Evaluating Libra from the history, current status and future of the monetary and financial system

(This article has a total of 27,000 words, the expected reading time is 60 minutes)

Dr. Long Baiyi

Guide

In 2009, Satoshi Nakamoto invented Bitcoin, which gave a solution to the global financial crisis by means of technical geeks. Today, ten years later, Libra, Facebook's stable cryptocurrency project, was born in 2019, which has stimulated extensive discussion and enthusiasm in the new and old world. Many people regard Zuckerberg as a geek hero who challenges the global financial industry hegemony and advocates financial openness and inclusiveness by one person, but what is the real situation? American bankers say that I don't care who rules the world, I am fucking as long as the coinage! Money transcends all government and military power!

As the most powerful power on the planet, how does the monetary system work? Who created the currency of this world? Who has profited from the creation of money? Who is affecting the rules of the monetary system on the planet? What is the real reason for the outbreak of the global financial crisis in 2008? What changes have occurred in the world after the financial crisis, and a similar financial crisis may occur in the future? Why do central banks care about blockchains and digital currencies?

After understanding these issues, this article shows the Libra's genius design to the reader. A magnificent cryptocurrency financial system was constructed on the fragile legal currency monetary and financial system. This is a skyscraper on the beach. Libra not only 100% protects the interests of the existing monetary system, but also satisfies all the appetites of the central bank for cryptocurrency regulation, and has also stimulated widespread enthusiasm and resonance in the new world. Libra through a systemized design, a small group of people monopolize the entire coinage tax revenue of the Libra economy. Libra's governance structure of surface democratization ensures the core team's long-term absolute control over Libra. China should learn and transcend Libra, and this article gives targeted advice. Libra is not the answer to Nakamoto's original dream. More precisely, Libra is a "Trojan horse" that brings the ruling power of the old world into the new world!

This article is divided into two chapters. The first chapter introduces the history, current situation and future of the monetary and financial system. Firstly, it describes the current situation of the monetary and financial system. Taking the US dollar as an example, it analyzes the principle of “loan creation currency” and the creation and distribution mechanism of the coinage tax. It introduces the key policy-making institutions of the global financial system and the central banks related to the Libra system. Including the Bank for International Settlements, the Financial Stability Board, the Federal Reserve, the European Central Bank, the Hong Kong Monetary Authority and the German Bank; etc.; reviewing the causes of the global financial crisis in 2008 and the progress of the industry in theory, practice and governance after the crisis: an overview of the G20 The improvement of the global banking regulatory framework promoted by /FSB highlights the full reserve banking program, the Chicago Project, which outlines the central bank's research work in the blockchain and CBDCs. In contrast to the analytical framework established in Chapter 1, the second chapter discusses the Libra project. Firstly, it evaluated the elements of the Libra project to realize the full reserve bank of Chicago, discussed the Libra coinage tax and its attribution, evaluated the shortcomings of Libra's financial stability, discussed Libra's governance structure, democracy and openness, and analyzed China's response. mechanism. Readers are advised to read the first chapter in full. Even if you are a monetary and financial professional, the content presented in this article may not be exactly the same as your knowledge.

Chapter 1 History, Current Situation and Future of the Monetary and Financial System

First of all, it is necessary to have a basic understanding of the actual situation of the operation of the monetary and financial system. This chapter outlines the history of money, the mechanism of creation, the tax and its vesting, and the current major global financial system policy-making bodies, so that readers have a basic understanding of the operation of the monetary and financial system.

Currency origin

The history of money includes different historical stages of credit currency, commodity currency, and barter exchange. A typical description of mainstream macroeconomic and monetary and financial textbooks is that money originated from the initial bartering and gradually evolved into the final development of commodity currencies to credit currencies. However, the current monetary and financial scholars (the academic circles do not equal textbooks) believe that some regulators also agree that the theory of currency origin of barter exchange lacks a basis. The new view is actually the earliest credit currency originated from the palace of the Babylonian era in 3000 BC. With the development of regional trade, with the development of regional trade, a commodity currency based on gold and silver has emerged. After the Roman aristocracy and the big landlord class came to power, they seized a large amount of gold, silver and land through monopoly trade. After the ancient Rome, Europe was due to domestic gold. The lack of silver, in a certain historical stage, the local people have to trade in the form of barter exchange, and the credit currency has been redeveloped in modern times. An outstanding American economist and distinguished financial historian Michael Hudson has an incisive description of the origin of money [1] ,

Michael Kumhof also has an overview of currency history in the Renewed Chicago Plan [2] . This article does not discuss the origin of the currency, but puts the focus of the discussion on credit/derivatives.

