This paper examines the impact of blockchain on financial infrastructure and analyzes the recently-watched Facebook Libra from this perspective. The conclusion of this paper is that the financial infrastructure is divided into account paradigm and Token paradigm. The former is represented by the bank account system, and the latter is represented by the blockchain. These two paradigms are very different, but they can all be used to carry financial assets and transactions, presenting very complex alternatives and complementary relationships in many application scenarios.
Facebook Libra, inter-financial settlement currency and central bank digital currency are all representatives of the Token paradigm. Facebook Libra implements a super-sovereign currency in a sense based on the Token paradigm, but there is no currency creation, far from currency non-stateization. This article also focuses on the possible risks and regulatory issues facing Facebook Libra.
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On June 18th, Facebook launched the Libra Alliance to publish a Libra project white paper claiming to build a simple global currency and a financial infrastructure that empowers billions of people (Libra Association, 2019). Facebook Libra is widely concerned around the world, and financial regulators, practitioners and scholars have interpreted it from different angles. There are still many people who analyze Facebook Libra from the perspectives of philosophy, political science and Austrian economics. Just as there are a thousand Hamlet in the eyes of a thousand people, there are also a thousand currency views in the hearts of a thousand people. These different angles of analysis have their value.
This paper attempts to analyze the new economic and financial activities supported by the blockchain, represented by Facebook Libra, from the perspective of financial infrastructure. Financial infrastructure is the “pipeline” of the financial system. These “pipelines” are located at the bottom of the financial system that most people do not see, but they affect how money flows, how financial resources are allocated, and how financial policies are transmitted. This perspective helps us clarify the complexities of Facebook Libra, cryptocurrencies, blockchains, and even distributed businesses. Just as we have to go deep into the municipal network and the submarine cable, we can fully understand the water, electricity, gas and the Internet that are within reach of everyday life.
This article is divided into four parts. The first part introduces the account paradigm and Token paradigm of the financial infrastructure, the second part compares the account paradigm and the Token paradigm, the third part discusses the Token paradigm in the legal currency field, focusing on Facebook Libra, and the fourth part summarizes the full text.
It should be noted that the term Token is used as the core element of the blockchain in this paper, emphasizing that Token carries the functions of real-world assets and transactions, and Token does not represent a cryptocurrency.
Account paradigm and Token paradigm for financial infrastructure
(1) Account paradigm
The representative of the account paradigm is the secondary bank account system (Figure 1). Individuals and enterprises open deposit accounts in commercial banks, and commercial banks open deposit reserve accounts in central banks. The legal currency exists in the liability side of the financial system. High-energy currencies are the liabilities of the central bank. Among them, the cash is the central bank's debt to the public, and the deposit reserve is the central bank's liability to commercial banks. Deposits are the central bank’s liabilities to individuals and businesses. In modern economies, cash is only a small percentage of the money supply, and most of the broad money supply is deposits. Currency forms such as deposit reserves and deposits have all been electronic.
In a cash transaction, the parties to the transaction can deliver the cash as long as they confirm the authenticity of the cash, without the need for a third-party trusted institution. This is similar to the Token transaction that will be introduced later. Transfers and remittances involve bank account operations. For example, peer transfer should simultaneously adjust the balance of the deposit accounts of the two parties in the same bank. In addition to adjusting the balance of the deposit accounts of the two parties in the respective bank, the inter-bank transfer involves settlement between the two banks. Settlement between commercial banks is subject to adjustments to their deposit reserve accounts at the central bank. Figure 2 is a simple example.
The bank account operations involved in cross-border payments are more complicated. Figure 3 is an excerpt from the Bank of Canada (Bank of England, Bank of England, and Monetary Authority of Singapore, 2018) from Bank of Canada, Bank of England and the Singapore Monetary Authority, page 28 of the report. Figure 1.
