China Economic Weekly – Jintai Capital Group reporter Wang Yufei
As the wind vane of Silicon Valley, the world's largest social media Facebook (Facebook) has more than 2.3 billion monthly active users. On June 18, Facebook announced the official launch of its digital cryptocurrency Libra project. A stone has stirred up thousands of waves, and digital currency has received unprecedented attention.
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In fact, since the introduction of the digital currency concept in 2009, the number of digital currencies led by Bitcoin has grown to more than 2,300. From the perspective of the industry, the shortcomings such as the coexistence of good and bad coins are obvious, the overall trend of market operation lacks consensus, and the application prospect is not clear. However, while many mainstream financial institutions are still conservative about digital currencies, many investors have already targeted this emerging block ahead of time and staged a story of the ups and downs of capital.
What kind of market orientation does Libra bring? What will be the impact on the digital currency international application market? "China Economic Weekly" reporter recently interviewed Dr. Wang Linyi, a digital currency expert engaged in financial research in the United States.
"atypical" digital currency
China Economic Weekly : Before Libra, the public's perception of digital currency seemed to be only bitcoin. What are the differences between the two digital currencies?
Wang Linyi : Libra is both a “traditional” digital currency based on blockchain technology and an “atypical” digital currency with unique management models and circulation attributes. Libra and Bitcoin are still quite different.
China Economic Weekly : There are views that Libra is not a mainstream digital currency. What is the reason?
Wang Linwei : The biggest characteristic of digital currency compared with traditional currency is decentralization, pan-liberalization and security. Facebook defines Libra as a digital currency, but it does make a big difference compared to mainstream digital currencies. According to Facebook's development plan, Libra is both a digital currency based on blockchain technology and a new digital currency with managed capabilities and barrier-free circulation attributes. Libra's features are very obvious and are concentrated in the following two points:
The first is regulated by the organization. Libra is managed by the Libra Association (Libra Association, LA), a Geneva-based non-profit organization. LA currently consists of 28 members, including the world's top companies in online payments, communications, shared travel and venture capital. LA will be the sole manager of the Libra currency system, with absolute authority to be responsible for full monitoring and real-time intervention in Libra's release and recycling.
Second, the value of the currency is subject to human intervention. One of the distinctive features of Libra's propaganda is the stability of the currency parallel to the current international mainstream payment currency. LA will control Libra's price at any time based on market demand and fluctuations, thus maintaining a relatively stable and minimally variable range to obtain the most basic trust in the currency.
The LA Council is the core leadership organization within the management structure, which has final discretion and decision-making power over major corporate initiatives. But its members are almost all private companies that target profit. Private companies must earn profits for shareholders, and Libra's movements are related to the stability of global users' wealth. How to reconcile this contradiction, Facebook has not yet given an answer that both the market and the government are satisfied. How to maximize the user's interests will be one of the biggest challenges facing Facebook's Libra in the future.
Once again, it has the basic functions of a world currency. If Facebook's Libra digital currency is successful, it can be seen as a digital “international currency” based on its global customer base and advertising platform. Since the Middle Ages, human society has begun to make hypothetical and early research on the creation of a global, international currency without borders.
After the Second World War, especially after the collapse of the Bretton Woods system, the discussion of international currencies became a hot spot. There is a view that the international currency can be value-for-value exchanged by the strict proportion of the countries' strong currency and precious metals, and this idea is actually very similar to the design of Libra's reserve pool and international low-risk benign assets.
China has also proposed that building an international currency should be one of the goals of the international monetary system in the future. However, due to the changes in the international political environment and the inconspicuous differences in the financial markets of various countries, the issue of international currency construction is still an unreachable goal. Until the emergence of blockchain technology and digital currency, international unified financial settlement tools are made possible.
Will Libra impact the traditional financial industry?
China Economic Weekly : After Facebook announced the launch of Libra, the voices of support and opposition in the global industry are very strong. What are their starting points?
Wang Linwei : I think there are three starting points for support.
