In recent days, the big news about Libra has emerged endlessly. Seven members of the Libra Association, represented by traditional payment companies, withdrew from the association before the Libra Association was formally established.
According to several media reports, the G7 working group submitted a preliminary assessment report on the global stable currency project before the annual meeting of the International Monetary Fund (IMF) and the World Bank (WB), saying that Libra is on the global financial system. Brought serious challenges.
High-ranking German and French officials in the European Union have repeatedly released rumors to ban Libra's operations in Europe, and "European countries should issue their own central bank digital currency." Further confusing is that the Executive Board member of the European Central Bank (ECB) is also the head of the G7 Stabilization Coin Working Group. Benoit Coeure said in an interview with Bloomberg on October 17, 2019, “ Global financial regulators have no plans to ban Facebook Libra or other stable currencies, but these digital currencies backed by official currencies must meet the highest regulatory standards."
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On October 16, 2019, Fed Governor Lael Brainard made a rare speech on "The Evolution of Digital Money, Stabilizing Coins and Payment Systems", mentioning that Libra will face the strictest regulation.
For a time, Libra has a cloud over his head. Is Libra still in the future? With so many complicated voices, which information is credible? This article will help the reader to unravel the fog from the method of thinking in the first principle.
The author recalls the article “From the history, current status and future evaluation of the monetary and financial system Libra” (hereinafter referred to as the “evaluation” text on May 28, 2019, which may be the most original reading of the original Libra theme in China). The content of Libra with banking and global regulation.
“The attitude of the mainstream monetary authorities is clear, and the regulators of the Bank of America and the United States have expressed clear support. The agency that represents the G20’s observations and policy recommendations for the global financial system is the BIS-sponsored FSB. The current chairman of the FSB is the Fed’s vice chairman. At the same time, the Governor of the Bank of England is the former chairman of the FSB. FSB's recent report on encrypted digital currencies said that “there is no significant impact on the stability of the global financial system because of its small size (encrypted digital currency).” FSB claims that "Libra needs a new regulatory framework for the introduction of Facebook's stable cryptocurrency." So it is cautious to be optimistic, even if the FSB publishes an assessment report for Libra, it is positive. The BIS/ECB attitude will also be.
The Libra project is indeed a genius design. It builds a grand and stable cryptocurrency financial system on the fragile cornerstone of the traditional monetary and financial system. It not only protects the interests of traditional commercial banks but also satisfies the central bank's regulatory demands for stable cryptocurrencies. It has also succeeded in stimulating broad enthusiasm and resonance in the new world of blockchain and cryptocurrency.
In the Libra monetary system, token holders enjoy exclusive or major monetary gains for the entire Libra economy, accounting for about 3% of the total Libra economy, while the reserves are all from users. The Libra project architects are well-versed through the governance structure, which satisfies the formal decentralization and guarantees absolute control over the project. Libra's financial stability has many flaws, and its openness and democracy are not satisfactory. China's response should be learning and transcending. ”
Defining the essence of Libra – the relationship with the traditional monetary system, Libra who moved the cake, who really grasps its future destiny
First, to clarify a basic fact, Libra fundamentally protects the interests of the traditional legal currency system, because it uses French currency (and/or French currency-denominated national debt) as a reserve pool, a "pseudo" based on the traditional legal currency system. Innovation".
Most people interpret Libra's subversion of the traditional system, so they misread Libra's relationship with the Fed, or misread the relationship between Silicon Valley geeks and Wall Street capital. Again, this article emphasizes that Libra fundamentally represents the interests of the traditional legal currency system. At the beginning of the release of Libra's white paper, you may be surprised that there is no traditional bank as a sponsoring member. One guess is that Libra has challenged the interests of traditional commercial banks.
In the "Evaluation" article, the author analyzes that Libra protects the interests of traditional commercial banks 100%, and from the perspective of cost-effectiveness, traditional commercial banks are most suitable to play the role of Libra eco-authorized distributors. Other types of enterprises cannot compete effectively with banks even if they participate. . If Libra announces the use of bitcoin or other native digital assets as a reserve, that is the real subversion, but it will be pressed to the ground by the Fed on the first day.
Strictly speaking, Libra is only a redistribution of the coin-making rights in the top-level rich group. The rich people always have old money and upstarts, but they never lack bankers. If Libra truly represents the ideals of Nakamoto, it is unlikely to trigger a hot debate on global regulation and a new regulatory consensus.
Libra's challenges to the monetary and financial system
How the traditional monetary system views the challenge of stable coins is a decisive factor in Libra's fate, not others, such as Facebook's stigma on the abuse of user privacy data.