Currency creation mechanism

The main issuance mechanism of the legal currency is that the currency issuer (such as the central bank) mortgages certain assets as reserves to issue currency. Observing the central bank's balance sheet, the debt side is the currency issued by the central bank. Generally speaking, the main reserves of the asset side contain a small amount of gold, most of which are foreign exchange, local currency bonds, various sovereign bonds and other bonds. Foreign exchange is the legal currency of other sovereign countries. Therefore, it can be considered that the legal currency is mainly based on the currency issued by the national credit, and the national debt is the most important reserve . The central bank issues money in the form of coins (coins are issued by the Treasury in the US rather than by the Federal Reserve), banknotes and reserves. Coins and banknotes are currencies that enter the circulation field. Reserves do not enter circulation. They are deposits from central banks in various commercial banks (or other financial institutions that have the right to open reserve accounts).

General currency, including coins and banknotes, and demand deposits from commercial banks . The central bank opens a reserve account for commercial banks, and through the interbank payment and clearing system, the demand deposits of commercial banks essentially have the purchasing power equivalent to coins/banknotes. For an economy, savings do not increase the total amount of currency in circulation, but only the flow of stocks within the banking system. (Before the central bank implemented a quantitative easing monetary policy on a large scale), the new demand deposits mainly came from loans issued by commercial banks. When the bank issues a loan, it adds an asset item of the loan to the asset side of its balance sheet (the future borrower repays the interest and principal according to the agreed timetable), and adds a credit of the same amount to the liability side. Deposit item (issued to the borrower). The amount in this demand deposit immediately has the purchasing power equivalent to cash. When the loan is returned, the currency is destroyed. Therefore, banks do not need pre-existing currency to issue loans, but “ create money at the same time as the loan is issued and destroy the currency when the loan is returned ”. In addition to the demand deposits of commercial banks, the shadow banking system can also create currency equivalents (money market fund shares) through the money market. Unless otherwise stated below, the discussion of currency does not include the shadow banking system. According to the Bank of England, more than 97% of the currency is created by commercial banks through loans, which is 95% in the United States .

Although the real operating status of the banking industry is “creating money through loans”, almost all mainstream monetary and financial textbooks describe banks as “financial intermediaries, on the one hand absorbing savings and on the other hand granting loans”. This is the so-called " financial intermediary " theory of banks. At the same time, the commercial bank deposits the depositor's funds in a certain percentage (the so-called “deposit reserve ratio”) into the central bank's reserve account, and the remaining funds can continue to lend. The borrowed money is deposited into the bank through the new depositors (may be other banks), the bank continues to deposit a certain percentage into the central bank reserve account, and the remaining funds continue to lend. Therefore, given a certain initial capital, through this process of cyclic lending, the entire bank system can create a currency that is a multiple of this percentage. This is the classic theory of money multiplier . In the classic monetary theory, the central bank uses the tools such as reserve funds and deposit reserve ratios to constrain the size of commercial banks to create money.

In the course of the operation of the actual bank, central banks including the Bank of England and the Swiss National Bank have cancelled the savings reserve for nearly 20 years. Reserve accounts are used only for interbank payments and liquidation, and for commercial banks to manage short-term liquidity. Even central banks that retain the deposit reserve system, such as the Federal Reserve, are continually reducing their reliance on the tool. In the 1960s, the Vice President of the Federal Reserve said that "commercial banks first make loan decisions and then look for reserves." This shows that the reserve cannot bind new loans. The Fed’s 2010 work paper also clearly stated that “the currency multiplier is just a myth ”. Under the modern central bank's inflation target management system, the central bank will theoretically provide unrestricted provision for commercial banks. Therefore, it is not effective to restrict the scale of the creation of loans/currency by commercial banks through the deposit reserve requirement (the deposit reserve system of the Chinese banking system is effective, and this article does not discuss it).

Through the central bank's reserve account, commercial banks not only have the statutory purchasing power of the current account provided to the depositors, the commercial banks actually have the power to create money, and they have the right to access the central bank's balance sheet. This means that commercial banks can obtain liquidity support from the central bank in the event of a liquidity crisis. The central bank also acts as the “final lender” of commercial banks. When commercial banks cannot obtain liquidity support from the interbank market, they approach the policy rate (policy rate, which here refers to the central bank’s short-term loan interest rate for commercial banks. For example, The United States, referring to the federal funds rate, provides loans to banks. If the commercial bank is insolvent, if the central bank assesses that the bank’s collapse (such as the so-called Global Systematically Import Banks: GSIB) will have serious economic and social consequences, the central bank will intervene in the use of taxpayers. Funds help the bank.

Why can commercial banks kidnap the economy and be " big but not down "? Because commercial banks have created most of the currency in circulation. In countries with high concentration in the banking market, for example, large commercial banks in the UK account for nearly 90% of the total assets of the banking industry, and the top five commercial banks in the United States account for 54% of the total assets of the banking industry. In the UK, if a big bank goes bankrupt, it means that the entire economy immediately loses nearly 20% of its liquidity , and a large number of companies and households cannot make daily payments . This is indeed a disaster that no one can bear the consequences.

