Will Libra bring the next Bretton Woods system?


The most eye-catching event in this week's cryptocurrency field was the two hearings held by the US Senate and House of Representatives against Libra. In these two hearings, Calibra CEO David Marcus was admired in the face of many doubts and martyrdoms from members of Congress and experts on Libra's doubts and martyrdom. Since the announcement of the Libra project, it has been a slamming voice in the cryptocurrency community. But in this article, cryptocurrency analyst Alessandro Raffelini explores the implications and implications of Libra in the history of the financial sector from a historical perspective.

In this article, I will discuss and analyze Libra, a digital currency recently announced by Facebook, the digital economy era giant. According to Facebook's plan, the giant decided to expand its business beyond the global digital advertising business and plans to monetize all of its instant messaging services (with a user base of 1.5 billion, including WhatsApp and Messenger).

Currently, Facebook's global digital advertising business accounts for nearly 98% of its total revenue. Thanks to Libra's innovation, we can predict that Libra will become the world's largest e-commerce and payment instrument, competing with traditional banks. But this project has also produced several problems, especially the most doubtful ones are:

Why do we believe in the new financial system formed by Facebook? The answer is not like the song "The Answer Wanders in the Wind", but rather from the "Libra Blockchain and Cryptography".

Simply put, Facebook will make money through a new, disruptive business model based on distributed ledger technology (DLT) and cryptography. After the announcement of this plan, we can now say that any discussion about the intrinsic value of cryptocurrencies is out of date, and blockchain and encryption technologies are expected to become the standard for new Internet adoption by many of the giant companies, including Facebook.

According to the plan of the Libra project:

  • Build a new decentralized blockchain;
  • Create a stable cryptocurrency;
  • Build a smart contract platform;
  • Providing new opportunities for financial services innovation.

In addition to the new cryptocurrency Libra, which will be available in 2020, Facebook also plans to launch an encrypted wallet Calibra running through Messenger and WhatsApp. The wallet tool will support Libra's point-to-point transmission and retail payments to support the creation of a new cryptocurrency (ie Libra currency) on a secure, scalable and reliable Libra blockchain.

The Libra currency will be supported by a “basket of bank deposits and short-term government bonds” managed by the Libra Association, a consortium of 28 large companies and institutions including Facebook, Visa, MasterCard and Uber, and “hope to 2020” In the first half of the year, the number of founders of the Libra Association was around 100."

Libra coins are based on the Libra blockchain, which is based on the Libra white paper, which aims to provide an open source software for a global audience so that anyone can build on it and billions of people can rely on it to meet Their financial needs.

The white paper explains that the main goal of the Libra project is to create an open financial services ecosystem built by developers and organizations to help businesses and people hold and transfer Libra coins on a daily basis.

The Libra network will be completely different from open, unlicensed blockchain networks (such as Bitcoin and Ethereum), at least initially, so it cannot be compared to other cryptocurrencies such as Bitcoin and Ethereum. In a system that does not require a license, any participant can submit the transaction to the ledger and verify the transaction; in a licensed distributed ledger technology (DLT), only the licensed participant can act as a verifier The transaction is verified, so you want to be a node of the agreement and you must get a license.

The Libra blockchain will be a decentralized network where some verifiers work together to manage transactions and maintain the state of the blockchain. These verifiers are also members of the Libra Association, which will be responsible for providing a governance framework for the Libra blockchain and the reserves that support Libra. Initially, the association (and the verifier) ​​will be composed of a number of different founding members located in different regions.

The ultimate battle: central bank vs. cryptocurrency

For Facebook's statement about the Libra project, the cryptocurrency community and the financial community react differently. Most of the comments are negative, but these comments may overlook Libra's ability to effectively accelerate the decentralization of finance, and that's exactly what we need . In my opinion, the real question is whether the Libra blockchain will be scalable, rather than discussing whether Libra can become a sovereign currency.

Libra will represent a fundamental milestone in the debate over the intrinsic value of blockchain technology and cryptocurrencies triggered by government authorities, celebrities and eminent economists, although many have already promoted Libra and Blockchain has nothing to do with it.

For example, the economist Nouriel Roubini (Dr. Doom) often criticizes the blockchain, calling it “the most over-hyped and least practical technology in human history,” and argues that “cryptocurrency is the culprit of all scams and bubbles. ”

Paul Krugman, winner of the 2008 Nobel Prize in Economics, also expressed his skepticism about cryptocurrencies and blockchains. Paul said that although this is a cutting-edge technology, it “retrieved the monetary system for 300 years,” he said. It is also said that unlike legal currency, cryptocurrency has no potential value. In Paul's view, the benefits of cryptocurrency are “just a bubble” and show that even gold and silver, in addition to having “storage value,” have more applications in the real world than cryptocurrencies because they Can be used to make jewelry and other real items.

