mechanism for Libra Stabilizer is just a transitional state. In the future, it will either transition into a commodity currency or lose its meaning after the central bank releases its own digital currency .

Author: Valley Yancey