For example, two countries, A and B, and their respective currencies, A and B. Both currencies are established by their respective central banks (RTGS in Figure 3, the real-time full payment system). The RMB is a large-scale payment system and a cross-border payment system (CIPS). The US dollar is the Federal Electronic Funds Transfer System (Fedwire) and the New York Clearing House Interbank Payment System (CHIPS).
Assume that A country resident Alice has a deposit of A currency in a bank A1 of country A. She has to pay Bob, a resident of Country B, who has a B-currency deposit account at a bank B2 in Country B. The problem is that there is no direct business relationship between Bank A1 and Bank B2. Therefore, it is necessary to introduce a correspondent bank, that is, bank A2 and bank B1 in FIG. The correspondent bank acts as a bridge between Bank A1 and Bank B2, but extends the cross-border payment chain.
In the correspondent banking mode, cross-border payments need to be performed as follows. First, in country A, Alice's A currency deposit at bank A1 is transferred to bank A2 (through the A currency payment system). This process is the interbank transfer in Figure 2. Second, funds are transferred from bank A2 to bank B1. Acting banks open accounts with each other. For example, from the perspective of bank A2, the account opened in bank B1 is called the nostro account, which is the foreign bank account. The account opened by bank B1 at bank A2 is called the vostro account, which is the interbank deposit account. The transfer of funds from bank A2 to bank B1 is achieved by adjusting the balance of these accounts. Currency exchanges need to go through a continuous connection settlement system (ie CLS in Figure 3). Finally, funds are transferred from bank B1 to bank B2 (through the payment system of B currency).
Two points need to be explained: First, unlike popular cognition, the Global Interbank Financial Telecommunication Association (SWIFT) is an interbank messaging system that handles the flow of information in cross-border payments. The flow of funds in cross-border payments is carried out through the bank account system. Second, some blockchain projects believe that SWIFT is the main reason for the high cost of cross-border payments. But in fact, it's not. McKinsey & Company's 2016 study shows (McKinsey & Company, 2016) that the average cost of a cross-border payment by a US bank through a correspondent bank is between $25 and $35, which is more than 10 times the average cost of a domestic payment. 34% of the cost comes from liquidity locked into the correspondent bank account (since these funds could have been used in higher-paying locations), 27% from treasury operations, 15% from foreign exchange operations, and 13% from Compliance costs. See Figure 4 for details, taken from McKinsey & Company (2016), Exhibit 9 on page 21 of the report.
The above briefly describes how the account paradigm carries currency and its transactions. We sacrificed rigor for readability. For example, account balance adjustment and capital flow are not rigorous academic terms, and can be expressed as a series of complicated debit and credit operations in accounting.
(2) Token paradigm
Xu Zhong and Zou Chuanwei (2018) summarized the Token paradigm of blockchain: Token, smart contract and consensus algorithm are all within the consensus boundary. There is an inseparable connection between Token and smart contract. The consensus algorithm ensures the trust in the consensus boundary. surroundings. See Figure 5 (Figure 1 of Xu Zhong and Zou Chuanwei (2018)).
The following nature of Token and its transactions is key to the application of blockchain to financial infrastructure. First, different addresses within the blockchain correspond to different users, similar to bank accounts. Cryptography technology (mainly based on the elliptic curve digital signature algorithm and hash encryption algorithm) guarantees the anonymity of the address, only users with the appropriate permissions can operate the address, similar to the bank account password.
Second, Token is essentially a state variable defined by rules within a blockchain. Tokens defined by the same rule are homogeneous and can be split into smaller units. The number of Tokens in different addresses, similar to the bank deposit account balance. The distributed ledger records the number of tokens in each address in the blockchain, similar to the bank account statement. The distributed ledger is updated and stored by multiple “miners” or “verification nodes” to ensure consistency. In the post-financial transaction processing, blockchain is used to shorten the custody chain, optimize the transaction process and simplify the reconciliation work, which is based on the characteristics of distributed ledger.
