Babbitt Column | Cash Pump: Libra

In the article " The Third Milestone in the History of Blockchain: Libra ", the author explains Libra's ability to improve financial infrastructure. Its grand vision of inclusive finance is worthy of deep thinking by blockchain practitioners.

Last year, the author published a paper on "Simulation and Thinking of Cash Social and Economic Activities That May Be Induced by Digital Money" at the Internet portal of Wudaokou Finance College of Tsinghua University. Although the article is somewhat boring, it explains how digital money can guide social and economic activities. Back to the cash society, it describes the cash social model that may be induced after the issuance of legal digital currency and the impact on the “old” financial products of deposits.

Economic activities based on digital currency have obvious cash social characteristics. Unlike current cash, digital currency is a currency that is endogenous to the Internet. It has no physical form and is purely electronic. Therefore, it does not have the characteristics of current cash and deposits that can separate physical objects from use. Deposits are derived from cash. The transfer of deposits is not accompanied by the movement of cash. The “money” and “account” are separate, but for digital currency, “money” and “account” are integrated, and “account” is "Money" moves, this is very obvious in the operating environment of Bitcoin. Therefore, the society in which digital currency is applied is likely to be a cash society, and the simulation cycle proposed in this paper also proves that this system is possible.

This kind of behavior change is likely to have different effects on the business model of commercial banks, the monetary policy of the central bank, and monetary behavior. For example, the weakening of the money multiplier will have an impact on the money supply policy. People's currency use behavior may be closer to the ancient society dominated by physical currency use than the credit currency era supported by the banking system when e-banking has not yet arisen.

And Libra's activation is likely to drive this process. Libra is 100% deposit reserve, which actually means that Libra is a "pumper" for French currency. The user provides the legal currency to the Libra franchisee, and the franchisee transfers it to the Libra Association for coinage, so the currency is "storage" and Libra enters circulation. As Libra develops into a virtuous circle and ecological development is getting better and better, Libra can exchange for more goods and services, and users will increasingly not exchange Libra for legal currency because the legal currency has no flexibility and programmable. Sex and many other advantages. Therefore, when Libra is “popular”, more and more French currency will be “frozen”.

But according to the logic of the author's previous article, Libra brings not only the change of currency form, but the change of currency use behavior. The whole society tends to circulate Libra's electronic cash, rather than deposit as a cash book symbol. But cash has no multiplier effect, and the mobility of the whole society will also drop significantly. If you simply calculate the deposit reserve ratio of 10%, then the legal currency that is frozen by Libra may bring about 9 times less liquidity reduction, that is, the increase of Libra reserve of 1 billion US dollars may bring 90 The liquidity of billions of dollars is reduced, which is a very powerful "pumping effect."

A simple electronic cash society does not require banks to act as a medium for funds. The purpose of "deposits" will also change greatly. Depositors treat deposits as an investment method that can obtain excess returns because they do not need banks. He provides financial security and financial circulation services, and banks can't create credits by playing money in the form of current deposits. Because banks are also releasing electronic cash, this is the particularity of electronic money.

Libra does have the potential to make this happen, but the drastic reduction in liquidity may be offset by a rise in the purchasing power of money caused by the “scarcity” of money, but the new currency issuance mechanism will eventually be discussed.

Although the above analysis seems to be early, it is also a problem that regulators must face because regulators must be responsible for financial stability, and the problems caused by the rapid switching of currency patterns are necessarily the focus of their attention.

Despite the extraordinary challenges faced by regulators, digitalization is a worldwide trend. The complete digitization of money is only a matter of time. Stabilizing coins is still the best digital currency experiment model currently available, and it is hoped that Libra will provide more benefits to the world. The operating experience of the digital monetary system.

Author: Yu Yin