Who is influencing and deciding the top-level system of global monetary finance? The answer is the bank interest group of the Federal Reserve, the ECB, the Bank of International Settlements (BIS), the IMF and the WB. (The author avoids the description of “bank cartel” to avoid the use of “conspiracy theory”. As a global leader, the bankers, central bankers and scholars who represent “transnational capital groups that do not represent any country or nation” have jointly influenced and developed the top-level system of the global monetary and financial system.
China does not belong to this group now, but the rapid growth of China's economy is partly due to the globalization of economic and financial policies. The Fed played the role of a de facto global central bank, and most of the sovereign central banks such as the Bank of England followed the former.
The Financial Stability Board (FSB) is an international organization that was spun off from the BIS part of the global financial crisis in 2008 to provide G20 government (the Minister of Finance and the central bank governor) with global financial system policy recommendations, although nominally independent. At BIS but essentially hosted and sponsored by BIS, the current FSB chairman is the vice chairman of the Fed's oversight. When discussing the ECB, we should distinguish the relationship between the ECB and the EU countries, the European Parliament, etc. The EU is a very special existence. The UK is not part of the EU. The EU military gave NATO, the monetary policy gave the ECB, and the diplomacy gave Europe. The parliament, the finances were given to the member states.
Independent of the European Parliament and the European Commission, the ECB does not accept orders from them and member states. Its core of power is a group of global elite bankers and scholars who support European integration. Therefore, Libra is relatively open to the trend of global integration, while the European Parliament is There are many splits and parties. Like the high-ranking EU member states, they will resist the erosion of Libra's sovereignty on behalf of globalization from individual countries or nationalist perspectives.
What challenges does Libra bring to the traditional monetary system? It has been reported recently that a preliminary report on the global stable currency submitted by the G7 Working Group pointed out that Libra poses a serious challenge to the current monetary system. Regardless of the conclusions of the report, the author quotes the FSB chairman's recent “global stable currency potential financial stability risk” in the G20 government open letter.
In the letter, the FSB Chairman reiterated the G20 leaders' view in the Osaka Declaration. "Encrypted assets do not currently pose a threat to global finance, but the introduction of "global stable currency" may present a series of challenges for the regulatory community. These challenges include Challenges to financial stability; consumer and investor protection; data privacy and protection; financial integrity, including anti-money laundering and counter-terrorism financing and customer identification compliance; reduced tax evasion; fair competition and antitrust policies; market integrity; And efficient governance; cybersecurity and operational risk; and appropriate legal basis.
The open letter states that stable currency projects with potential global influence and scale must meet the highest regulatory standards and be subject to prudential supervision and supervision. Priority should be given to assessing and resolving possible regulatory gaps. The G7 Stabilization Coin Working Group has completed a preliminary assessment and handed over the work on global stabilization currency regulation issues to the FSB. The FSB has set up a working group to form a regulatory policy. The FSB will submit an advisory report to the G20 government in April 2020 and a final report in July 2020. (Readers can subscribe to the "Digital Assets Institute" public number to get the full text of the open letter Chinese translation and author's review)
The mission of the FSB is to provide the G20 government with any policy recommendations regarding the stability of the global financial system. The general working method is to investigate, analyze, research and formulate regulatory policy recommendations for the global financial system. G20 countries are responsible for the specific implementation and supervision.
After the financial crisis, the reform policy recommendations and implementation supervision of the global banking and financial system are under the responsibility of the FSB, such as the Basel III Agreement, shadow banking supervision, financial derivatives and OTC regulation, and the current issue of global stability currency project supervision. It is a new task for FSB. The FSB takeover of this matter means that global regulation has formed a consensus to incorporate the development of global stable currency regulation into the formal workflow. The FSB's official report is a recommendation for the global stabilization currency regulatory policy. On October 18, 2019, the FSB released a news report saying "Starting the supervision of stable currency."
What does this mean? Don't watch Libra being supervised so badly. Now it's awesome. It means working with policy makers to solve the regulatory gap from the very beginning. When Libra's compliance status is reached in July 2020? Libra is probably the only stable currency project that has been “certified” by global regulatory consensus, and compliance may be Libra's biggest competitive advantage. Now it is to watch the "thief" being beaten. In the future, it is to watch the "thief" eating meat.
The rise of the global stable currency is in line with the demands of the global elite
The emergence of the global stable currency represented by Libra et al. is in line with the demands of the global integration elite. As I discussed in the article "Currency Competition and System Remodeling under the Digital Money Tide", the new currency will reshape the global pattern of currencies, creating new connections and new boundaries. Digitization may change the foundation of the international monetary system. Libra is a synthetic international currency based on a variety of legal currencies.