Third, Tokens can be transferred between different addresses within the blockchain, similar to bank transfers. The total amount of the Token transfer process is unchanged, and the income of the A address is the loss of the B address. The Token transaction confirmation is completed at the same time as the distributed ledger update, and there is no settlement risk. Distributed ledgers and confirmed Token transactions are open to the public and are not tamper-proof.
Fourth, blockchain consensus algorithms (such as the Nakamoto Consensus invented by Nakamoto) and non-tamperable features make it possible to guarantee that Tokens will not be "double flowers" without relying on centralized trusted institutions. Spending).
Fifth, the blockchain runs on the Internet, and the transfer of Token between different addresses within the blockchain is naturally cross-border. This feature is the basis for the blockchain to be applied to cross-border payments.
Token is a piece of computer code in its form of existence, without any intrinsic value. So, what is the source of Token's value? Token is generally translated into tokens or representations in Chinese. The token or representation itself has no value, and the value comes from the assets it carries. The use of Token to carry real-world assets (so-called "asset-winding") is essentially based on laws and regulations, using economic mechanisms outside the blockchain to link Token to the value of certain types of underlying assets. This process is inseparable from centralized trustees (Table 1).
There are three rules to follow to carry assets with Token. The first is the issuance rule : the centralized trustee issuance of Tokens based on the underlying assets in a 1:1 relationship.
The second is the two-way redemption rule : the centralized trustee ensures a two-way 1:1 exchange between Token and the underlying asset. The user gives the unitized assets of the unitized trusted institution 1 unit, and the centralized trust organization will issue 1 unit token to the user. When a user returns a unit Token to a centralized trusted organization, the centralized trusted organization will return 1 unit of the asset to the user.
Third, credible rules : Centralized trusted institutions must regularly audit from third parties and fully disclose information to ensure the authenticity and adequacy of the underlying assets that are the Token issuance reserve.
Under the constraints of these three rules, 1 unit Token represents the value of 1 unit of the underlying asset. When Token has a secondary market transaction, the Token market price will deviate from the value of the underlying asset, but the market arbitrage mechanism will drive the price to return to value: if the price of the 1 unit token is less than the value of the 1 unit of the asset, the arbitrage will press The market price buys 1 unit of token, and then exchanges the unitized assets from the centralized trustee to obtain the intermediate price difference (=1 unit-marked asset value – 1 unit token price). Arbitrage activity will increase demand for Token and drive its price up. Conversely, if the price of the 1 unit token is higher than the value of the 1 unit asset, the arbitrageur will exchange 1 unit of the asset with the unitized trust institution for 1 unit token, and obtain the intermediate price difference (=1 unit token price -1 unit) The value of the underlying asset). Arbitrage activity increases the supply of Token, driving its price down.
Once these three rules are not strictly adhered to, the effect of the market arbitrage mechanism will be weakened, and the Token price will be decoupled from the value of the underlying asset (not necessarily completely decoupled).
Which assets are suitable for carrying with Token? This depends mainly on whether the assets meet the requirements of the two-way exchange rules, and this depends on the existence of the assets, the level of standardization or homogenization, the system of property rights recognition and registration, and the transaction process. Assets with standardized, clear property rights and simple transaction processes are best suited to be carried by Token, mainly including monetary and financial securities.
Comparison of Account Paradigm and Token Paradigm
(1) Comparison of two paradigms
1. Performance in trading scenarios
When Token is transferred between different addresses in the blockchain, the total amount of Token does not change. Token transactions do not rely on centralized trusted institutions. The transaction confirmation and distributed ledger update are completed synchronously and there is no settlement risk. However, many blockchains can only guarantee settlement finality in a probabilistic sense because of the possibility of bifurcation, although the probability can tend to be 100% over time. As we all know, the blockchain is subject to the "three-dimensional paradox": no blockchain can have three characteristics of accuracy, decentralization and cost efficiency. In particular, the higher the degree of decentralization of the blockchain, the lower the efficiency, and the efficiency is concentrated as the number of transactions per second (TPS) that can be supported per second. For example, Bitcoin can support up to 6 transactions per second.