Most central banks pay interest rates on deposits in commercial banks' reserve accounts, and interest rates are close to policy rates. Generally speaking, the central bank tends to encourage commercial banks to invest excess reserves in the interbank market. Therefore, the excess reserve interest rate paid by the central bank to commercial banks will be slightly lower than the policy interest rate, thus encouraging commercial banks to invest excess reserves in banks. The market first seeks help from the interbank market when there is a lack of liquidity.

The current central bank's most important way to regulate liquidity is open market operations, which release and recover liquidity through repurchase operations based on eligible mortgage bonds. Commercial banks are equivalent to obtaining/returning liquidity (currency) by lending/recycling bonds to the central bank. Of course, only qualified dealers or banks can participate in the open market operations of the central bank.

The attribution of the coinage tax and the coinage tax

The coinage tax means the difference between the cost of the currency casting foundry and the currency in circulation and the real purchasing power represented by the currency, and the profit for currency casting. In the commodity currency era, the cost of currency casting is mainly the precious metals required to cast money, such as gold or silver. The coinage tax is owned by the currency foundry authority. After entering the credit currency era, the form of money is mainly in the form of numbers. Therefore, the broader definition of the coinage tax is the profit generated by the currency issuance department.

In the era of the legal currency, the situation of the coinage tax will be more complicated. Take the US dollar as an example. The US dollar currency consists mainly of cash (including coins and banknotes), reserves and bank demand deposits.

The dollar coin is cast by the US Treasury. On the Treasury's balance sheet, coins are treated as assets rather than liabilities. The coinage tax is the difference between the legal purchasing power represented by a dollar coin and its casting and distribution costs. According to the annual report of the US Mint, the casting cost of a 1 cent coin in 2016 is 1.5 cents, and the cost of casting a 1 dollar coin is about a few cents. The coinage tax belongs to the US Treasury and is actually the US government.

US dollar bills and reserves are issued by the Federal Reserve on the basis of US Treasury bonds. On the Fed’s balance sheet, banknotes and reserve metals are in debt, and national debt is an asset. Understand the costs and benefits of the Fed's currency issuance based on the definition of the generalized coinage tax. The cost of the Fed mainly comes from the interest expenses of commercial banks in the central bank reserve account deposits, the printing and circulation costs of banknotes and dollars, and the salary of the staff. The Fed’s income mainly comes from the interest income of holding US dollar bonds. The reserve is equivalent to the number of accounts in the computer system, with no manufacturing and distribution costs. The dollar printing cost of any denomination of banknotes is 5 cents, and the circulation cost is not large. Although the Fed labor cost is not cheap, it can be roughly ignored compared with the interest expense of reserve deposits. Therefore, in order to simplify the calculation, the Fed's income mainly comes from the interest income of the held government bonds, and the expenditure mainly comes from the expenditure of the interest deposit of the commercial bank reserve deposit. Therefore , the income of the Federal Reserve's coinage tax is roughly equal to the interest income of holding government bonds minus the interest expense of deposits in commercial bank reserve accounts . The Fed’s net income, except for 6% as dividends, is distributed to shareholders, and the remaining 94% are all turned over to the US Treasury [3] .

In the five years before the 2008 Global Financial Crisis (GFC), the Fed’s average annual contribution to the Treasury was $23 billion. Since 2010, the Fed’s average annual contribution has been $86 billion. After the GFC, the Fed bought a lot of low-priced securities during the crisis and sold them all after the crisis, so it was profitable. It seems that most of the dollar coinage tax has been allocated to the US government, but it is not. In normal years (that is, the Fed does not profit from the low-priced securities purchased during the sale crisis), most of the Fed’s expenditures are interest on commercial bank reserves. In 2017, the Federal Reserve paid nearly $26 billion in reserve deposits to commercial banks. interest. If the interest income of the Fed holding government bonds is regarded as the coinage tax, the commercial bank actually participates in the distribution of the subject of the coinage tax.

In the United States, commercial banks create 95% of the currency in circulation. The cost of creating money by commercial banks is mainly the cost of obtaining funds. Commercial banks obtain funds mainly from several sources, such as stocks (equivalent to retail funds), interbank markets (financed funds) and central banks (as final lenders), and share capital. . The cost of obtaining funds is the lowest, and the interbank market is slightly lower than the central bank's benchmark interest rate, with the highest share capital. For example, current US retail bank depositors have a demand deposit interest rate of 0.01%, and the interbank market and central bank benchmark interest rates are close to 2-2.25%. The comparison between 0.01% and 2% is very surprising, but this is the real situation. This also explains why commercial banks do not need pre-existing deposits to lend, but they also make great efforts because the bank's capital cost from this channel is the lowest. It also explains why banks tend to reduce their equity expenditures because the cost of capital obtained through equity financing is the highest. This is the case with the global banking system, but this article does not discuss this issue. The bank's income mainly comes from the interest income from lending, so the bank's coinage tax is actually the bank's spread income . (Data from FDIC) [4]

