Babbitt Column | Yang Wang, International Monetary Research Institute, China National People's Congress: Why Libra Marathon Needs to "Run"

Since the release of the Libra white paper, Libra has been on the cusp of public opinion. Although Libra has been questioned by many parties from the US Congress and the G7 Stabilizing Coin Working Group, Libra is a marathon for blockchain financial innovators and does not need to “run”.

The open letter from Facebook founder Mark Zuckerberg also validates this view. Facebook will work with policy makers and will not give up Libra to make Libra a safe, stable, well-regulated cryptocurrency.

Libra is born for Pratt & Whitney

Libra is essentially an encrypted digital currency that can be used for financial services such as cross-border transfers and daily payments. Libra's white paper has always emphasized that Libra's mission is to create a “simple, borderless currency and an inclusive financial infrastructure that serves billions of people.” In this infrastructure, Libra will serve as a payment tool globally. Used within the scope. The infrastructure is based on the digital currency Libra, blockchain technology, the Libra Association, Libra Reserve Assets and the Calibra Digital Wallet, and is committed to providing more affordable, efficient and affordable financial services on a global scale.

As a payment tool, Libra must have stable, low inflation and widely accepted features. Facebook defines Libra as a “stable currency” and Libra will use a basket of low-volatility assets, including currency deposits and short-term government bonds, as reserve assets to support Libra's currency stability.

Libra is often used to compare with Bitcoin. Although both are digital currencies based on blockchain technology, they are quite different in many respects. The nature of Bitcoin is investment, and its price is determined by the relationship between supply and demand, and naturally there will be value fluctuations. Libra's positioning is a "payment tool" that has the potential to become a substitute for legal currency. As a payment tool, Libra must guarantee the stability of value, so it also needs the support of a basket of reserve assets and the Libra Association's stable management of currency. In addition, Bitcoin transactions are completely anonymous, and Libra is based on regulatory compliance, which will work with the regulatory system, so each transaction is traceable and recorded for a long time.

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Table 1 Libra vs. Bitcoin

Source: Public Information, Jude Financial Technology Research Institute

At present, financial services are not "at your fingertips", and many people are still excluded from the financial system. Libra's original intention is to solve the problem of high, unacceptable and unsafe financial services. The Libra white paper mentions that Libra will be widely used for cross-border payments and daily online and offline payments, becoming a widely used currency. Facebook is committed to building a global financial infrastructure, and Libra is the most important part of this financial facility.

Libra innovation has no time

Libra uses blockchain technology to create a new payment system that is a disruptive innovation in current financial services. At present, financial services are still dominated by the banking industry. Especially in cross-border transfers and exchanges, banks often charge higher fees and long transaction times. On the other hand, many remote residents have difficulty accessing banking services. They are still outside the financial system. Libra is the solution to the pain points of traditional financial services. Libra takes advantage of blockchain technology to decentralize and point-to-point distribution, and is committed to providing more convenient, cheaper and safer financial services to users around the world.

Libra first targeted the payment industry, and Libra's original intention was to solve cross-border payments and daily transfers. Libra's project director, Marcus, publicly stated at the US Congressional hearing that Libra will compete with third-party payments such as Alipay and WeChat. Libra and third-party payment have certain overlap in business, and Libra's landing will inevitably impact the payment industry in the future.

Libra and the third-party payment model are very different, it has created a new payment system. Third-party payment platforms such as Alipay and WeChat payment are based on Internet technology. The platform works offline with payment service providers to provide online payment services to users online. Third-party payment platforms do not issue digital currency, users still use fiat money to trade, and the platform must obtain a local payment license. Libra is built on blockchain technology, and users use this new digital currency for payments and transactions, and Libra does not need to work with physical payment service providers.

Libra has a greater “ambition” than third-party payment platforms. Taking Alipay as an example, although Alipay is actively exploring overseas markets, the strategy adopted is relatively conservative: it cooperates with local payment service providers to provide payment services for local residents. Since its inception, Libra has advocated the establishment of a global financial facility to provide payment services on a global scale. Especially in the cross-border payment field, interconnected technology can not effectively reduce the fee, and digital currency and blockchain technology can minimize cross-border payment, which will become a significant advantage for Libra to compete with third-party platforms.