Under the account paradigm, the transaction may involve only internal adjustments by the asset side or the liability side, as well as the simultaneous adjustment of the asset side and the liability side. For example, if a bank lends money to a company, the bank has an additional loan to the enterprise on the asset side and an additional corporate deposit on the liability side. Under the deposit reserve system, this process continues as a multiplier expansion mechanism for deposits. Account maintenance is inseparable from centralized trusted institutions (such as banks), and credit risk (especially counterparty risk) is always present. The settlement risk cannot be eliminated, but there is a final settlement. Transaction efficiency under the account paradigm can be very high. For example, PayPal can support an average of 193 transactions per second, and Visa can support an average of 1,667 transactions per second.
2. Openness and privacy protection
Blockchains are highly open to users. Anyone who generates a pair of public and private keys based on a digital signature algorithm can have an address within the blockchain. The address has good anonymity. It is difficult to identify the address owner without using techniques such as cluster analysis. However, there are many Tokens in the address and Token transactions between the addresses, which are visible on the whole network and cannot be tampered with. Trading with Token is like an anonymous veil. While this helps protect the privacy of address owners, it also increases the regulatory difficulty of KYC ("know your customers"), AML (anti-money laundering), and CFT (anti-terrorism financing).
Opening an account generally requires approval and is therefore highly selective. Personal bank accounts and payment accounts must meet strict authentication requirements in particular. Interested readers can refer to the “Administrative Measures for Network Payment Services of Non-bank Payment Institutions” (People's Bank of China Announcement  No. 43) and “Implementation of Personal Banking” Notice of Account Classification Management System (Yinfa  No. 302). Financial accounts can generally infer the owner from the account name, but how many assets are in the account, only visible to those with relevant permissions. This is also a key difference between the account paradigm and the Token paradigm.
If you expand your horizons from financial accounts to social network accounts, e-commerce accounts, and various application accounts, you will find that although the real-name systems of different accounts have strong or weak points, accounts are always associated with identification. The account records the behavior of its owner in different scenarios, such as social, shopping, and travel. By analyzing these behavioral information, the account owner can be imaged (consumer profiling) and the important characteristics of the account owner's preferences, credits, and income can be inferred. This is the information base for Internet companies to conduct advertising business (which is still the main source of revenue for Google and Facebook) and for financial services such as financial precision marketing and online lending. Wan Jianhua (2013) put forward the concept of “the account holder gets the world” very predictively.
However, the collection and use of personal information under the account paradigm can easily evolve into infringement of personal privacy. Personal information is difficult to defend, difficult to protect, easy to use without reasonable authorization, or data collected from A business is used for B business. Organizations holding personal information may cause personal information to be stolen if they are not adequately secured. This is reflected in the data breach scandals of Facebook and Cambridge Analytica. These problems faced by the account paradigm do not exist under the Token paradigm.
Data management and privacy protection have increasingly become an important policy issue that can significantly impact future Internet business models. In May 2018, the European Union began implementing the General Data Protection Regulations (GDPR). In May of this year, China's Internet Information Office issued the "Data Security Management Measures (Draft for Comment)." Data management and privacy protection are not entirely institutional issues, but also cryptographic techniques such as verifiable computing, homomorphic encryption, and secure multi-party computation. Readers interested in these cryptography techniques can refer to PlatON (2018).
(2) Substitution and complementation of two paradigms
First, the two paradigms have alternative relationships in some scenarios, such as stable cryptocurrency and third-party payments (see Figure 6).
In September 2018, Circle Company of the United States launched USDC (Circle, 2018) based on Ethereum. The USDC is issued in 1:1 with a US dollar reserve. Any institution that follows the USDC agreement and meets relevant regulatory compliance requirements can become a USDC issuer. The USDC follows a two-way redemption rule. The USDC issuer will be deposited in a bank protected by the FDIC after receiving the US dollar reserve provided by the user. The USDC transaction between users is a Token transaction within the blockchain and does not affect the reserve in the bank. When the USDC user redeems the USDC, the USDC issuer will transfer the corresponding amount from the reserve to the user's bank account in addition to destroying the received USDC.