The top five commercial banks in the United States had a total asset size of 9.7 trillion US dollars in 2018, and the total assets of the US banking industry was 17.9 trillion US dollars, accounting for 54%. At the end of 2018, the balance of US banking loans was 10.14 trillion US dollars, and the average spread of the US banking industry in 2018 was 3.45%. Therefore, the net interest margin income is nearly $350 billion. Further analysis, this $350 billion is the net interest income (interest income – interest expense) of commercial banks. It is described earlier that commercial banks need to pay interest costs for obtaining funds from multiple sources. The Fed's federal funds rate can be understood as the upper limit of the interest rate of the bank to obtain funds from the market. The Fed's 2018 average interest rate is 2%, so it can be estimated that the US banking industry's interest income in 2018 is nearly 200 billion US dollars. This 200 billion US dollars can be understood as the cost of commercial banks for "coin", then who is this 200 billion dollars paid to? This $200 billion was paid to net savers . Many people have both loans and deposits in the bank (or other forms of participation, such as providing money to banks through money market funds), so they pay interest and interest to the banking system. According to statistics, 60% of Americans cannot pay unplanned $1,000 bills, and only wealthy people have more assets to save. Finnish Patrizio Lainà's doctoral thesis "Full Reserve Bank" [5] provides detailed statistics on the net income level of different groups of people. According to the statistics released by the Federal Reserve two weeks ago, from the 1980s to the present, the wealth of the top 1% of the wealthy in the United States increased by 29 trillion US dollars, and the net wealth of the latter 50% decreased from 700 billion US dollars to -200 billion US dollars. Interested readers can further study that the net savers are distributed in the top 1% and 10% of the social wealth owners, and no answer is given here.

So a brief summary, in the US monetary and financial system, (without considering the shadow banking system), the Fed created banknote cash and reserves, commercial banks created nearly 95% of the currency in circulation, net savers, the US government and business. Banks have become the main beneficiaries of the coinage tax. In 2018, net savers, the US government, and commercial banks were allocated nearly $200 billion, $80 billion, and $350 billion in seigniorage taxes, respectively. The top five US commercial banks account for nearly 54% of the total assets of the banking industry, so their shareholders and executives are essentially the biggest beneficiaries of the dollar system's coinage tax. There may be a considerable overlap between net savers and commercial bank shareholder groups, so the distribution of the coinage tax may tend to be more concentrated .

The US 2018 GDP is 20 trillion US dollars, so the coinage tax (paid to the US government) accounts for about 3% of GDP. This can be understood as the cost of using money in society (including governments, businesses and households). Both Richard Verner and Michael Hudson pointed out that money is essentially a tool for the financial food class to transfer payments from the real economy [6] . The mainstream monetary and financial theory describes money as a rare thing, similar to land. Both land and currency are regarded as factors of production, and the production sector needs to pay for the use of production factors such as land and currency from the economic benefits it creates. From the description of this article, credit currency creation is actually based on credit. In theory, anyone can generate credit for anyone, that is, private credit is not a rare thing. In the modern banking system, the loan activity creates private credit. Through the reserve account opened by the commercial bank in the central bank, the commercial bank allows the private credit to obtain the statutory purchasing power; when the private credit faces the risk of default, the commercial bank passes the deposit protection plan and the government rescue. Plans, etc., private debt can be converted into public debt.

Global bank's main policy-making body

The World Bank and the International Monetary Fund are familiar and the introduction is skipped.

The Bank of International Settlement (BIS) is relatively low-key. It is indeed a real bank, except that its customers and shareholders are only 60 central banks and monetary authorities around the world. BIS was established after the First World War to manage German war reparations. In the following decades, after the Second World War, the establishment and rupture of the Bretton Woods system after the Second World War, the establishment of the European Union, and the establishment of the European Central Bank, BIS has seized the opportunity to successfully transform at every important historical juncture, and has now become the global banking policy research and formulation. The most important institution. The central bank governors join the BIS in their personal capacity, so the BIS is also known as the “Central Bank Governors Club”. The BIS includes multiple committees internally. The Basel Agreement I/II/III, a well-known global banking regulatory framework, was developed by BIS, and the GSIB mentioned above was also “certified” by BIS. Although becoming a GSIB will face more stringent regulations (such as higher capital adequacy requirements), but it is undoubtedly a "free death gold medal." When the regulatory or law enforcement department investigates or even pursues the bank, GSIB will make the bank offender, or reduce the crime, only impose a small amount of fines on the company, and the senior executives will be exempt from criminal punishment. As the other pole of the global banking industry, the establishment of the European Central Bank (ECB) can be said to be the product of BIS's progress in European integration. Headquartered in Basel, Switzerland, BIS is a truly super-sovereign international institution. Any sovereign country, including Switzerland, has no enforcement power over BIS, its executives and even buildings [7] .