But in my opinion, these criticisms are not correct because they do not see the potential and opportunities to promote monetary and financial decentralization brought about by blockchain technology and cryptocurrency .

At the same time, bankers have expressed criticism and suspicion, emphasizing the risk that cryptocurrencies have a criminal tool. Recently, the French central bank governor Francois Villeroy de Galhau announced that he is forming a G7 country working group to study how central banks can ensure that cryptocurrencies such as Facebook's Libra will be regulated by a series of regulations such as anti-money laundering laws and consumer protection rules. To be honest, I thought there would be different announcements about how to improve the existing monetary system through digital currency.

Bank of England Governor Mark Carney once said: “Libra must be safe enough from the start, otherwise it should not start, and the major central banks around the world will need to regulate it.”

From the current point of view, the mainstream view is that Libra has positioned itself as a new global sovereign currency, like a digital dollar to replace the old financial institutions. But this is impossible, because the cryptocurrency and legal currency with actual functions can coexist, and this is also necessary for the entire system promoted by the technology .

You can supervise the cryptocurrency, but you can't stop it because it's an endogenous process of economic development. Unfortunately, I also feel that bankers and governments are trying to organize a final battle against Facebook and cryptocurrencies. They can't accept the idea of ​​a decentralized financial system, but if they want to stop this decentralization, they will become losers in the black hole and lose the opportunity to develop their old business models.

While Facebook may pose a real threat because it could be the most powerful central organization on the planet, Facebook is also trying to use blockchains and digital currencies to address the actual needs that other companies or financial institutions don't want to solve .

They should not create a full-scale war, but should study how to properly regulate cryptocurrencies and quickly enter this new era of digital currency, rather than fear or escape. Central banks must understand how decentralized monetary and credit creation can spawn different monetary policies that have a real impact on the needs of economic development for the benefit of all mankind. If they choose to try to understand how to enter the next stage of economic development brought about by cryptocurrency, then this black hole is likely to become a flashing light that guides them along the way.

I was amazed at the comments made by bankers and politicians who didn't know Libra. I think if they understand history, they will have a clearer understanding of innovation. In fact, I can foresee that if Facebook had the idea of ​​making Libra a sovereign currency, then this would be a very bad idea, because in this case, Libra's structure would be inherently fragile and lead to Libra. Failure . In fact, the real dilemma is how to achieve the coexistence between the French currency and the cryptocurrency with practical functions (such as Libra).

Surprisingly, although the cryptocurrency community reacted differently to Libra, almost everyone pointed out that the main difference between Libra and Bitcoin is “trust” because Bitcoin buyers don’t need to entrust their assets or information. For any third party, Libra users must trust the Libra Association. It seems that most people in the cryptocurrency community are against Libra, who attack it mainly in three ways:

  • Blockchain infrastructure;
  • trust;
  • Security and privacy.

Ethereum co-founder Joseph Lubin expressed many concerns about Libra. He pointed out that Facebook does not eliminate people's subjective trust, but requires us to trust Libra and try to convince us that Libra will have its "intrinsic value" because Libra will be supported by "a basket of bank deposits and short-term government bonds." Its value will not fluctuate as much as other cryptocurrencies. In addition, although Libra's goal is to become an open source decentralized system, its code base will only be partially accessible at first, so it is not so easy to create an efficient and secure ecosystem and expand it.

Although I have some concerns, I am not as negative as most community members. In fact, I think Facebook is following the path of other large companies moving toward a decentralized financial model. This represents the beginning of the coexistence between legal currency and cryptocurrency with actual functions .

Due to the introduction of Libra, the possibility of cryptocurrency and legal currency coexisting will be greater than we think. But unfortunately, financial institutions are still arguing whether cryptocurrencies meet monetary standards and whether they are a sufficiently stable means of value storage or an effective medium of trading. Frankly, I think this debate will end with the promotion of Libra. Libra gives us a great opportunity to change the perception of the digital currency by the central bank and the government forever .

From a strategic point of view, I believe that some of the most important players in the Internet sector can move from strategic to blockchain, change their business models and become core players in this technological revolution, and ultimately participate in other different industries. Together, gain new business and economic value from the decentralization of the blockchain and financial system. The easiest way to do this is to form a private, licensed blockchain network between them like Libra.

Will Libra bring the next Bretton Woods system?

As mentioned above, Libra is designed as a stable digital cryptocurrency that will be fully supported by the Libra reserve and supported by a network of competitive exchanges trading Libra. This approach is similar to the way other currencies were introduced in the past to ensure that a country's legal currency can be traded with other physical assets such as gold or other legal tender. However, Libra is not backed by gold, but is backed by a basket of low-volatility assets such as strong fiat currencies, bank deposits, and short-term government bonds issued by stable and reputable central banks.