In the third-party payment, after the user recharges the payment institution, the payment institution will deposit the legal currency received into its reserve fund account in the bank, and increase the balance of the account of the user in the payment institution. The balance of this account is essentially IOU (I own you). Transfers between users only affect their account balance (IOU transactions) at the payment institution and will not affect the reserve fund at the bank. When the user withdraws, the payment institution deducts the balance of the user account (deregistered IOU), and transfers the corresponding amount from the reserve fund to the user's personal bank account.
Therefore, the stable cryptocurrency and the third-party payment are isomorphic in the model, the former belongs to the Token paradigm, and the latter belongs to the account paradigm.
Second, the complementary relationship between the two paradigms is followed by the USDC example (Figure 7). Currently, most USDC transactions take place on cryptocurrency exchanges. The user transfers the USDC to the blockchain address of the cryptocurrency exchange, and the cryptocurrency exchange equalizes the account balance (IOU) of the user on the exchange. The USDC transaction within the cryptocurrency exchange is actually an IOU transaction. The reason for this is that USDC transactions within the blockchain are subject to the performance of the blockchain, and IOU transactions are much more efficient.
Token paradigm in the legal currency field and analysis of Facebook Libra
Table 2 classifies the Token paradigm in the legal currency field in two dimensions. The first dimension: whether the issuer is a central bank or a private institution. The second dimension: whether the target user is wholesale (institutional only) or retail (public).
Since the deposit reserve is electronic, the wholesale central bank digital currency is less meaningful, so we only introduce the types other than the wholesale central bank digital currency in Table 2. This discussion helps us understand the technical and economic context of Facebook Libra.
(i) Central Bank Digital Currency (CBDC)
The CBDC is a form of legal tender. It is the electronic currency issued directly by the central bank to the public and is also the liability of the central bank. The CBDC replaces the cash.
The CBDC faces several controversial issues. First, in the technical path, CBDC can adopt the Token paradigm or the account paradigm. There is no final conclusion on how to choose. Second, whether CBDC pays interest. If CBDC completely replaces cash and pays interest, it is theoretically a new monetary policy tool, especially at the zero lower bound of the nominal interest rate. Third, the impact of CBDC on the stability of commercial bank deposits. Because the central bank’s credit is higher than that of commercial banks, will ordinary people withdraw large-scale commercial bank deposits and switch to CBDC? Because of these problems, there is currently no major country to introduce CBDC.
The following CBDC prototype system design is from Yao Qian (2018). The CBDC prototype system is divided into three layers (Fig. 8, which is shown in Figure 1 on page 3 of Yao Qian (2018)). The first layer is the issuance and withdrawal of CBDC between the central bank and commercial banks, and the transfer between commercial banks. The second layer is for individuals and business users to access CBDC from commercial banks. The third layer is the transfer of CBDC between individual and business users.
The transfer of CBDC between commercial banks, between commercial banks and between individuals and business users, and between individual and corporate users is essentially a token transaction within the blockchain. Figure 9 is the transfer process of CBDC (Fig. 6 on page 7 of Yao Qian (2018)). After the commercial bank A issues a CBDC transfer request to the central bank, the central bank invalidates the source currency, and generates the destination currency of the commercial bank B according to the transfer amount. If there is a balance after the transfer, the return currency of the owner is the commercial bank A. This transfer process is similar to the UTXO (unspent transaction output) mode.
The CBDC issuance and returning follow the two-way exchange rules, and the central bank deposit reserve account needs to be adjusted. After the commercial bank applies to the central bank for the issuance of CBDC, the central bank first deducts the deposit reserve of the commercial bank and equalizes the digital currency issuance fund, and then generates the CBDC whose owner is the commercial bank. After the commercial bank applies to the central bank for depositing CBDC, the central bank first destroys the deposited CBDC, deducts the digital currency issuance fund and increases the deposit reserve of the commercial bank in equal amounts. This ensures that the total amount of currency issuance remains the same in CBDC issuance and return.
