The main characteristics of digital currency Libra and China's countermeasures

On June 18th, Facebook, the world's largest social networking company, announced that it will launch the digital currency Libra in 2020, which has caused widespread concern. Although Libra is still in the stage of exploration, there is a huge controversy, but the digitization of money is the trend of the times. It is expected that various digital currency explorations will emerge in the future. China should closely follow the progress of digital currency, strengthen technology research and development and international cooperation, actively participate in the formulation of international rules, steadily promote the liberalization of capital account, accelerate the internationalization of the RMB, reduce the impact of digital currency, and steadily develop domestic digital currency. Possible risks.

The main features of LIBRA

 

According to the Libra white paper, Libra is a simple global monetary and financial infrastructure that serves billions of people [1]. This has three main meanings. One is to issue new currency and it can be exchanged freely. The second is to be able to circulate globally and beyond the scope of sovereignty. The third is to establish a payment clearing facility for the currency, making it widely accepted for daily use. . Digital currency is not new. In 2009, bitcoin-based cryptocurrency based on blockchain technology has emerged [2], but Libra has received widespread attention, mainly because of the huge influence of Facebook. However, commercial credit alone is not enough to build trust, and Libra has designed some new mechanisms.

Compared with digital currencies such as Bitcoin, Libra's new features are mainly in three aspects. First, it requires a 100% asset reserve to maintain a stable currency by linking a basket of legal tenders (including the four currencies of the US dollar, the British pound, the euro and the Japanese yen). This is similar to the currency issuance mechanism in Hong Kong; Bitcoin has no real asset reserve and is issued. The amount depends mainly on the algorithm rules and computing power, and the currency value fluctuates greatly. Second, the governance mechanism is different. Libra still uses the blockchain distributed technology, but Facebook and 27 institutions have established the Libra Association as the management agency to manage the reserve assets and maintain the stability of the currency. Third, the application scenario is rich, Facebook has a strong ecosystem, the user scale is as high as 2.7 billion, covering about 1/3 of the world's population, more than 100 countries, there are a large number of potential application scenarios such as cross-border payment [3], daily consumption; Bitcoin Due to the unstable currency, it is difficult to play the payment function, mainly speculative assets.

At present, the public information about Libra is very limited, and there is more controversy but lack of consensus. Recently, US President Trump, Federal Reserve Chairman Powell, and the US Congress have all questioned Libra. The Libra white paper published by Facebook is mainly about the vision description, which is far from the feasible operation level. On July 16th and 17th, the US Congress held two hearings on Libra to discuss its privacy issues and its impact on the financial system. Libra’s congressional hearings responded to some of the questions, including: Libra will not be officially launched until the regulatory issues are resolved; the Libra Association will work with the Federal Reserve and other central banks to ensure that they do not compete with sovereign currencies; the Libra Association will fully assist the financial Supervision, combating money laundering activities, etc.

China's coping strategies

 

With Libra as the representative, it is expected that the exploration of digital currency will continue to emerge in the future. After market selection, it is likely that a mature digital currency form will eventually emerge. Digital currency may bring a series of effects, including impacting existing international payment systems; reducing the effectiveness of capital controls; increasing the difficulty of financial regulation; weaker currencies may be accelerated, and the dollar's advantage will be further enhanced. China has certain advantages in the field of financial technology such as mobile payment, which provides a beneficial soil for the development of digital currency. For digital currency, China must actively participate in and promote steadily, as well as rationally recognize and identify risks.

First, rational understanding of the nature of money should not overstate the impact of Libra. The currency follows a profound economic, social and historical law, and the formation of the international monetary system is the result of the game of big powers and comprehensive national strength. The form of money may change due to the application of digital technology, but the nature of money is difficult to subvert with a certain technological innovation. There are many controversies about Libra at present, but some of them are obviously biased. They should be objectively analyzed from the basic rules and discerned.

Second, closely track the latest developments in digital currencies and actively strengthen international cooperation. The current digital currency has been explored a lot. The main players are both central banks and financial institutions (such as JPMcoin of JP Morgan) and technology companies. Digital currency has cross-border characteristics. From the perspective of currency circulation and financial supervision, the development of digital currency is inseparable from international cooperation and requires the coordination of central banks and international organizations. China should closely follow the progress of digital currency and actively participate in the formulation of relevant international organizations and rules.

Third, accelerate financial reform and opening up and prepare the system for digital currency. We will steadily promote the opening of the capital account and avoid the problem of capital control failure caused by the development of digital currency. Taking advantage of the trend, we will take advantage of the opportunities of digital currency development to accelerate the internationalization of the RMB. Strengthen financial supervision and risk prevention, timely identify chaos, and reduce the financial risks generated by various market institutions in the name of exploring digital currency.

Fourth, based on China's reality, we will develop domestic digital currency steadily. Based on actual needs, we will give full play to China's financial technology advantages, strengthen technology research and development, and explore the digital currency technology path suitable for China's actual situation. Based on financial supervision and monetary policy objectives, under the premise of risk control, we will develop digital currency steadily, sum up and learn from China's regulatory experience in third-party payment, and continue to track and evaluate digital currency pair payment, financial stability, monetary policy, etc. The impact of the field.

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references

[1] Source: Libra white paper published by Facebook.
[2] The digital currency has been at least 10 years old. As early as the beginning of 2009, digital currency based on blockchain technology, generated according to algorithm rules and dominated by non-sovereign credits, has emerged. However, due to lack of credit support, the price of digital currency such as bitcoin has fluctuated greatly, becoming a speculative tool and unable to play the currency. The role of value scale.
[3] Libra may have greater potential for application in developing countries such as Africa, as these countries have high exchange costs and long exchange times.

Author | Shi Guang Deputy Director and Associate Researcher, Bank Research Office, Institute of Finance, Development Research Center of the State Council

Source: Tencent Research Institute