As stated by Bank of England Governor Mark Carney in August 2019, the dollar-based international monetary and financial system is unsustainable, similar to Libra’s basket currency scheme, with a network of multinational central banks’ digital currencies and provided by the public sector. The “synthetic hegemonic currency” may be the best alternative.
In recent decades, the growing international ties have created scarcity of US dollar security assets and the huge cross-border spillover effects of US monetary policy through the global financial cycle. Synthetic international currencies associated with several different account units can compensate for the shortage of security assets to a certain extent, as the value of debt denominated in multiple official currencies will fluctuate with the value of the synthetic currency (the fluctuations in synthetic currency may become smaller). If international trade is invoiced in a unit of synthetic currency, the global relevance of trade flows will also decrease.
Currently, 40% of international (commodity and service) trade is denominated in US dollars, so US shocks and monetary policies have had a considerable impact on stimulating or hindering international trade. In a world that uses synthetic currency, this impact on the dollar will have a much smaller impact on trade efficiency. Of course, synthetic currency will have spillover effects from its impact on the support of the currency, but in the face of special shocks to countries, diversification may inhibit these spillover effects.
Support for Libra is also in the interest of the dollar itself. The speech of Fed Governor Lael Brainard reflects the Fed’s clear understanding of the network externalities of large-scale network platforms and the substitution of global stable currencies for traditional French currency, which may bring the effect of digital dollarization and replace the currency of financially weak countries. Even the sovereign currency of other developed economies has a strong penetration. In addition, in the face of widespread global criticism of the dollar-based monetary system, it is in the core interest of the Fed to push Libra to the front.
But on the most critical issue – the deliberate avoidance or flashing of the Libra pricing unit, leaving the imagination of the various stakeholders (mainly the central bank). However, as analyzed in this paper, Libra has a high probability of using the US dollar as the unit of valuation, which is the fundamental way to maintain the authority of the US dollar currency. As a result, Libra is more like a global stable currency test supported by the Federal Reserve and cutting into cross-border payments with blockchain and digital currency technology innovation. It is a “Trojan horse” that the Fed places into the future global monetary system.
So now the global government and regulation may be the most true idea of Libra.
In the United States, the Fed, which represents the interests of Wall Street, is only the Fed, which believes in the interests of Wall Street. I believe that Facebook has been fully recognized by the Fed before its white paper was released. The Fed has never actually expressed a clear objection. The fundamental reason why the Federal Reserve supports Libra in the “dark world” is that it represents the dollar interest and is an extension of the dollar hegemony in the digital world. The need to properly understand the meaning of "full communication" does not mean that Facebook and the Fed communicated compliance and regulatory details, but formed a consensus on the strategic goals of the global stable currency. It's like pushing some big initiatives with senior government leaders, and decision-makers only need decision-making goals and guidelines, rather than making implementation details.
The obstacles encountered in the US Congress can be understood as rationalizing this matter from a legislative perspective, so Facebook needs to communicate and coordinate with the Congress on behalf of the broader interests of all (outside Wall Street). Congress seems to have a strong influence, but on the one hand the lack of real professionals can effectively stop such projects (for example, the Fed is theoretically responsible to Congress, but Congress has never had enough expertise to effectively hold account of Fed officials. Including the 2008 financial crisis, Bernanke and Paulson lie in the public in order to protect the interests of Wall Street banks, speak contradictory, Congress is not a method, and on the other hand, it is greatly influenced by lobbying forces.
The biggest lobbying power in the US Congress comes from two industries, military and financial. A few days ago, because members of Congress wrote to VISA/MasterCard to threaten Libra to trigger the highest standards of regulation for all related businesses (including their traditional payments), the two chose to exit, but today (October 18, 2019) Senator Michael Rocks wrote to the Libra node Anchorage to support Libra. Although it seems that Congress is controversial about Libra, the core idea is to figure out how to supervise and balance different stakeholders. A member of parliament can freely express opinions or write a letter requesting "prohibition" of a lot of things, but a distance of 100,000 miles from legally efficient documents. Therefore, the author believes that the US Congress is a "small episode" to Libra's various voices, and does not affect the overall situation.
The Bank of England's position on Libra can be basically understood as the Fed's "review machine", which has always emphasized "conforming to the highest regulatory standards."