One is huge information inclusiveness. In the era of digital economy, an important negative change is the rapid explosion of information, which leads to threats to information security, leakage of personal information and illegal use. There are also such problems in the financial sector. Every financial institution operates under the digital module, and each financial institution provides its own investment channels, and the cross-institutional sharing rate is low. The financial industry in the United States is highly digitized, and the shortcomings that follow are particularly evident. The repetition and complexity of the related digital information makes the user a single individual under each digital financial channel, and cannot integrate the fragments, which brings great trouble to the user in managing information and correctly using the information.
The operational advantages advocated by Libra can solve this problem. Through high service, compatibility and borderless currency value transfer, Libra users will not need to expose any digital information beyond Libra's boundaries in the future. The financial services required by individuals and organizations can be quickly completed through the Libra platform. Information has a high degree of security and lock-in under blockchain technology. At the same time, due to the huge volume of Facebook users and the continuity of using their social platforms, Facebook can recommend products and services to users with extremely high precision. It can be said that in the future, Libra users will only need to process information from Libra to solve all consumer problems. This move brings security and convenience to users, and may also make Facebook the unrivalled network integrated platform in the future digital economy.
The second is the stability of the convertible value. Libra will be designed as a currency with hedging capabilities, and this feature will be the most important means of Facebook's transformation of the market's inherently unstable digital currency value. Libra's currency system is designed to bypass almost all multi-layered structures in the current international financial system, and only transit through LA, which not only guarantees any users in the Libra international user network, but does not have to exchange with any third party at any place. The financial institution/individual contact reduces the risk and potential costs to almost zero, and helps LA to form a comprehensive monitoring system covering all Libra transactions within the system, which can effectively guarantee the balance and value of supply and demand in the Libra market. stable.
The third is low cost. Libra's solution uses a single digital currency to settle through Facebook wallet, no matter where the remittance is located, the entire transaction process will be almost zero cost, there is no so-called handling fee. The impact of this on the current international transfer system will be revolutionary. According to the World Bank remittance fee monitoring report, by the second quarter of 2019, the global average international remittance rate is still as high as 6.84%, even in the relatively developed G20 countries, the value is still around 7%.
For the voice against Libra, I think the starting point should be mainly two aspects.
The first is the uncertainty at the legislative level. Although LA's legal registration location is in Europe, Libra's sponsor Facebook is based on the United States, so the key to the success of Libra's plan is the attitude of the US government. On July 16, Marcus, the head of Facebook's Libra project, was asked by the US Congress to go to Washington for a hearing. In the process of being called "baked" by the media for several hours, many members of the US Congress proposed various questions including the definition of digital currency, statutory authorization, regulatory mechanism, and even the infiltration of illegal terrorism.
In addition to US President Trump’s public expression of Libra’s disapproval on social media, the Fed’s chairman also publicly revealed “deep concerns” about Libra. At the same time, the promotion of the Libra project in the international arena has also encountered a block. Recently, the Data Security Committee from the Office of the Information Commission (ICO) and Australia, Canada, the European Union, Albania and other countries jointly issued a statement on Libra to question the security and legality of the Libra project. In Asia, the central banks of Japan and Singapore are conservative on the Libra project and require Facebook to provide more substantive details on security.
Uncertainty from the legislative level is still the biggest resistance that Facebook has encountered in promoting Libra. This can also be seen as a game of political power behind the industrial structure of Western countries.
Second is the lack of experience in data security and management of large-scale Internet financial systems. Based on the vast Facebook user base, the Libra project will easily capture massive user data in the future, including background information, preferences, consumption and transaction content, etc., plus Facebook's existing data acquisition capabilities, making Libra users in the future There will be no more privacy under the Facebook platform.
China Economic Weekly : What changes will Libra bring to the traditional financial industry?
Wang Linwei : Libra's open system design and the potential user groups of several billion will bring a phenomenal impact on the traditional financial industry. There is no doubt about this. According to a World Bank survey in 2017, 21% of the world's population does not have a bank account or has received financial services. In some Latin American countries, the figure is even higher than 80%. This market gap that needs to be developed is a future new market that any financial institution will actively strive for.