The Financial Stability Board (FSB) was established in 2009 after the London G20 Summit and was commissioned by the G20 to provide observations and policy recommendations for the global financial system. It is sponsored and hosted by BIS, but does not have a reporting relationship with BIS. The FSB closely tracks the development of crypto-digital currency technology, and a recent report stated that “the (crypto digital currency) market is limited in size and currently poses no risk to the global financial system” [8] . The current chairman of the FSB is Fed Vice Chairman Randal K. Quarles, and the former is the current Governor of the Bank of England, Mark Carney.

The European Central Bank (ECB) is the first truly super-sovereign central bank to issue euros and implement monetary policy in euro-zone countries [9] . Although it does not have the financial power of member states, some systems have been established to effectively influence the fiscal policies of member states. ECB shareholders only include central banks in EU member states, but not every member of the central bank can be considered as state-owned, such as the Italian central bank is considered a private bank. The ECB has a high degree of independence. Although its leader's appointment requires the approval of the EU Council, it does not accept the directives of the EU's governing bodies and member governments. It is often criticized for its low degree of democratization and black box-like decision-making process. If a member country complies with the fiscal rules established by the ECB, its issued national debt is eligible to participate in the ECB-led bond purchase program, so its national debt is considered a risk-free credit asset. The ECB President Mario Draghi established this system, and the ECB has effectively corrected the financial speculations of Greece and Italy. In addition, the ECB has briefly closed the clearing channel with Greece to force it to comply with the ECB fiscal rules. Draghi also serves on the BIS Board of Directors and served as the first chairman of the FSB.

The Federal Reserve System is a central bank system of the United States that is a private banking system that is organized in private and that performs public purposes. The system is mainly composed of the Federal Reserve Board, 12 regional Federal Reserve Banks, and the Federal Open Market Committee. It has about 4,000 member banks. The Federal Open Market Committee consists of 12 voting members, including seven members of the Federal Reserve Board, the chairman of the New York Federal Reserve, and the remaining 11 regional Fed presidents, who rotate four seats each year to determine monetary policies such as interest rates and open market operations. The New York Fed’s status is detached, representing the Fed’s seat at the Bank for International Settlements, and its trading room and the Fed’s 22 tier-one brokers for open market operations. The Fed’s finances are independent of the U.S. government, and the U.S. government does not own shares in the Fed. The US government has appointed all senior employees of the Fed but cannot revoke their duties. Although the Fed is responsible to the Congress, members of Congress are unable to effectively regulate or hold the Fed due to professional restrictions. Jerome Powell is the current chairman of the Federal Reserve. The mystery of the Fed is that no one knows the actual owner. The Secrets of Federal Reserve shows that the Federal Reserve Bank of New York is the actual controller of the Federal Reserve. It provides the US President with a list of Fed senior employee nominees. The documents filed with the Office of the Comptroller of the Currency show up. In 1983, six Wall Street banks held a 53% stake in the New York Fed.

Because Libra clearly states that it is a currency board system similar to Hong Kong, here is a brief introduction to the linked exchange rate system of Hong Kong dollars. The most important duty of the Hong Kong Monetary Authority is to maintain monetary stability within the framework of the linked exchange rate system. Hong Kong began implementing the Linkage System in October 1983, maintaining an exchange rate of US$1:7.8 with automatic interest rate adjustment. Since the implementation of the Linkage System, it has suffered external shocks, including the 87-year global stock market crash, the 1997 Asian financial crisis and the 2008 global financial crisis. The Hong Kong Monetary Authority has introduced a number of technical measures to maintain exchange rate stability, including strong exchange guarantees (guarantee to buy dollars from licensed banks at an exchange rate of 7.75 Hong Kong dollars to 1 US dollar) and weak exchange guarantees (guaranteed to 7.85 Hong Kong dollars to 1 The US dollar sells dollars to licensed banks) and the discount window provides liquidity for banks (through collateral for collateral to enter into repurchase agreements). In addition, the Hong Kong Government has an independent fiscal policy and a prudent financial management policy. It has accumulated a huge fiscal surplus. Therefore, the Link System will not be affected by supporting the government deficit, but may be subject to financial subsidies. The Hong Kong government's huge foreign exchange reserves are held and managed by the Exchange Fund to support the Link System. As of the end of 2016, the assets of the Exchange Fund were close to $460 billion, more than seven times the currency in circulation, reaching one of the highest levels in the world. In addition, the Hong Kong government is also supported by the huge foreign exchange reserves of the Chinese government [10] .