The EU's leading German law is really against Libra. The fundamental reason is that Libra represents the US dollar interest and has eroded the monetary sovereignty of the euro zone. Senior officials of the European Union's leading German and French countries have long sweared at Libra, "prohibiting its operation in the EU" and "European countries should vigorously develop their own central bank digital currency."
However, the ECB attitude on behalf of the EU monetary authorities is very embarrassing. When the Libra white paper was released, the ECB spoke relatively cautiously. There was also an ECB executive committee saying that “money is a public good and cannot be handed over to bad records in the abuse of user privacy data. Facebook, but ECB Executive Benoit Coeure is also the head of the G7 Stabilizing Coin Working Group. First, I will talk about Libra's currency competition and restructuring. Until now, I have made a clear statement. "The global financial regulator has no plans to ban Facebook Libra or other. Stabilizing coins, but these digital tokens backed by official currencies must meet the highest regulatory standards."
At present, the proportion of Libra basket currency, the dollar and the euro are 50% and 18% respectively. Considering the percentage of the global settlement currency, the dollar and the euro are about 40% and 30% respectively, the dollar is significantly strengthened, and the euro is weaken. But it seems that the ECB has accepted this arrangement. Michael Hudson, the famous leftist economist and author of The Financial Empire, pointed out in an interview that the euro is only the "satellite currency" of the US dollar. The United States directly controls European politicians through various means, including monitoring and direct acceptance. I can't judge whether there is any correlation between phenomena, but perhaps it is an angle for interested readers to explore further. At the moment, we believe that Libra's basket currency ratio has already formed a consensus between the Federal Reserve, BIS and ECB.
Libra represents an extension of the dollar hegemony in the digital world
Zhu Min, dean of the National Institute of Finance, wrote that "Libra actually strengthens the already hegemonic position of the US dollar." Libra's reserve basket consists of five kinds of legal currency. How does it reflect the dollar currency authority?
First, we determine the meaning of "anchoring" in Libra's anchor in a basket of fiat currencies, because many people misunderstand or misuse the term "anchor". In the current context, sometimes “anchoring” means that Libra’s reserve assets are “anchored” to a set of legal or national debts, where “anchor” is the meaning of stock support; sometimes “anchored” "" refers to the unit of currency valuation. When you talk about Libra, you usually say "anchor" to a basket of legal coins. Many people take it for granted that they are "anchored" to Libra's unique pricing unit. In fact, the Libra white paper only explicitly states the first "anchor". That is, a basket of legal or national debt is used to support its issuance, and there is no clear denomination unit.
Dr. Ouyang Mo, a legal counsel in Facebook, said in an online interview, "Libra should be simplified, and Facebook will change the structure to a dollar-denominated form to help be approved." I also believe that Libra has a high probability of using dollar pricing, and several the reason:
First, Dr. Ouyang Mo pointed out that “September 2018 has approved two stable currencies in US dollar-denominated units: PAX and Gemini”, so “Facebook can use the (legal system) precedent to get approval”.
Second, if Libra and the US dollar are required to be converted, this will allow the US dollar monetary policy to be effectively transmitted to the Libra ecosystem, but in fact Libra will exchange with the basket currency instead of the US dollar, taking into account the currency weights and exchange rate changes in the basket. Libra has considerable volatility/uncertainty with the mandatory exchange of dollars. Libra Association is registered in Switzerland and not in the United States. This conversion commitment is not necessarily legally binding. It is not possible to fully confirm the mandatory exchangeability between Libra and the US dollar.
Third, the account unit is the most important attribute of a currency (different payment instruments are connected to an independent currency through its account unit rather than other attributes such as exchange media and value storage). As long as the dollar is used for pricing, the Fed guarantees its Currency authority. From this point of view, the author believes that Libra's dollar-denominated price has been a consensus with the Fed before Facebook published the white paper, but it has not been publicly discussed before.
Libra's regulatory barriers
As a well-known digital currency pessimist in the Fed, Fed Governor Lael Brainard rarely published a long speech on "Digital Currency, Stabilizing Coins and Payment System Evolution" on October 16, 2019. Readers working in the government may have experience. The more influential the more influential leaders are, the less likely they are to speak on major issues. Therefore, the speech of Lael's director is significant and reflects the Fed's position on relevant issues. Interested readers can subscribe to the public account of the "Digital Assets Institute" to get the full text of the Chinese translation of the speech and the author's comments.
The speech is very long, and the main part is about the regulation of the stable currency. Therefore, the author summarizes the main points of the speech and starts the topic of supervision.