Compared to the rate and cost of the new financial industry's penetration into new markets, Libra's involvement will make this cake competition no suspense, because the design of Libra system will enable new users to access financial services without any financial institutions. To communicate, you only need a smart device that can use Facebook and a port that accesses the Internet. Such convenience and zero-cost access to channels are beyond the reach of any traditional financial services organization.
In addition, if the Libra system successfully enters the operational phase, thanks to the stability of Libra currency value and the rapid market roll-out rate, the three basic financial services such as stored value, transfer and payment will quickly occupy the market and become mainstream (Alipay and WeChat The great success of paying in the Chinese market has made a high-quality interpretation of this). We can expect Libra to further enter the credit, investment, wealth management and other business sectors after the initial market penetration and customer group education, and it is very likely to dominate the market. The market space in which the traditional financial industry depends will no longer exist. The industry winter will come. Therefore, the representatives of existing financial institutions and the policy spokespersons of the financial sector in the government's decision-making level will certainly hinder Libra's entry into the market. This is worthy of continued attention in the near future.
It is necessary to study Libra in depth
China Economic Weekly : How to see the future of digital currency and the response of the Chinese market from Libra?
Wang Linwei : The digital economy has become the subject of every economy in the world. Payment has led the economy and has become a new fast lane for the development of the digital economy. In 2018, the global mobile payment market has exceeded 880 billion US dollars and is expected to increase to 3 trillion US dollars in 2024; the global use of mobile payment users is expected to exceed 1 billion in 2019. In China alone, more than 81% of mobile phone users are using mobile payment services. According to the new data released by the US Department of Commerce, the US digital economy reached 1.35 trillion US dollars in 2017, accounting for 6.9% of GDP. About 5.1 million people in the United States are engaged in digital economy-related work.
Digital payments have penetrated every emerging and traditional industry, from retail, transportation, communications, to education, medicine, and artificial intelligence, each of which actively or passively intersects with digital payments. However, the current use of digital currency in the digital payment sector is still small, and there are bottlenecks such as mixed currency and lack of industry norms. Under the contradictory pattern of the overall boom in the digital payment market and the relatively chaotic choice of digital currency instruments, Facebook announced the development of Libra, a new digital currency that relies on Facebook's huge mass social networking platform, which will pay for future global digital payments. The market has revolutionized it.
China's digital payment industry is ranked first in the world in terms of popularity, number of users, and activity and transaction volume. The Chinese digital payment network, built mainly by Alipay and WeChat payment giants, has brought about a change in the way of financial consumption in China. But we must not have the inertia of thinking behind the door. Although Facebook and its related applications are not currently operating in the Chinese market, it is worth noting that if Libra succeeds as a global leader in digital payments, gaining user recognition and government access, then China will likely Missing the opportunity to actively merge into this emerging digital currency system, even after the Libra international system is relatively mature, the Chinese market may passively accept the business conditions of the Libra payment system and lose the right to speak in the global digital currency payment market.
None of the 28 association members currently announced by LA are from China or even Chinese-funded companies, indicating that Facebook has consciously excluded the Chinese market during the start-up phase of the Libra project.
In the future development of the digital economy, the momentum of flattening, integration, and cost sharing is becoming increasingly apparent. Financial innovation-driven innovation to lead the industry will become more normal in the future. The creation of a new industry and the development of a new product are inseparable from the global market through the Internet. Products are global, technology is the world, and such thinking will increasingly become the consensus of the Internet economy. The popularity of financial instruments and digital currencies will likely be an opportunity to link to the next wave of the Internet.
It is necessary for the Chinese market to deeply study Libra's design structure and operation mode, use the characteristics of digital currency to upgrade the existing online ecosystem of China's Internet characteristics, and actively explore the possibility of authorizing the issuance of central bank digital currency by the People's Bank of China.
Article transferred from China Economic Weekly – Jintai Capital Group