Li Lihui, former president of Bank of China: Is digital currency another reconstruction of the global monetary system?

Author|Li Lihui, "Head of the China Internet Finance Association Blockchain Working Group, the former President of the Bank of China"

Article | China Finance, No. 17 of 2019

In 2009, bitcoin based on blockchain technology was introduced. On June 18, 2019, the Libra test online line, led by global social networking giant Facebook, is scheduled to be officially launched in 2020, with the goal of becoming a Wall Street-free, uncontrolled central bank that can cover billions of people. Global currency and financial infrastructure. The digital form of money can be called digital currency. This paper attempts to analyze and interpret such a question through the observation of legal digital currency, virtual currency, and trusted institution digital currency in digital currency: whether digital currency will be the global monetary system A refactoring?

The basic structure of legal digital currency is yet to be determined

A digital currency with statutory status, endorsement of national sovereignty, and subject of issue responsibility constitutes a legal digital currency, or central bank digital currency.

Central banks in several countries have already announced the launch of digital currency research and development based on blockchain technology. However, regarding the basic structure of legal digital currency, the current opinions are not consistent. For example, whether it is based on the Token or the Account, whether it is for retail services or wholesale services, is anchored or non-anchored, and needs further argumentation and decision. .

More importantly, is the issuing mode of legal digital currency an indirect issuance mechanism for maintaining the traditional legal currency “central bank-commercial bank” or a direct issuance mechanism for “central bank-public”? With the indirect issuance mechanism, the current mode of operation of the money market will not undergo fundamental changes, and digital currency will gradually replace the traditional currency; if the direct issuance mechanism is adopted, the central bank will have absolute position and power to regulate the money market, which will directly absorb Public deposits, thereby limiting the initial credit capacity of commercial banks.

The application of blockchain technology to construct a legal digital currency has theoretical advantages over traditional legal currency. First, it can be paid directly, without cash payment, which is conducive to reducing transaction costs and currency circulation costs, improving capital turnover and efficiency; second, the central bank can have real-time and complete data, which is conducive to the accuracy of the total money supply. The third is that the flow of funds information can be observed and traceable. From the perspective of anti-corruption, anti-money laundering, counter-terrorism financing, and anti-tax evasion, high-efficiency fund flow information tracking can achieve better control effects.

In China, WeChat payment, Alipay application of big data, cloud computing and other new technologies, the construction of a payment and life service platform with trust links as a link, breaking through the traditional payment model, has achieved a billion-level linear link. WeChat payment and Alipay have occupied the retail payment market. The number of transactions in cash and ATM has been shrinking. The bank card has become the account card of WeChat payment and Alipay, and has retreated to the large payment market.

Whether digital currency can replace traditional currency forms, replace emerging electronic payment instruments, become the main currency form and the main payment instrument, will depend on four key factors, namely, higher efficiency, lower cost, economic scale of business value, and society. Recognized reliability and safety.

The underlying technology of virtual currency needs to be broken

How to define the coin or token of a public blockchain community? Some emphasize the characteristics of digital technology, and the coin is called "encrypted digital currency." Some emphasize financial attributes and call tokens "passports."

My rough view is that if the essence of the currency is "a contract about exchange rights," the economic support of the "exchange right" and its financial attributes should be emphasized. The coin or token not only becomes a value tag and payment instrument in the virtual community, but also can be traded with legal tender to form the transaction price, which also has the financial instrument attributes. Therefore, it may be more appropriate to define a coin or token as a "virtual currency." At the same time, it should be clarified that if virtual currency does not have a qualified issuer, no physical asset support, and insufficient credit endorsement, it will be distinguished from the legal digital currency and from the trusted institution digital currency.

In 2009, when Bitcoin came with a blockchain tag, few people could see the future. In the past two years, virtual currency has fluctuated and plunged; some people have been mining, some have speculated; some have made a fortune, some have gone bankrupt; very few have obtained securities licenses, and most of them are suspected of illegal fundraising.

The growth of virtual currency represented by bitcoin has economic reasons.

The first is the living soil of virtual currency. The public chain of the “decentralized” structure is essentially a self-organization with self-regulation, a governance mechanism that uses network consensus, and an incentive mechanism for issuing virtual currency. The virtual currency is the equivalent and payment instrument recognized by the participants.