The German bank [11] system is quite different from the United States and Britain. The private banks, the savings bank [12] (saving bank) and the cooperative bank [13] (cooperative bank) constitute the "three poles" of the German banking industry. It accounts for about 70% of the total assets of the German banking industry and is relatively balanced. Unlike the US and UK private banks, which have a monopoly on the industry, Germany's top four private banks (for example, Deutsche Bank) account for about 12% of the bank's total assets [14] . At present, there are about 1,500 savings banks and cooperative banks, all of which are non-profit (or not profit-oriented) community banks. Each bank is an independent legal entity, and its personnel and assets are relatively small, mainly for local The project provides credit support. Their business indicators such as profitability, profit fluctuations, and operating costs have surpassed private banks, and none of the financial crises need to receive government assistance (both private banks). None of them has been bankrupt for 200 years. Through reasonable governance, community banks avoid the problem of agent of traditional big banks and provide effective accountability mechanisms. For example, a cooperative bank, a shareholder is a member, initially only absorbs members' savings and provides loans to members. The decision-making mechanism is one-person, one-vote, German law restricts mergers and acquisitions to community banks; regional operations, there is no competition between regions (the same region) Within, cooperative banks and savings banks have a competitive relationship; a number of cooperative banks in a larger region provide technology, training and even liquidity insurance services to individual banks in the form of alliances [15] . Germany has 1,200 hidden champions of the world (about 300 in the United States), mainly served by community banks. Savings banks and cooperative banks originated in Germany and have developed well in many European countries, such as France, Spain and Italy. In my opinion, the German banking system may be the best practice in the world, but because of the defeat of Germany in World War II, its model is not the flow of World Bank owners. The German community bank has a strong decentralization feature, which coincides with the decentralized democratization advocated by the blockchain. Its successful practice in the past 200 years provides an excellent reference for the blockchain decentralized structure governance. Therefore, although German banks are not the focus of this article, they are still listed for readers interested in open finance.

The root cause of the financial crisis

After GFC, the work of reviewing and reflecting on the root causes of the financial crisis is full of enthusiasm. This article extracts the views of Richard Verner, Adair Turner, Mervyn King, and Michael Kumhof. This is also the opinion that the author agrees with.

Lord Adair Turner, the author of Devil and Debt (the chairman of the Financial Services Authority in the UK during GFC), pointed out that the (credit) currency has endogenous instability, which comes from a debt-based monetary creation mechanism. Lord Mervyn King, former Governor of the Bank of England, pointed out in the book The End of Financial Alchemy that the root cause of the 2008 global financial crisis came from the national credit-based monetary banking system [16] . So how does this debt-based monetary system lead to a financial crisis?

Modern banks have created the largest amount of credit money through loans. The loan-based currency creation process is very fast. As long as the bank evaluates a loan that is profitable and risk-controllable, it only takes a few keystrokes to issue loans and create new purchasing power through the computer system. There are three uses for adding money.

The first use is to enter the field of productive investment , that is, to invest in the construction of new plants, or new technologies and new processes, etc., in the future can generate cash flow to repay interest and principal and obtain additional income. The use of such funds has a real contribution to economic growth.

The second use is for consumption . Before an economy's productivity has not improved, the products and services it creates in a unit of time are limited. As a result, new currency is used to consume limited products and services, with the result that the consumer price index (CPI), or inflation, is pushed up.

The third use is for the purchase of existing assets, especially real estate assets and financial assets. Asset purchases involve only the transfer of ownership, without the creation of new products and services, and therefore do not contribute to economic growth, which is called speculative investment . Because of the limited number of assets or the limited speed of asset additions, the addition of a large amount of money to chase limited assets will push up asset prices. After the asset price pushes up, asset holders are optimistic about the continued rise in asset prices and are willing to use the asset pledge to obtain more loans from banks and continue to use them for speculative investments. Banks are also optimistic about lending with value-added assets as collateral, and are willing to lend more mortgages. All market participants, including asset speculators (also borrowers) and banks, are optimistic about the continued appreciation of assets, so more loans are being issued and more new currencies are entering asset speculation. This is a self-reinforcing process (procyclical), and asset prices are pushed up quickly to form asset price bubbles. The optimism of the market as a whole cannot last forever. At some point, market sentiment is reversed, or asset speculators find that his income or the value-added portion of his assets cannot pay his loan interest (the so-called "Minsky moment") and default, or It is the bank that feels that the risk will come and stops the new loan or recovers the loan in advance, resulting in asset selling. As with the asset price boom, asset selling is also a self-reinforcing process that triggers an avalanche of asset prices. This creates a boom in asset prices and a broken asset price cycle. The asset price cycle is the root cause of the financial crisis. The borrower accumulates a large amount of debt during the asset price bubble phase, and this debt does not decrease as the asset price breaks down. After the financial crisis, the de-leverage of families and businesses was triggered. Household de-leveraging means reducing consumption and increasing savings, and corporate de-leveraging means reducing investment. Therefore, the de-leverage of households and businesses leads to a reduction in economic demand and a long-term economic recession. Therefore, the financial crisis triggered an economic crisis and brought about a long-term recession.