(2) Inter-financial settlement currency
In February 2019, JPMorgan Chase announced the launch of JP Morgan Coin (JP Morgan, 2019, see Figure 10) for real-time settlement of customer transactions based on the Quorum Alliance chain. JP Morgan Coin represents the US dollar deposited in the designated account of JPMorgan Chase. After depositing the US dollar into the designated account, the customer will receive an equal amount of JP Morgan Coin. The transfer of JP Morgan Coin between customers took place on the Quorum Alliance chain. Customers are not necessarily in the United States, which enables cross-border payments. Upon returning to JP Morgan Coin, the customer will receive an equivalent amount of USD transferred from the designated account.
UW-CBDC is a cross-border payment scheme proposed by the Bank of Canada, Bank of England, and Monetary Authority of Singapore (2018) by the Bank of Canada, the Bank of England and the Singapore Monetary Authority's 2018 study “Cross-Border Interbank Payments and Settlement”. . In UW-CBDC, U refers to the global, W refers to the wholesale type, and CBDC refers to the central bank digital currency (but UW-CBDC is not issued by the central bank). UW-CBDC is similar to Facebook Libra in many respects (Figure 11, Figure 5 on page 36 of the above report).
UW-CBDC is created by multiple countries through their central banks or an international multilateral organization. UW-CBDC uses a basket of currencies as a reserve. UW-CBDC is issued and returned through an exchange, and the central bank participating in UW-CBDC can use its exchange to buy and sell UW-CBDC through the exchange. National commercial banks then exchange UW-CBDC with their national currency to their central bank.
Commercial banks directly settle cross-border transactions through UW-CBDC. Commercial banks using UW-CBDC do not need to be in the same country, do not need to open each other's nostro account and vostro account, nor do they need to go through a correspondent bank. This simplifies the cross-border payment chain and eliminates the cost of locking liquidity at the correspondent bank (see Figure 4).
If you extend the use of UW-CBDC to both personal and business users (from wholesale to retail), it's actually the Facebook Libra model.
(3) Facebook Libra
1. Libra operating mechanism
The following introductions to Libra are organized from the Libra Association (2019).
Libra is a composite currency unit based on a basket of currencies. Facebook claims that Libra will have stability, low inflation, global acceptance and fungibility. Libra's currency basket is expected to consist mainly of the US dollar, the euro, the pound and the yen. The Libra price is tied to the weighted average exchange rate of this basket of currencies, and although it does not anchor any single currency, it will still show lower volatility.
Libra is issued based on a 100% legal currency reserve. These French currency reserves will be held by investment-level custodians around the world and invested in bank deposits and short-term government bonds (that is, the investment style of the central bank's foreign exchange reserves). The investment income of the French currency reserve will be used to cover the operating costs of the system, ensure low transaction fees and dividends to early investors (ie “Libra Alliance”, see below). Libra users do not share the investment income of the French currency reserve.
The Libra Alliance will select a number of authorized resellers (primarily compliant banks and payment agencies). Authorized dealers can trade directly with the French currency reserve pool. The Libra Alliance, Authorized Dealers and the French Currency Pool have linked Libra prices to the weighted average exchange rate of a basket of currencies through a two-way exchange between Libra and French currency.
The Libra blockchain belongs to the alliance chain. Libra plans to recruit 100 verification nodes early and support 1,000 transactions per second to cope with normal payment scenarios. The 100 verification nodes form the Libra Alliance and are registered as non-profit organizations in Geneva, Switzerland. Currently, Libra has recruited 28 verification nodes, including companies, non-profit organizations, multilateral organizations and academic institutions located in different geographic regions. The governing body of the Libra Alliance is the Board of Directors, composed of member representatives. All decisions of the Libra Alliance will be made through the Board of Directors, and more than two-thirds of the members of a major policy or technical decision will be required to vote.
