Deng Jianpeng: Libra's potential risks and China's response

Source: Securities Daily Original title: "The potential risk Libra to deal with China's policy" Author: Deng Jianpeng, Central University of Finance and Law School professor, doctoral tutor

In June 2019, the world's Internet giant Facebook released the white paper Libra (Libra). According to the white paper, Libra uses a basket of fiat currencies as an asset reserve. Facebook's mission is to “build a simple, borderless currency and a financial infrastructure that serves billions of people.”

The plan has attracted worldwide attention because of the synergistic effect of the network scale advantage of Internet technology giant platform companies and currencies in the digital economy. Therefore, if Libra plans to launch smoothly, it will have an unprecedented impact on the global financial system.

Although the Libra project is currently only a plan, it has caused shocks to the global industry and regulatory agencies. About a month after the publication of the white paper, the US Congress urgently held a hearing on the plan. At the hearing, Mike Crapo, chairman of the Senate Banking Committee, said that despite many uncertainties, Libra's goals were commendable and confirmed Libra's benefits in HP finance, faster and cheaper payments.

Sherrod Brown, vice chairman of the Senate Banking Committee, expressed concern, but he and other Senate members expressed a sense of distrust of Facebook based on past history , rather than a simple denial of the Libra plan.

In addition, Patrick McHenry, vice chairman of the US House Financial Services Committee, said at the hearing:

"Washington must avoid becoming a place to stifle innovation. We must not ban because we can't understand technological innovation for the time being. In fact, the change has arrived, blockchain technology is real, and Facebook enters this new world just to the fact. Confirmed."

However, the prospects for the US Congress hearings on the Libra project are not entirely optimistic. The United States has high financial regulatory requirements and does not allow Facebook to issue stable currency Libra until it meets regulatory standards. However, Congress attaches great importance to financial technology innovation and tries to maintain its leading position in the world.

Under the premise of meeting the strict regulatory and compliance requirements of the United States, Libra plans to proceed smoothly in the future. Libra plans to have a significant impact on existing industries. If the operation is mature and stable, it may have a major impact on cross-border payments and bank loans. If it is opened for use in China in the future, it will soon be "short-handed" with Chinese third-party payment giants. Of course, Libra plans to run smoothly, and there are still many uncertainties.

What are the potential risks of Libra's plans? If Libra plans to infiltrate or influence China's financial market in the future, how can China respond appropriately? These issues are worth pondering.

The author believes that the potential problem of Libra's plan is firstly that the cost of compliance in the previous period is too high . For example, in the United States operating funds transfer business, you must apply for a corresponding license. Libra's plan to operate globally means applying for a compliance license for financial regulators in various countries. The time and economic costs are enormous. Although Facebook plans to issue coins in 2020, the author estimates that it is difficult to operate normally without three to five years to complete the national compliance requirements.

Secondly, as an operating entity that will involve the interests of the global public in the future, Libra Association must regularly disclose information to various regulatory agencies , such as publishing its independent audit report on its own schedule, promulgating reserves and asset composition ratios and investment profit or loss status, and stakeholders. Information, etc., to meet the requirements of national regulatory agencies. Since the beginning of this year, TEDA, a well-known stable currency (USDT) issuer, has been sued by the US Attorney General of New York. One of the important reasons is the black-box operation, which does not disclose information properly. This has become a precedent for stable currency issuers.

Again, the risk of reserve investment and market manipulation . According to the white paper, after Libra issued the currency, the legal currency obtained by the association became a reserve fund, and most of it will be invested in the purchase of low-risk government bonds. However, in extreme cases, once an investment risk arises, there is a risk that Libra holders will not be able to redeem the fiat currency. At the same time, the influx of Libra into a certain segment of the industry may push up the market price of the industry, causing potential market manipulation problems.