But in the short term, Libra is still difficult to compete with third-party payment platforms. Although Marcus has anchored Libra's competitors to third-party payment platforms such as Alipay and WeChat payment, even if Libra can be successfully implemented, it will be difficult to challenge its business in the short term.

First of all, based on regulatory considerations, China is currently not allowed to issue digital currency, and Libra's entry into the Chinese market remains questionable. And Facebook's intention is to combine social products with financial services, but Facebook can't be widely used in China, which will cause difficulties for Libra's promotion. Alipay relies on Taobao. WeChat payment relies on social platforms such as WeChat and QQ. Users are more sticky. This long-term user habit is difficult to change in the short term.

Secondly, compared with China's third-party payment platform, Libra's advantages are not very prominent. According to data from the People's Bank of China, domestic mobile payments reached 41.51 trillion yuan in 2018, and Alipay and WeChat payments accounted for more than 90% of the market. Users of third-party platforms are still trading in a single legal currency, and third-party payments have built a secure and stable payment system. Users can enjoy fast and secure finances simply by paying lower fees or even without paying fees. Service, at this point, Libra's advantage is difficult to play.

But it is undeniable that Libra's payment model is a revolution in the payment industry, especially in the cross-border payment field.

Libra is difficult to become a currency

Libra is essentially a digital currency. According to the white paper, it has the functions of value scale, transaction medium, value storage and payment means, and can replace French currency in many scenarios. How this new digital currency fulfills its monetary function and whether it will have an impact on the monetary system has also become the focus of attention of all parties.

At present, any digital currency cannot replace fiat money in terms of function and features. The value of money comes mainly from exchange value, which can be used for value reserves and means of payment, which requires the value of money to remain relatively constant over time. Bitcoin is difficult to obtain, and the value fluctuates greatly. The credit problems of other cryptocurrencies are more difficult to guarantee. These digital currencies cannot be used for daily payment settlement.

Libra solved the "pain point" of the above digital currency. Libra is backed by a basket of low-volatility reserve assets to ensure the stability of its currency, and has the potential to be endorsed by Facebook and the Libra Association to make it a currency. Libra not only guarantees the stability of the currency, but also attempts to design and develop a complete set of payment clearing system to fully utilize Libra's payment function. From the perspective of Libra's release design and use, Libra is functionally compatible with French currency, but Libra still can't really replace any kind of legal currency.

The Libra white paper mentions that the best currency should be characterized by “stability, low inflation, universal acceptance and interchangeability”. As the leader of the global monetary system, the US dollar has basically had such an advantage. In the past two decades, the inflation rate of the US dollar has remained below 6%, and the US dollar has become the most widely used currency in global trade.

As the center of the international monetary system, the hegemonic status of the dollar is not only from the currency itself, but also the embodiment of government credit and state power. After World War II, the US government established a dominant position in the US dollar through a series of international monetary system negotiations. The Bretton Woods system, in which the US dollar is linked to gold and other countries' currencies are linked to the US dollar, further consolidates the hegemonic position of the US dollar. Libra is only endorsed by a number of multinational corporations, and the disparity in strength is evident.

In addition, Libra wants to be a digital currency widely used around the world, it must hold a large amount of dollar assets to ensure the stability of the currency, which is also a support for the dollar. The hegemony of the dollar is not a day's refinement. Although Libra can partially replace the US dollar in terms of payment function, it is still difficult to shake the hegemony of the dollar.

In the long run, if Libra can be widely implemented on a global scale, it will have a greater impact on the small country's monetary system. On the one hand, Libra's reserve assets include the US dollar and other relatively strong currencies. Libra's extensive circulation is conducive to consolidating the status of these currencies, and small countries' currencies that are not included in reserve assets may accelerate their marginalization.