2. Analysis of Libra
The information disclosed by the Libra Association (2019) is very limited. The following analysis is best effort, and try not to introduce additional assumptions or guesses.
(1) Libra from a currency perspective
Super sovereign currency. Zhou Xiaochuan (2012) has a profound explanation of the super-sovereign currency. Libra does not have a currency creation function because it represents a basket of currencies that already exist. Libra's 100% is based on the French currency reserve pool and does not generate a coinage tax. Libra has no real monetary policy. Therefore, Libra is far from being a non-state of currency .
If Libra is widely circulated and Libra-based deposit and loan activities occur, is there a currency creation? The answer is no, Libra-based deposit and loan activities will not create new Libra (Figure 12). The reason is actually very simple: First, the total amount of Token in the process of transferring between different addresses in the blockchain is unchanged, and Libra is no exception. Second, the only way to expand the Libra issue is to increase the French currency reserve.
Libra has a valuable storage function. But because of the currency network effect and the fact that there are no Libra-denominated goods or services in reality, Libra's trading medium and pricing unit functions will be limited in the early stage of Libra development. For example, consumers who use Libra to shop in a country may have to convert Libra to local currency during the payment process. This can affect payment efficiency and experience.
Libra can promote financial inclusion. Users who have a Calibra digital wallet on their mobile phone have the physical conditions to own and use Libra. Libra's transaction fees are low. Libra Alliance members have a rich industry background and a deeper understanding of user needs, which helps Libra to flexibly embed multiple aspects of user life and improve the convenience of users using Libra.
In the lower right area of Table 2 of Libra ("Private Issues + Retail"), there have been many stable cryptocurrencies (such as USDC). These stable cryptocurrencies are mainly used in cryptocurrency exchanges and do not really enter the daily lives of ordinary people. Whether Libra can become a real payment tool remains to be tested by the market. One limitation that cannot be ignored is the performance of the Libra Alliance chain. 1000 transactions per second certainly cannot support the daily payment needs of hundreds of millions of people. The Libra Alliance chain has a plan to turn into a public chain. The public chain is more open, but its performance is more limited. Will Libra, like Figure 7, combine the account paradigm to circumvent the performance limitations of the blockchain?
Finally, there are two issues worthy of attention: First, in countries with political economic instability and monetary policy failures (such as high inflation), can Libra replace the country's currency to achieve a similar "dollarization" effect? This can cause complex problems in monetary sovereignty. Second, with the passage of time, can Libra-denominated economic activities reach the volume of a small economy, thus becoming the optimal currency area in a certain sense?
(2) Libra from a risk perspective
The Libra Association (2019) did not disclose the Libra currency basket rebalancing mechanism, the French currency reserve pool management mechanism, and the two-way exchange mechanism between Libra and constituent currencies, making it difficult to accurately analyze Libra's market risk, liquidity risk and cross-border capital fluctuations. risk. Once the relevant information is disclosed in detail, we can analyze the risks in these categories and evaluate the corresponding prudential regulatory requirements. At present, it is definitely the following two points.
First, if the Libra French currency reserve pool implements aggressive investment strategies for the pursuit of investment income (such as a high proportion of investments in high-risk, long-term or low-liquid assets), when Libra faces concentrated, large redemption, the French currency reserve pool There may not be enough high liquidity assets to deal with. The Libra Alliance may have to "fire the sale" of the French currency reserve assets. This may put asset prices under pressure and worsen the Libra system's liquidity and even liquidity. Libra does not have the support of the final lender of the central bank. If Libra is large enough, the Libra run may trigger systemic financial risks. As a result, Libra's currency reserves will be prudently regulated, reflecting the requirements for bond types, credit ratings, maturities, liquidity and concentration.
Second, Libra naturally has cross-border payment capabilities, and Libra's use will be cross-border, cross-currency and cross-financial. Libra will have a complex impact on cross-border capital flows and will be prudently regulated for this risk.