The second is the market demand for virtual currency. Virtual currency transactions can be anonymous, cross-border, and difficult to control. They can be used in public-chain communities as well as in gray-black transactions, and may even become tools for illegal liquidity and tools for speculative trading. The global "dark net market" has always had illegal transactions such as drugs, guns, pornography, etc. The scale is difficult to measure, and Bitcoin has become such a "underground" trustworthy, "ground" difficult to control payment tools.

The third is the speculative market of virtual currency. For example, a large Bitcoin account is held in the hands of a few people, and it is estimated that 40% of Bitcoin is held by about 1000 accounts. These “key minority” are at the top of the food chain and have the potential to manipulate the market and control prices. Retail investors in the currency market are often “cutting leeks” and the losses are huge.

The technical flaw in virtual currency comes from the “decentralized” public blockchain architecture. In this architecture, full-network verification requires large-scale data synchronization, and the operational capabilities of each node need to be up to standard and balanced. Therefore, whether it is Bitcoin or Ethereum, the issue of transaction efficiency and scale has not yet been resolved.

The economic defect of virtual currency is that it lacks sufficient physical asset support and credit endorsement, and its value is unstable and speculative is too heavy. In 2018, Bitcoin bottomed out at $3,158, a drop of 84% from the highest price. The total market value of global virtual currency dropped from $835 billion at the beginning of the year to $110 billion, a drop of nearly 87%.

Based on the above factors, virtual currency seems to survive and develop, and very few may expand the territory, most of which can only be partial. In the future, if the underlying technology of virtual currency-dependent blockchain can break through the bottleneck of large-scale application, if the operating mechanism of virtual currency can solve the problem of value stability, it will be possible to enter popular trading and payment scenarios.

The trend of digital currency in trusted institutions remains to be seen

Credible institutions include digital currencies issued by financial institutions, which can be called trusted institutions digital currency.

The concept of “trustworthy institution digital currency” is proposed here, mainly based on the consideration that the digital currency that can become a climate must be trusted. The legal digital currency can be trusted because of legal status and national sovereign endorsement. The digital currency of any other institution must be To be “trustworthy”, we must have such qualities: credit endorsement with public trust institutions; customer size with commercial value; efficient and reliable financial transaction and payment platform; auditable financial asset support; admission to market.

Compared to virtual currency, trusted institutions digital currency is more likely to be a common trading tool in digital financial markets.

In July 2017, Goldman Sachs digital currency SETL coin received the first digital currency patent of the US Patent and Trademark Office. In February 2019, JPMorgan launched JPM Coin as a payment clearing tool for Interbank Information Net (IIN). JPMorgan plans to link IIN to 400 banks to replace the SWIFT system. In March 2019, IBM and Stellar's IBM BWW (Blockchain World Wire) main online line for digital asset trading and settlement, supporting real-time exchange of various legal tenders and digital currencies. The 13 multinational banks led by UBS are preparing to launch a “multi-function settlement currency” based on distributed accounting technology in 2020, which is denominated in major currencies such as US dollars, Japanese yen, Euros and British pounds for clearing and settlement transactions.

Until June 18, 2019, Facebook launched the digital currency Libra. If it is possible to obtain regulatory approval, Libra seems to have all the features of becoming a trusted institution's digital currency.

First, the industry giants jointly initiated and covered a large customer base. Libra is led by Facebook and co-founded 28 institutions, including credit card clearing giants MasterCard and VISA, online payment system PayPal, online travel booking company BookingHoldings, e-commerce platform EBay and Mercado, online taxi platform Left and Uber, streaming music The platform Spotify, the online luxury platform Farfetch, and the telecom operator Vodafone, these giant-level founding organizations can provide Libra with sufficient credit endorsement, and have a huge global customer base, with a combined calculation of at least 2 billion.

The second is to apply digital technology to build an independent financial infrastructure. WeChat payment and Alipay have proven the feasibility of digital financial infrastructure. Only WeChat Pay and Alipay do not issue their own digital currency. Libra applies the distributed peer-to-peer architecture of the alliance blockchain. It is also possible to apply privacy computing technology at the same time to prevent data leakage under the multi-party data collaboration architecture and protect data privacy and data security. The distributed peer-to-peer architecture and privacy computing technology have evolved iteratively and theoretically should have the feasibility of large-scale applications. Facebook claims that Libra's goal is to create a simple global currency and financial infrastructure, using its own Calibra e-wallet or instant messaging software such as Facebook's Messenger/WhatsApp to provide trading and transfer platforms that cover every corner of the globe. Need a bank.

