When talking about cryptocurrencies in the speeches of senior central bankers and dignitaries of major countries recently, they expressed such a view: cryptocurrencies, especially stablecoins, have brought some positive results in solving retail cross-border payments and financial inclusion Impact, already has the monetary attributes of payment and value storage. However, currently there is no appropriate regulatory framework. If it is allowed to develop, once it occupies a dominant position in currency circulation, it will bring systemic risks and wider impacts to the current legal currency system and seriously challenge national currency sovereignty. As Bank of England Deputy Governor Jon Conliff said in a recent speech:
"Stable assets linked to large technology and social media platforms are likely to become mainstream, and the public will withdraw all or most of the funds in bank accounts and deposit them in virtual wallets provided by non-bank institutions … Credit provided by the economy may become weaker or even disappear. "(Jon Cunliffe, 2020)
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Japanese Liberal Democratic Party Member Koizumi Yamamoto also expressed similar concerns in a recent interview with Cointelegraph Japanr, arguing that the stablecoins issued by Bigtech, such as Facebook, may have the function of currency payment and value storage, but as the unit of currency valuation, it must be controlled by the government .
"If Japan does not issue digital currencies and everyone in the world is using other digital currencies, the yen will be forgotten and lose sovereignty." (Kozo Yamamoto, 2020)
I. Why is the currency's valuation function (or value scale) closely related to the national currency sovereignty and has the "significance of the country" that cannot be controlled by others?
The value scale is the most basic attribute of money: among all the attributes of money, it is the general equivalent of a commodity and a common measure of the value of all commodities. It is the most essential attribute. Under the premise of the value scale, the means of payment and the value storage function It is possible. In modern society, the value of currency is often expressed in legal digital currency units. A pays 1,000 yuan to B to buy goods, C deposits 200 US dollars to a bank account, and 500 euros to pay utility costs. Whether it is to achieve payment, Or wealth expression is closely related to a certain amount of fiat currency units.
Fiat currency is protected by law as a means of payment: In many countries or regions, fiat currency is recognized by law as an effective and legal public and private payment method. For example, "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE" is printed on US dollar bills (this voucher is legal tender and is used for all public and private debt payments), and pound, Australian dollar, Hong Kong dollar and other banknotes have similar text. Fiat currency as a means of payment is not necessarily mandatory as the only effective means of payment in some countries, but legal provisions guarantee that relevant legal protection can be obtained in the event of disputes over the use of law.
National currency sovereignty's commitment to currency value guarantee: the origin of currency is a historical process, but since the currency is issued by a country, the guarantee of currency value is the responsibility of the state. The earliest metal coin issued by the country in the West was a platinum coin issued by the kingdom of Lydia in the 6th century BC. The coin was cast with a lion pattern on the surface of the coin, which represented the government's guarantee of the value of the coin. From the lion pattern of the Lydia coin to the payment promise printed on today's US dollar bills, as well as national emblems, seals, and portraits of heads of states appearing on banknotes and coins of countries, all are the image of national sovereignty, symbolizing government or currency management The authority guarantees and honours the value of the legal tender issued. Of course, what is more important is the legal system formulated by the government or the issuing authority to support currency sovereignty. For example, Article 16 of the People's Bank of China Law states: "The legal currency of the People's Republic of China is Renminbi. All public and private debt in the People's Republic of China shall be paid in Renminbi. No unit or individual may refuse to accept it."
(Credit for Lydia Platinum Coins: Reid Goldsborough)
This value commitment is reflected in laws and monetary policies to protect holders during their holding and use, including stable currency value, reasonable denomination structure, satisfying supply, smooth circulation, and preventing counterfeiting. The issuer is responsible for redemption or redemption when the banknotes or coins held are physically damaged and they are requested to be exchanged by the bank, or the old currency ceases to be in circulation for the new currency. Some countries have implemented a never-recall policy for all issued currencies, such as the US dollar and Hong Kong dollar, but promised to apply to the issuing authority for exchange for new banknotes in the event of unsuitable recirculation of banknotes.
2. Can the currency issued by a private institution assume the function of a monetary value scale?
From the perspective of modern history, currency issuance in many countries or regions has gone through a process ranging from decentralized to centralized, from private institutions to public sector issues. The main reason is that decentralized, multi-agent issuance cannot ensure stable currency value, unified exchange rate and safe operation. The Bank of Canada's Ben Fung et al. (2017), from the perspective of the exchange medium should have the ideal characteristics of convenient transactions, good anti-counterfeiting, high security, scarcity and consistency. The history of the institution's issuance of banknotes is examined, and it is proposed that:
Privately issued currency lacks security: that is, the issuer cannot meet the holder's requirement for equivalent redemption as a coin, or the issuer cannot pay the holder equivalent when the issuer fails. For example, the Canadian Maritime Bank went bankrupt in 1887, and the 311,000 yuan banknotes in circulation were not fully recovered until two years later. Historical experience proves that ensuring the security of cash requires other institutional arrangements in addition to management. The U.S. Treasury cashes banknotes for any bankrupt national bank. The Canadian Banking Act of 1890 established the Canadian insurance system, established the Canadian Circulation Redemption Fund, and provided support for bankruptcy banks to redeem banknotes. The deposit insurance systems implemented in various countries today are exactly the effective measures provided by the central bank to provide the ultimate guarantor for fiat currencies.