On the other hand, Libra has a mechanism to ensure the stability of the currency. Its actual assets are a series of low-volatility assets, and adopt a 100% margin system. The endorsement of a series of multinational companies makes it more comparable to the general digital currency. Stable. For many small countries, due to political turmoil, monetary policy and other reasons, the national currency has a large inflation risk. In these areas, Libra can take advantage of safe-haven assets, or it will have a certain impact on the local currency.

Libra is blocked and long

Since June 18, when Facebook and several organizations released Libra white papers, the controversy surrounding Libra has never stopped. The US Congress has even opened two hearings to question Libra's operating mechanism, governance structure and attributes. . Although Marcus responded to these questions one by one, concerns about Libra's various potential risks have not disappeared, and Libra's future development is still long.

Who will supervise Libra and how to supervise it will become the core of regulatory attention. The financial infrastructure that Facebook intends to create is an innovation in the financial system that does not currently identify exactly which institutions can fully supervise Libra.

Libra's position on himself is "stable currency", a "payment instrument" with currency characteristics, but many members have reviewed it. Is Libra a security, ETF or bank? In fact, Libra's positioning is vague. As a digital currency, it anchors a series of legal coins and is linked to stable assets. It has the characteristics of investment products such as ETFs, but it does not pay interest to users. Close to the currency.

If you can't identify your financial attributes, Libra's supervision will be difficult to be clear. Libra is governed by the Libra Association in Switzerland, and Libra's trading coverage spans the globe. Libra's regulation may involve multinational collaboration, which also exacerbates regulatory difficulties.

Marcus also pointed out that Libra will follow the regulations and will not release Libra until the regulatory concerns are lifted. In the future, Libra needs to further clarify its financial attributes and clarify a responsible entity that US regulators can reach, so that the US government can clearly define the regulatory entities and need to consider regulatory cooperation on a global scale.

Unlike Bitcoin, every transaction made using Libra is tracked and recorded for a long time, and the massive amount of data generated during the transaction involves the privacy of many traders. Whether Facebook can guarantee that transaction data is not leaked and that it does not abuse the data also raises concerns among regulators and many participants. Especially in the context of the massive user information disclosure incident in Facebook last year, Facebook still needs to make greater efforts to regain the trust of users.

In terms of technology, the establishment of a mature blockchain system also requires further exploration by Facebook. As a set of financial facilities designed to serve global users, it must have high throughput, low latency, and high stability, not only to meet the frequent trading needs of billions of accounts, but also to ensure the security of funds and data. The technical development of the blockchain puts high demands on it.

During the hearing, many Members also questioned Libra's operating mechanism. In order to truly land, Libra still needs to solve many operational problems.

As a digital currency, Libra can guarantee liquidity, whether there is enough reserve assets and users can convert Libra into French currency at any time. Whether Libra can truly guarantee the relative stability of the currency is still a problem. For the whole system, whether Libra can effectively authenticate customers, whether it can achieve anti-money laundering and counter-terrorism financing is also a problem that Libra needs to think further before landing.

The Seven Countries Stabilization Coin Working Group (G7) also questioned the operation of Libra. At present, there are no stable coins tested in the real world. The risks of stable currency in money laundering, terrorist financing, consumer data protection, public trust and monetary policy transmission are unknown. French Finance Minister Lemaire (France is the G7 presidency) said at a press conference on July 18: "We cannot accept private companies issuing money in the absence of democratic control." The G7's concerns are justified. Facebook intends to issue currency like sovereign states, but it lacks the ability to bear the negative consequences. At present, it cannot give detailed risk control plans. The risk of Libra rushing is too high.

The current Libra does not yet have the mature conditions for landing, and Facebook has not solved the doubts from all parties, but Facebook still has confidence in Libra. For Libra's long marathon, there is no need to “run”, as Mark Zuckerberg said in an open letter, he will actively work with regulators to resolve all concerns before Libra is ready to launch.

Text:

Yang Wang: Executive Dean of the Jude Financial Technology Research Institute, Senior Research Fellow, Institute of Financial Science and Technology, Renmin University of China, Research Fellow, Institute of International Monetary Research, Renmin University of China;

Song Kezhen: Researcher at Jude Financial Technology Research Institute