In my opinion, Libra will help push the central banks to start exploring digital currencies with similar characteristics . One possibility is that Facebook's cryptocurrency will become a powerful positive force in developing countries, forcing local governments to maintain the value of their fiat currency purchasing power. In fact, the core idea of ​​the Libra Reserve is that Libra's supply and prices will be relatively stable as the volatility of these “baskets of assets” will not change in the short term.

Imagine that if a Calibra wallet does appear, users who embed the wallet's platform (including Messenger and WhatsApp) will be able to use Libra coins to trade any goods or services with the merchant. What impact will this have? I think there is a reason for cryptocurrencies to be adopted on a large scale. Internet giants such as Facebook or Amazon can start using their cryptocurrencies or push cryptocurrencies.

Looking back at the history of the United States, we can compare Libra's mechanism with the gold standard or the Bretton Woods system . In the Bretton Woods system, the United States plays a central role in the global monetary system. Looking back at history, we can indeed learn a lot.

The Bretton Woods system, which was promoted in World War II in 1944, prompted the allies to join the new monetary system, accepting dollars (rather than gold) as the reserve currency, while the US government promised to retain enough gold to support the dollar. It was not until 1971 that the United States completely lost the ability to bear the dollar for external exchange of gold. The Nixon government terminated the free exchange of the dollar and gold and established the legal currency system, which declared the end of the Bretton Woods system.

Under the Bretton Woods Agreement, countries pledged that their central banks will maintain a fixed exchange rate between their currencies and the US dollar. The establishment of this new system, with the goal of maintaining a stable exchange rate between the national currency and the US dollar, is based on the idea that this will help the reconstruction of the post-war economy and avoid recurrence like the Great Depression of the 1930s. Competitive currency depreciation (Note: Competitive currency depreciation refers to the promotion of exports of goods by governments by depreciating their own national currency).

This monetary system is characterized by a fixed exchange rate, which is supported by the US dollar (the value of the dollar is supported by the price of gold) and is managed by the International Monetary Fund (IMF). The exchange rates of national currencies remain fixed and remain within the lower range.

The agreement stipulates that central banks must work with the IMF to defend against the dollar by defending against speculative attacks. If the price of a country's legal currency is too high or too low, the country could have changed its exchange rate by negotiating with the International Monetary Fund (IMF). The mechanism ensures that when the domestic currency depreciates against the US dollar, the bank must purchase more dollars in the foreign exchange market, which will reduce the supply of the national currency, thereby increasing the price of the national currency. And if the national currency appreciates against the dollar, the bank will issue more domestic currency (increasing supply), thereby lowering the price of the national currency.

The Bretton Woods system will make the United States the dominant currency in the world economy, and the United States is the only country that can print dollars. The dollar has become a substitute for gold, and the value of the dollar has increased. The result is an increase in demand for dollars in various countries, but the value of the dollar against gold remains unchanged . This has laid seeds for the collapse of the Bretton Woods system 30 years later, but the Bretton Woods system has given countries greater flexibility than the gold standard.

The collapse of the Bretton Woods system occurred in 1971, when the US dollar became a global currency, causing stagflation, inflation, and economic recession in the United States. In 1971, because speculators believed that the US dollar was overvalued, it launched a large-scale speculative attack on the US dollar (that is, in a short period of continuous selling of the US dollar in exchange for more valuable gold), Nixon announced that the US dollar will no longer be convertible gold. In 1973, the Bretton Woods system was over.

Can Libra repeat the history of the Bretton Woods system? Is Libra interested in becoming a sovereign currency? In my opinion, as of now, according to the structure of the Libra reserve , it makes no sense to make Libra a sovereign currency , but to my surprise, some economists and bankers are still arguing about this possibility.

Taking history as a guide, you can know that it is…

If Facebook has the idea of ​​replacing the national fiat currency, even if it is theoretically feasible, this is not a good idea, because Libra may become unstable in its essence. Libra is just a perfect cryptocurrency that helps drive the “decentralization of finance and credit”. Libra will be strong, but it won't be a sovereign currency .

Libra will play a role in pushing governments and central banks to change monetary policy. It will also facilitate online transactions, but other powerful cryptocurrencies will also emerge, including cryptocurrencies issued by central banks. Of course, if Libra is too close to the US dollar, the Bretton Woods scenario may reappear.

However, I believe that this new digital currency will encourage developing countries to unite in research and development and launch similar cryptocurrency projects, thereby stabilizing the surrounding economic regions and promoting trade, curbing government budget deficits and debt. That is why I firmly believe that central banks and governments in developing countries will soon turn to exploring similar digital currencies to make themselves stronger with the surrounding economic regions.

The only way to stop this process is to ban cryptocurrencies and Libra, but in the current free world, this move will be dangerous.

Author | Alessandro Raffelini

Compile | Jhonny

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