IMF Liu Yan: Legal definition of digital currency is the basis of regulation

Author: Little new interview: Yu Ye

Source of this article: WeChat public account new financial review

Entering the era of digital earth and digital economy, currency has also entered a new evolutionary trajectory.

On January 3, 2009, Bitcoin was born, and people began to think more about the meaning of digital currency … In 2019, the design concepts of anchoring a basket of currencies and targeting pain points of cross-border business in the Libra project white paper detonated public opinion. Regulators have given widespread attention.

At present, the central banks of major countries have shown strong interest in digital currencies. Various types of tokens are in full swing, while fiat digital currencies are still in the pipeline.

Now that digital currencies are being debated, how can we define digital currencies? What impact will digital currency have on our lives? How should regulation respond? With these questions in mind, we interviewed Ms. Liu Yan, Deputy General Counsel of the International Monetary Fund (IMF) during the first Bund Financial Summit. Let ’s take a look at her point of view ~


Q: What about digital currencies?

Liu Yan: In short, I think that the digital currency like Bitcoin and Ethereum is attractive because it is a new payment system. It relies on distributed payment technology such as blockchain. center.

Its advantages are that it can help to solve the obstacles and limitations in the existing cross-border payment system, because the current payment system is relatively expensive, slow and lacks transparency. Therefore, this new technology is helpful in inclusive.

On the other hand, these technologies have many limitations. For example, the value of bitcoin fluctuates too much and cannot be a reliable means of payment. However, a new stablecoin has emerged, which has many characteristics of Bitcoin, but it attempts to stabilize its currency value by linking it with an asset pool.

Therefore, it may become a new payment method or a kind of savings of assets; it may also develop into a new payment system. However, even Bitcoin (digital currency) has not been tested so far, and it has some potential risks in terms of financial stability or financial stability, consumer protection, and privacy protection. Therefore, digital currency has some helpful effects, but also has some risks.


Q: What difficulties does digital currency bring to anti-money laundering?

Liu Yan: Digital currency does bring some challenges to anti-money laundering, because it has some risks in money laundering and terrorist financing. Let me briefly explain the reasons.

First, digital currency transactions are fast and transactions are performed anonymously online, so using digital currencies can transfer assets very quickly and anonymously;

Second, digital currencies do not pass through regulated intermediaries such as banks, but anti-money laundering and counter-terrorism financing are implemented through intermediaries;

Third, the digital currency network is decentralized, and it is difficult for regulators to determine who should be the subject of regulation.


Q: How does the IMF prepare for this new thing?

Liu Yan: The IMF has many partners. One of the most important partners is the Financial Action Task Force (FATF). This is an institution that formulates anti-money laundering and anti-terrorism financing standards.It re-examined the standards in October 2018 and made some new adjustments for digital currencies. It refers to digital currencies as virtual assets. At the same time, in June of this year, it set new guidelines. The IMF is an observer of the task force, so we are actively involved in the development of standards and guidelines.

The Financial Action Task Force requires countries to take some measures against virtual assets. I think there are two points that can be mentioned:

First, it requires States to ensure that service providers of these virtual assets must be registered and licensed and that they have anti-money laundering and anti-terrorist financing requirements;

Second, for these suppliers, the requirements for anti-money laundering and counter-terrorism financing are very similar to those for banks, so they also need to conduct due diligence on customers and report suspicious transactions. These measures have indeed strengthened the regulation or supervision of digital currencies. In our work, we not only provide policy advice or provide technical assistance, we are also based on this standard.


Q: Facebook founder Zuckerberg mentioned at the hearing that he was making space for Libra. If the US government does not support Libra, the United States may lose its financial supremacy. Do you think digital currency will bring some impacts and challenges to the existing international monetary system?

Liu Yan: At present, digital currency includes Libra, its coverage is still small, and its connection with the international financial system is limited. However, we still suggest that countries should take some actions, because once these currencies are widely used and reach a cross-border scale, they will have a great impact on the international monetary system or the international financial system. I think it's too early to talk about its impact on the United States and its impact on the entire international monetary system.


Q: Some people think that Libra's initial design of a basket of currencies is similar to Special Drawing Right (SDR). Do you agree with this statement?

Liu Yan: I personally think it is incorrect. Let's first review the creation of SDR. SDR is a tool to supplement international reserves created by the IMF in 1969. At that time, its value was determined by the value of a basket of freely used currencies; and its issuance was not a global issue. It could only be issued by the International Monetary Fund. Member States and some specific organizations.

Libra's specific settings are actually not very clear. According to it (white paper), my own understanding is that it was issued in a legally complex and organized way by Facebook and some other commercial banks.

I think SDR and Libra are very different. There are about three differences:

The first point is that the purpose is different. SDR was created in 1969 under the Bretton Woods system, which was then a fixed exchange rate system. The system collapsed in 1973, and many countries changed from a fixed exchange rate to a floating exchange rate. Their reliance on SDRs has decreased a lot, but even so, SDRs have played a very active role as an international reserve currency. Libra was not created to achieve the same purpose.