The third is to support the "hard assets" and maintain a stable value. Members of the Libra Association invest at least $10 million each as a reserve. Users who purchase Libra's legal currency will also become a reserve to support the value of Libra. Libra uses reserves to make low-risk, low-return investments that are tied to low-volatility physical assets such as US and European bonds and fiat currencies to keep value stable. Facebook's low profile said, "The success of this project depends on its trust and security integration with the existing financial system. Governments around the world, especially regulatory and law enforcement authorities, are essential partners for this effort." At the same time, high-profile claims, "hope that Libra becomes an infrastructure that is not controlled by Wall Street and is not controlled by the central bank." Libra is more like a digital new financial system that attempts to overstep the central bank's authority and subvert the existing monetary system. Libra's success will depend on market access and administrative licensing.

In the digital financial market access, several of the above-mentioned digital currency projects initiated by large financial institutions have been subject to regulatory approval. Libra is registered in Switzerland. Can it be recognized and licensed by the government's financial regulatory authorities? Can you gain the trust of the financial system and achieve a safe and reliable integration with the existing financial system? There is no clear answer yet.

The United States has successively issued digital currency licenses and e-wallet licenses in recent years. In law, there seems to be no sufficient reason to simply reject Libra's application, and it is more likely that Libra will be given administrative restrictions on additional restrictive conditions, such as requiring Libra to anchor the legal currency basket to increase the dollar's weight to match the US dollar. The currency status requires Libra to follow legal norms regarding anti-money laundering, counter-terrorism financing, and anti-tax evasion.

Super-sovereign digital currency may reconstruct global monetary system

Libra poses an unprecedented challenge to the existing monetary system: transcending national sovereignty, surpassing central banks and crossing commercial banks. Super-sovereign digital currencies have the potential to fundamentally reconstruct the global monetary system.

First, it may affect the status of sovereign currency. The status of money as a general equivalent depends essentially on the trust of the public, and “legal” only strengthens public trust. The shell becomes the original currency form not because of “legal” but by the publicly recognized equivalent. Once the sovereign currency of a backward country or a country with financial difficulties loses the trust of the nation, it may be replaced by the digital currency of a trusted institution. The sovereign currency of an economically developed country or alliance may become the anchor of a trusted institution's digital currency.

Second, it is possible to reshape the currency hegemony. The hegemonic status of digital currency will be determined by the coverage of the digital currency of the trusted institution, the size of the user and the size of the physical assets. There may be several digital currency systems that are evenly matched in the world. The globally circulated super-sovereign digital currency may no longer have a clear country label, the most important being the publicly recognized global commercial credit and digital trust.

Third, it is possible to form a financial system that spans commercial banks. Libra, a trusted institution's digital currency system, is likely to form a financial infrastructure that covers all corners of the globe, starting with payment and liquidation, and gradually entering the fields of savings, financing, investment, insurance, asset trading, etc., infiltrating the economic life of the civilian population. Resist the court with the existing banking system and intend to replace it.

Fourth, it may affect the process of internationalization of the RMB. If the renminbi fails to be included in the global digital currency system, its future sphere of influence may be weakened.

We should actively respond to the challenges posed by the development of digital currency.

First, master the leading role of digital technology and digital economy. Implement national strategy for digital technology and digital economy, national team plus private team, large and medium plus small, accelerate the research and development of digital technology and digital economy, master independent intellectual property rights in key areas of digital technology, and establish global in key areas of digital economy Sexual competitive advantage. Digital currency is at the core of the future global digital economy competition. It is necessary to study the realization path of RMB internationalization in the digital age and study the feasibility of issuing China-dominated global digital currency.

The second is to accelerate the construction of the digital financial system. Based on ensuring the sustainable development of digital finance, based on preventing systemic financial risks, we must establish a digital trust mechanism, and promptly formulate digital financial services such as legal digital currency issuance, digital asset market supervision, digital currency supervision of trusted institutions, and virtual currency supervision. Institutions, pay close attention to the development of national standards for digital financial technology, and strive to establish a professional digital financial technology application review and verification system.

The third is to strengthen international coordination. Digital finance is bound to strengthen the globalization of finance. In the construction of the global system of digital finance, China should actively participate in and strive for the right to speak. International regulatory coordination should be strengthened, regulatory consensus should be reached, international standards for digital finance supervision should be established, international regulatory actions should be taken, joint research and development of feasible technical solutions, and effective control of cross-border illegal flows of funds.

(Responsible editor Sun Furong)

Article source: WeChat public number China Financial Journal