Turner pointed out that for three uses of money, more than 80% of new currencies enter asset speculation, and less than 10% of new currencies are used for productive investment.

The banking industry naturally prefers loans for the third purpose. This is because from the banking perspective, the loan borrowers of general productive investment are new businesses, not only have higher risks for investment projects, but also lack of available collateral, and the banking industry lacks the ability to evaluate individual projects. . But mortgages are different. First, the risk assessment of real estate assets or financial assets is relatively standardized. Banks can easily implement pipeline operations. In addition, the value of collateral, especially the value of continuous value-added, makes banks feel safe, even if In case of default, the redemption of the collateral can also be cancelled to recover the bank losses. For a long time before GFC, real estate mortgages have been regarded by the banking industry as one of the safest assets.

Verner, Kumhof and Turner all point out that credit creation and distribution is a huge privilege that can influence the economic situation very effectively. In order to avoid or weaken the impact of the financial crisis, it is necessary to control the total amount and distribution of credit , encourage credit/money flow to productive investment and curb its flow to speculative areas. All three of them praised the "credit guidance" implemented by the People's Bank of China and its supporting industrial policies to a different extent, which played a key role in China's economic miracle in the past few decades.

Monetary and financial reform movement after GFC

After the GFC, central bank officials, scholars, and civil currency movement organizations are actively exploring from theory and practice. Prior to GFC, the theoretical basis of global banking governance was largely based on financial liberalization represented by Hayek [17] , advocating for regulation and allowing the market to play its regulatory role. Since Hayek won the Nobel Prize in the 1970s, he became the standard bearer of financial liberalization. His theory provided the theoretical basis for the IMF's global financial liberalization movement since the 1980s. US President Ronald Reagan and British Prime Minister Margaret Thatcher are both faithful followers of Hayek. The financial liberalization movement is accompanied by a large-scale supervision of the global banking industry. The former Fed Chairman of the FFC (especially Greenspan) is pushing the banking industry. Regulated and praised. In 2003, Robert Lucas, the president of the American Economic Association, confidently declared that "the core issue of preventing the depression has been resolved." In 2006, the IMF believed that financial innovation "enhanced the stability of the financial system" and made it possible for commercial banks to close down. Sex becomes smaller. However, all these illusions came to an abrupt end in the summer of 2008.

Bank theory reflection and exploration after GFC

The tragic consequences of GFC have led many prophets to reflect on the theoretical basis of bank governance, currency creation, government and private control of currency creation, and free flow of international capital.

At the 2016 Annual Meeting of the Institute for New Economy Thinking (iNET), Soros pointed out that the efficient market hypothesis and the rational expectation hypothesis are the two "fundamental flaws " of classical economics . iNET Chairman Adair Turner pointed out that modern macroeconomics largely ignores the operation of the financial system, especially the role of banks, and criticizes the classic financial textbooks on the theory of "financial intermediation" of banks, the essence of global banking It is the bank that creates money through loans . Turner was amazed at why the theory of "banks creating money through loans" that formed the mainstream consensus in the early economics era completely disappeared from modern financial textbooks, so that students in economics/finance majors received wrong education in schools. Turner pointed out that the reason why contemporary economists make mistakes comes from the "fatal conceit" that believes that the free market can always produce optimal results. This conceit and Hayek have criticized "the deadly conceit in the socialist planned economy, not only makes The planned economy is not advisable, and it is impossible to succeed in “similar [18] .

Former head of research at the IMF, the head of research at the Bank of England, Michael Kumhof, criticizing other economists who support the theory of "financial intermediation", said, "They don't know what they are talking about… I can use more harsh words." He and the former IMF colleague Zoltan Jakab's paper [19] proposed a bank modeling framework based on the theory of "commercial banks create money through loans", the framework's DSGE (dynamic stochastic general equilibrium model, the current central bank research macro and monetary policy) The main tool) simulation results accurately match the real financial cycle data, and has been adopted by many monetary policy institutions such as the IMF and the People's Bank of China.