Privately issued currency cannot maintain high scarcity: that is, to control the inflation rate of the issued currency. Guaranteeing currency stability and controlling inflation is the central bank's monetary policy goal. It is difficult for privately issued currency to do this. According to the regulations at the time, the amount of currency issued cannot exceed the bank's paid-in capital plus reserves. In the era of cashable banknote issuance, due to insufficient management capacity, misconduct of management personnel, or simply price fluctuations, it is common for the issue preparation to be lower than the total value of the issued currency. Bank runs will occur in the face of various turbulences. Talking about currency stability? Privately issued currencies lack unity: Without government intervention or institutional arrangements, currencies issued by different entities cannot be exchanged for each other in accordance with the prescribed denomination. For example, before the establishment of the Bank of Canada from the 19th century to 1934, bank notes in circulation in Canada included bank bonds issued by private chartered banks, and government bonds issued by the Canadian Dominion at the time. There were multiple currency units in parallel, including shillings, pounds, and yuan. Currency denominations There are many kinds, even 4, 5, 6, 7 yuan, etc., the conversion is very inconvenient and brings high transaction costs. Today, there are more than 1,000 digital currencies, each with its own currency unit. There is a multiple equilibrium relationship between each other. Before the emergence of stablecoins, the exchange rate relationship between various cryptocurrencies was relatively chaotic. After the emergence of stablecoins, the exchange rate between various cryptocurrencies is actually based on fiat currencies. Independent private monetary value scales have no possibility of standing in the real world.
3. Can the emergence of stablecoins bring security to the value of private cryptocurrencies?
From the current point of view, the emergence of stablecoins has not provided more security for private cryptocurrencies, but has accelerated the turbulence of this market.
The recent report of the French central bank on stablecoins (Anastasia Melachrinos and Christian Pfister, 2020) believes that, like Tether, stablecoins that use off-chain guarantees, 100% of the guaranteed assets are stored in third parties, and theoretically should be subject to external audits However, it may not be able to be implemented in practice. First, the management cost is very large. Second, in the global low interest rate environment, the legal currency benefit as asset guarantee is very small, and 100% adequate preparation is unlikely to make up for the cost. They found that there was consistency between the volatile Bitcoin price from late 2017 to early 2018 and the surge in TEDA: the price of Bitcoin fell by 42.7%, while the transaction volume of Tether coins increased by 213%. At that time, the Tether coin issuer also owned the Bitfinex trading platform. It was suspected that it did not hold the equivalent USD reserves necessary to issue Tether coins in advance, but used the premium of Bitcoin to supplement its USD reserves. It can be seen that Tether has contributed to the Bitcoin bubble.
In the recent bungee market of the cryptocurrency market, the performance of stablecoins is very “eye-catching”: As the “king” of stablecoins, Tether coin issued 300 million more in less than a week. When the BTC price fell steeply on March 12, Tether The OTC price of the coin was above 8RMB. As of March 20, its bid price has remained at 7.25RMB, and the exchange rate between the US dollar and RMB as its backup asset is 1: 7.05. In addition, there are 4 stable currencies such as USDC, PAX, BUSD and TUSD, which are also among the top five in the stable currency market.
According to the Tether coin issuance mechanism, with the US dollar as its currency support, whether the hundreds of millions of newly issued shares can guarantee the equivalent of the US dollar as a guarantee, the issuer has not provided any evidence to support it, and no auditing agency has confirmed it. If it is really the same as the soaring in 2019, there is no corresponding dollar as a guarantee of currency value, which will inevitably imply great risks.
The issuance model of Tether coins is similar to the issuance stage of cash notes in the early last century. Some commercial banks in China issued quite similar models: from full preparation of precious metals, to 60% of physical objects, 40% of securities, to 40% of physical objects, 60%. Securities until the final white bar.
How to view the existence and governance of stablecoins
The G7 and BIS reports in the "Global Stability Coin Impact Survey" report gave a fair evaluation of the advantages and disadvantages of the stable currency: the emergence of the stable currency has made the monetary authorities of various countries aware of the two issues that must be resolved under the current payment system: There are 1.7 billion people worldwide who do not have a trading account and do not have access to mainstream financial services. Second, cross-border retail payment is inefficient. From the design of stablecoins to some practices, it shows that it may solve some of the shortcomings of the existing payment system, "may be more capable as a means of payment and a means of value storage, which helps to develop faster, cheaper and A global payment method with better inclusiveness. "Challenges the dominant position of financial institutions in the current payment market in terms of improving the level of inclusive finance and enhancing the competitiveness of the payment market.
However, these benefits can only be realized if significant risks such as law, governance, anti-money laundering, cybersecurity, integrity, data and consumer protection, and tax compliance are addressed. Otherwise, stable coins regardless of size will pose new challenges and risks. A global stablecoin with a large user base may amplify these challenges, posing challenges to healthy competition, financial stability, monetary policy, and even the international monetary system, forming a new governance gap.
At last year ’s G7 Finance Ministers and Central Bank Governors Meeting, the governance of stablecoins determined the same principles, the same risks, and the same supervision as the current payment system. Priority assessment and development of solutions for risks not covered by the current regulatory framework, It is the responsibility of policy makers in each country to adjust existing regulations and establish new ones as necessary.
The Financial Supervisory Board (FSB) is also conducting research and supervision of stable currencies at the global level, formulating regulatory recommendations on stable currencies, and ensuring that stable currencies used as payment instruments must meet the standards of commercial bank currencies: the currency is stable and can be legally redeemed , Equivalent to fiat currency. (Jon Cunliffe, 2020)
Whether stablecoins are effective hedging tools in the crypto market or whether they can become a new currency form that complements the legal digital currency in the new international currency payment system remains to be tested.