Finally, Libra is involved in a variety of hidden legal risks . The payment system behind Libra's plan may be a big one. This kind of payment and monetary system is likely to violate some countries' competition laws or anti-monopoly laws, thus incurring legal sanctions in some countries. In addition, the Libra program also involves the risk of anti-censorship. The white paper states that holders of future Libra stable coins are not associated with their true identity, which is difficult to meet compliance requirements in the United States.

As we all know, the United States has very strict anti-money laundering laws, financial institutions must identify their customers, implement anti-money laundering laws, and so on. Libra's plan is unlikely to be against the US and EU review mechanisms, otherwise its illegal costs will eventually be unbearable.

The stability of the currency Libra has the above potential problems, but also poses challenges for global regulators. China's regulatory agencies should track research and deep understanding in a timely manner and give a reasonable response. In the initial phase of Libra's initial operation, it is possible to fully anchor the legal currency issue. In the future, if the operation is mature, recognized by global holders, and has high credit, Libra will first challenge the countries with poor legal currency credit, and consumers will soon use this stable currency to make these countries The currency “Libraization”, which in turn affects some countries’ monetary policies.

In the long run, if Libra works well, the future is likely to surpass the sovereign currency, and even gradually decouple from the sovereign currency, which itself becomes a pure credit currency and challenges the sovereign currencies. At the same time, regulation may present its own limitations. Virtual currency based on blockchain technology can be issued point-to-point, with a "gaseous" pattern, which does not have to have a bank account under the sovereign border of a traditional financial institution. Libra easily crosses borders and its payment network system may penetrate into any sovereign country. The virtual currency characteristic of this "gaseous" model may be difficult to regulate.

At present, China's regulations and policies concerning foreign exchange management have not yet established certainty for stable currency. Therefore, in this field, law and supervision are still blank. However, those stable currencies that anchor the US dollar or other foreign currencies are already impacting the corresponding domestic mechanisms, which should cause serious reflections from regulators and legislatures.

Of course, the emergence of stable coins is not necessarily a bad thing. After all, its future may facilitate global cross-border payments, legally and quickly transfer assets, facilitate cross-border shopping, and help promote economic growth. If the stable currency can really guarantee a relatively constant currency in the future, it is also an important benefit for the holder. Evidence from ancient and modern China and foreign countries shows that after the appearance of statutory banknotes, in the long run, it is often depreciated greatly, which makes the people's wealth looted implicitly. From this point of view, the stable currency that can guarantee the stability of the currency value in the future has great value and may be sought after by the holders, thereby restricting the impulse of some countries to abuse the currency.

In view of the possible risks and impacts of Libra in the future, the author believes that China should make a reasonable response in a timely manner. The blockchain + financial industry is developing rapidly and has a great impact on the world. In the past ten years, China has technological advantages in the development of financial technology. For example, the central bank's research in the field of digital currency is in the forefront of the world, and it is the world leader in mobile payment. If China can make full use of its existing advantages, it is possible to turn China into the world's leading payment and digital currency system in the future, and on this basis, form new financial infrastructure and ecological scenarios.

To this end, the previous regulatory thinking should be properly adjusted to avoid a "one size fits all" policy and turn towards inclusive and prudent. At the international level, there is now a mature regulatory sandbox mechanism; in China, there has been a very mature pilot mechanism since 1978. It is a trend to issue stable currencies and open up the digital economy.

But what about the stability of the currency risk? It is far from enough to stay in academic research or on paper. Referring to the UK regulatory sandbox and China pilot mechanism, the regulator authorized certain Internet companies to encourage them to try to issue coins in a limited geographical space, explore various mature experiences such as local market and risk prevention; and explore the mechanism of docking and standardization of stable currencies; Governance and follow-up, in addition to anti-money laundering and foreign exchange control, should also pay attention to issues such as customer privacy protection, stable currency operation security issues, personal data rights protection issues. If it is possible to pass the above-mentioned stable currency issuance pilot, the regulator will carefully assess its risk within the set time, and then push it to the market and the world under the premise of controllable risks.

The author believes that based on China's special advantages, China is entirely likely to introduce a system similar to Libra.