(3) Libra from a compliance perspective
Libra involves multi-country and multi-currency and meets the compliance requirements of relevant countries. For example, there is a regulatory framework for issuing stable cryptocurrencies in the US and the Eurozone, and these regulations will apply to Libra. For example, the USDC must meet at least the following compliance requirements: first, the US Treasury Department has a virtual currency operating license under FinCEN; second, it operates a state-directed currency transfer license; third, the US dollar reserve is deposited in a FDIC-protected bank. Fourth, the authenticity and adequacy of the US dollar reserve should be regularly audited and disclosed by third parties; Fifth, the provisions of KYC, AML and CFT. In particular, in the area of AML and CFT, the Financial Action Task Force (FATF, an international intergovernmental organization) issued the "Virtual Assets and Virtual Service Providers: A Guide to Risk-Based Approaches" on June 21 (FATF, 2019). ).
to sum up
This paper studies the application of blockchain in financial infrastructure ("Token Paradigm"), and compares the similarities and differences between the Token paradigm and the account paradigm in carrying financial assets and transactions. We have found that these two paradigms have presented complex alternatives and complementary relationships in many application scenarios. Given the inherent advantages of the Token paradigm, its application to financial infrastructure is an unstoppable trend, but before large-scale applications, it is necessary to overcome some of the inherent shortcomings of the Token paradigm (for example, low performance, anonymous features such as KYC, AML, CFT, etc.) The difficulties caused).
The Token paradigm provides an understanding of Facebook Libra, stable cryptocurrency, inter-financial settlement currency, and central bank digital currency. This perspective helps us penetrate technical issues and focus on the core economics and regulatory issues in the legal currency sector. Facebook Libra implements a super-sovereign currency in a sense based on the Token paradigm, but there is no currency creation, far from currency non-stateization. Facebook Libra will face prudential supervision on statutory reserve management and cross-border capital flows. Facebook Libra will meet complex compliance requirements due to multiple countries and multiple currencies.
We believe that innovations such as Facebook Libra should not be regarded as “flooding beasts” on the one hand, to see the technological trends and economic logic behind them, and on the other hand, there is no need to analyze their possible myths. Introduce appropriate regulations.
Finally, it should be noted that account paradigms and Token accounts can carry securities and related transactions. This article focuses on the currency field due to space limitations. Readers interested in the securities market infrastructure can refer to the Financial Market Infrastructure Standards (CPSS and IOSCO, 2012) issued by the Bank for International Settlements Payment and Settlement (CPSS) and the International Organization of Securities Commissions (IOSCO) in 2012. The impact of the Token paradigm on this area can be found in the 2017 Research Report of the Bank for Payment and Market Infrastructure of the Bank for International Settlements (CPMI, formerly known as CPSS), Distributed Accounting Technology in Payment, Clearing and Settlement: An Analytical Framework (CPMI, 2017). The specific scheme design can be seen in DTCC (2019).
 Bank of Canada, Bank of England, Monetary Authority of Singapore, 2018, "Cross-Border Interbank Payments and Settlements".
 Bech, Morten, and Rodney Garratt, 2017, "Central Bank Cryptocurrencies", Bank of International Settlement (BIS).
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 Committee on Payments and Market Infrastructures (CPMI), 2017, "Distributed Ledger Technology in Payment, Clearing and Settlement: An Analytical Framework", Bank for International Settlements (BIS).
 Committee on Payment and Settlement Systems (CPSS), and International Organization of Securities Commissions (IOSCO), 2012, "Principles for Financial Market Infrastructures".
 DTCC, 2019, "Guiding Principles for the Post-Trade Processing of Tokenized Securities".
 Financial Action Task Force (FATF), 2019, "Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers".
 JP Morgan, 2019, "JP Morgan Creates Digital Coin for Payments". https://www.jpmorgan.com/global/news/digital-coin-payments
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Author: PlatON Zouzhuan Wei