The core points of the presentation include: The US/Fed has a long history and experience in issuing and managing private currencies, including currencies or assets issued by non-bank institutions to assist in intra-network transactions, such as gift cards, points, and virtual game currency. With the expansion of the scale and scope of private networks, its network externalities have greatly expanded the payment system based on digital platforms, such as China's Alipay and WeChat payment.
Libra's most unique feature as a stable currency program is its active users with one-third of the world's population, and through its payment system, the Libra network can quickly expand to a global scale. Libra and any stable currency project of global scale and scope must address a range of legal and regulatory challenges before they can go live. Many central banks are pushing the central bank's digital currency, and the Fed will not join in the fun. Let's first look at how others are doing. The Fed supports innovation in the payments sector and is happy to see innovations that have long-term impact on the payment system in the coming years, including options to stabilize the currency.
The Lael Council highlighted the four aspects of legal and regulatory issues.
First, you need to be aware of your customers' (know-your-customer: KYC) rules and regulatory compliance to avoid stabilizing coins being used for illegal activities and illegal finance. Libra's business model is naturally cross-border, and every participant in the Libra system is seen as a financial institution's need to comply with anti-money laundering laws in each jurisdiction. Libra's global business may require a consistent global anti-money laundering framework to reduce the risk of illegal transactions.
Second, issuers of stable currencies designed to facilitate consumer payments must clearly demonstrate how to ensure consumer protection. Consumers must be trained and their rights are different from bank accounts. In the United States, regulatory and regulatory protections have been implemented for bank accounts so that consumers can reasonably expect their deposits to be insured; fraudulent transactions are the responsibility of banks; clear, standardized disclosures about account fees and interest payments. It is unclear whether Libra has similar protection and how consumers have claims. It is unclear how much price risk consumers face because they seem to have no rights to stabilize the underlying assets of the currency. Consumers need to be aware that stable currency is likely to have very different legal terms from sovereign currency issued by sovereignty. There is a need to clarify the entities responsible for the security of personally identifiable information and transaction data, and how personal data is stored, accessed and used. A number of cyberattacks over the past few years have highlighted the importance of these issues.
Third, it is necessary to define the financial activities of the participants in the Libra ecosystem so that the judicial authorities can assess whether the existing regulatory and enforcement mechanisms are perfect. As a legally registered place of the Libra Association, Switzerland is particularly concerned about these topics. The Swiss authorities have set up three new categories to help regulate by function: "payment tokens" are cryptocurrencies for payment or value transfer; "practical tokens" are blockchain-based applications; "asset tokens" "is an encryption asset similar to stocks, bonds, and derivatives.
Fourth, a globally stable currency network may pose financial stability risks, such as liquidity, credit, market and operational risks, whether they occur individually or in combination, which may trigger loss of confidence and trigger a “run”. A global stable currency network raises many complex issues of legal independence but interdependence, and lacks transparency in the rights and responsibilities of market participants in reserve management and networks.
to sum up
From the statements and actions of the ECB, the Federal Reserve and the BIS/FSB, it is not difficult to conclude that global monetary policy-making institutions have reached a consensus on the significance of the rise of stable currencies for global integration, and are actually promoting relevant regulatory policies. The development of stable currencies clears the obstacles to law and regulation. The rise of digital currency has dramatically changed the way traditional currency competes. Globally stable currencies like Libra, combined with networks that already have large economic ecology and large user bases, their strong network externalities may allow Libra to quickly have a global reach. Influence.
The US dollar with the highest weight in the Libra reserve pool and the high probability of using the US dollar as its unit of valuation fully safeguards the dollar's currency hegemony and extends it to the digital world. The Fed, the FSB and the ECB have a clear understanding that the global stable currency may reshape the global monetary system, especially the formation of a digital currency zone across geographies and jurisdictions, and the replacement of the sovereign currency of a weak country leads to digital dollarization, which may be global integration. The goal of the elite group hopes.
But Libra may have a high probability of using the US dollar as a unit of pricing, so Libra may not really realize a new security asset and reduce the dollar's desire for global spillovers. It is more likely to be the Fed's future global monetary system. Trojan horse." This article ends with Zhu Min's Libra comment. "It is not excluded that Libra will cooperate with the US government after the operation is mature, that is, to cooperate with the US Treasury and the Federal Reserve to gradually increase the proportion of the US dollar in a basket of currencies, and ultimately only linked to the US dollar. Becoming an official digital dollar issuer and operator", the author believes that this "cooperation" may start earlier than Zhu's judgment. In fact, the Libra white paper drafting stage has already begun.
So the more realistic reality and the future may be, the dollar of Libra, the future of the dollar.