Second, SDR is not a currency, nor is it a recourse to the IMF, nor does it have an asset pool behind it. Libra is not the same. Libra has an asset pool to support it. It does have some recourse against Libra.

Third, the holders are different. SDR is only available to all members of the IMF and some specific organizations, such as the International Settlement Bank can hold SDR. At least for now Libra is talking about its goal to be an unlimited and widely used in various transactions, so I think the two are completely different.


Q: After Libra changes the plan, it may shift to anchoring a single fiat currency. How do you evaluate this change?

Liu Yan: My own understanding, the purpose of his change is to stabilize the value of the currency, and it is a way to allay the concerns of management agencies in various countries about it. But what will happen in the end, or the impact on the international monetary system, I think it is still too early at least.


Q: What do you think of the impact of digital currencies on strong and weak sovereign currencies?

Liu Yan: I think digital currencies such as Libra or Bitcoin cannot yet replace sovereign currencies like the US dollar and the euro.

Because a currency wants to be a reserve currency or a global reserve currency, it must have several conditions, for example, it must have a responsible institution behind it; its currency must have long-term stability; it must have A relatively deep and liquid market, including its issuers, should be willing to be the last lender, just like the IMF is now the last lender; it must be a currency that must be used for all trade.

I think that under these conditions, Libra, or other digital currencies, cannot reach the status of a reserve currency.

However, if this digital currency can be widely used, it may replace some sovereign currencies. For example, in countries where exchange rates fluctuate greatly and institutions are relatively weak, nationals of these countries may give up their currencies. Once this situation occurs, a new kind of "dollarization" or "Libraization" problem will arise. I think this will have a lot of damage to a country's monetary policy or fiscal policy.

From these perspectives, all countries should strengthen their monetary or fiscal policies and actively improve some of the problems in the existing payment structure.


Q: What legal and policy recommendations does the IMF have on the possible impact of digital currencies?

Liu Yan: From the perspective of our work, in October 2018, the IMF and the World Bank launched the Bali Fintech Agenda at the Bali Annual Conference. There are twelve points. Two of these are very important. They involve legal and regulatory aspects, which are also closely related to the basic mission of the IMF.


Bali fintech agenda


Our basic mission is to maintain the stability and effective operation of the international monetary system. One of these two points is to strengthen the stability of the international financial system. The second is to strengthen the legal mechanism so that there is a very favorable and clear Legal basis.

These two points have in common that any country needs to find a very balanced and effective mechanism. On the one hand, it can enjoy the results brought about by this new technology, and on the other hand, it must be able to actively prevent the various risk.

From the perspective of financial stability, I think that fintech is either a blockchain or a digital currency. In fact, it is a double-edged sword. On the one hand, it has some advantages to strengthen compliance, but it has other advantages. On the one hand, it also brings many risks, such as the risk of money laundering or terrorist financing, especially digital currencies. It is fast, it conducts transactions anonymously, and it does not pass through intermediaries. In terms of the supervision mechanism, it actually brings a lot of troubles.

Therefore, the Bali FinTech Agenda requires various countries to actively study and prevent such risks of money laundering or terrorist financing, so as to enable us to truly enjoy its results, and not cause much damage to the international economic system. . From a legal perspective, the Legal Department of the IMF has been actively tracking these new developments, especially studying the meaning and impact of the laws it brings.

When it comes to digital currency or other fintech, it is inevitable to talk about legal issues. For example, what does it mean to hold a stablecoin? What recourse does a holder have against the issuer? What rights does the holder have over the assets behind the stablecoin? Even though a stablecoin may answer these questions when it is issued, a jurisdiction, such as its bankruptcy law, may have different regulations, which may have a veto power.

Moreover, for example, what is the significance of the central bank issuing digital currencies? Is it a liability of the central bank? Or is it a form of bookkeeping by the central bank or a legal currency? So these are very important legal issues.

I think these legal issues, in fact, the definition of this attribute will directly affect supervision, because these digital currencies may be a means of payment, or they may be a commodity, a deposit or an investment tool. So the nature of the law will directly affect how these products or commodities are regulated. The clarity and stability of the law is actually very important. It is a very important aspect to determine a way of supervision and decide how to prevent risks.

Interviewed guests:

Liu Yan, Deputy General Counsel of the International Monetary Fund (IMF), provides legal advice on IMF operations, including the IMF's monitoring of member economies, and financial and technical support to member countries. She currently leads the IMF team, helping member countries strengthen the legal framework related to financial regulation, and assisting in the development of international standards for financial regulation. She is also responsible for overseeing the formulation and implementation of policies related to lending, sovereign debt management and restructuring by the IMF's Legal Department to provide solutions to private sector debt issues. In addition, she is committed to helping member states better handle relationships with correspondent banks. Prior to joining the IMF in 1999, Ms. Liu worked in the law firm of Fried Frank Harris Shriver & Jacobson and Milbank Tweed Hadley & McCloy in the United States.