The author of the best-selling book "Yen Prince", the inventor of the quantitative easing (Quantitative Easing: QE) theory, the world famous central bank observer Richard Verner compared three kinds of money creation theories in the paper [20] – financial intermediation, currency multiplier and bank loans Create money and prove the correctness of the latter through empirical methods. Verner criticizes the foundation of monetary interest rate theory in the paper [21] – the market equilibrium theory, which refers to its hypothetical deduction rather than the scientific method based on empirical induction (Turner also pointed out that contemporary economists in the "Debt and Devil" problem). He pointed out that in the field of quota restrictions, quantity rather than price plays a decisive role, so he proposed the "credit quantity theory" and suggested that the central bank's monetary policy needs to shift from price guidance to quantity guidance . In his paper [22] , based on the macro data of the United States, Britain, Germany and Japan over the past 50 years, he found that “interest rates follow GDP growth and are continuously positively correlated”. Nobel laureates Finn E. Kydland and Edward C. Prescott pointed out in Business Cycle: The Fact and the Myth of Money [23] that “although there is no evidence to show the monetary base or the M1 lead cycle, some economists still believe in this currency. Myth… M2 shows some evidence that it leads the cycle for a few quarters…". We have already seen that although the central bank still uses interest rate policy instruments, it increasingly relies on open market operations and QE quantitative policy tools.

When talking about government or private control of currency , Turner made it clear that “money is a social public infrastructure. It is different from hotels, tourism and other services that can be completely handed over to the market economy. Money cannot be given to chasing profits. The private sector of the purpose . The 2008 financial crisis showed that it is not reliable to hand over money to the private sector and to hand over money to the government." Turner and Kumhof also mentioned that “after the Great Depression in the 1930s, the Chicago School economists, including Henry Simons, Irving Fisher, and Milton Friedman, were the pioneers of market economics, but without exception. Unanimously agree to hand over the power of currency casting to the government." Former Chinese central bank governor Guo Shuqing said at the end of 2018 that "the private sector can participate in the digital currency system, but it needs to have a public spirit." It can be seen that currency has been an important public infrastructure among past and modern mainstream economists and regulators, and this has been widely recognized. Kumhof also briefly reviewed the history of government and private sector currency control in the paper "Revisiting the Chicago Project." Evidence shows that in the historical stage of the government's control of the currency in the history of mankind, the economic performance is better than the period of private control. After the First World War, Germany's super inflation was widely spread as a typical case of the failure of the government to control the monetary system. Kumhof also clarified this history. At that time, the governor of the Bundesbank stated in his autobiography in the 1960s that the history was actually super-inflation caused by private control of the central bank’s indiscriminate currency and frantic foreign exchange speculation.

When talking about the free flow of international capital, Turner gave a suggestion of “anti-marketization”. Prior to GFC, the mainstream idea was to support international financial integration. The “Washington Consensus” even urged emerging market economies to promote domestic financial market liberalization and capital project liberalization. But the BIS Global Financial Systems Committee's 2009 Capital Flows and Emerging Market Economies pointed out that “although the world's countries have made extensive cross-country analysis of the impact of capital account liberalization, the evidence supporting liberalization to promote economic growth seems very limited” . The large-scale inflow and outflow of capital in a very short period of time will make monetary policy implementation and liquidity management in emerging market economies more complicated. Turner believes that if the global capital market is excessively free, it may create too many wrong capital flows. Global debt capital flows may undermine financial stability in emerging market economies. In the euro zone, unstable debt capital flows are one of the important reasons for the 2008 European debt crisis. Net capital flows are out of touch with effective capital investment. Most capital flows do not flow from rich countries to poor countries, nor do they support sustainable capital investment. Conversely, capital flows tend to flow from poor countries to rich countries or between different countries with comparable income levels (such as the European Union). Capital supports unsustainable consumption, extravagant investment, and speculation in existing assets. Many capital flows have increased the scale of unsustainable debt creation and exacerbated the debt backlog in the post-crisis period. Therefore, Turner suggested that “should have some obstacles to the free flow of international capital, and a certain degree of division of the global financial system is also a good thing”.

Improvement of the global banking regulatory framework promoted by the FSB

In 2009, the G20 has promoted a series of financial regulatory reform measures aimed at reducing the possibility of future financial crises and weakening its effectiveness [24] , and the FSB is responsible for specifically promoting these measures.

The first is to implement the improvement of the global banking regulatory framework set out in Basel III , aimed at improving the resilience of the banking industry against reverse shocks. The agreement requires banks to have higher capital adequacy ratios, liquidity ratios, leverage ratios, and ratios of stable funds. For the first time, banks are required to provide additional capital buffers for countercyclical periods. In order to avoid the moral hazard of banks “big but not down”, the new agreement requires additional capital requirements and bank disposal frameworks for large banks and GSIB. The requirement for their total loss-absorbing capacity (TLAC) is to ensure that they issue a sufficient number of self-help debt instruments so that they can avoid using taxpayer funds to dispose of the bank. But the new agreement still faces some criticism. For example, King criticized the new agreement as too long in the End of Financial Alchemy, and the thousands of pages of the text were not only difficult to understand, but also greatly increased the compliance costs of banks (especially small banks). King recommends simple and clear regulatory indicators that are easy to understand and enforce. For example, he suggested that the “all-weather pawn shop” central bank, its regulatory liquidity ratio indicator requires that all the short-term (one-year) liquid assets converted by the bank after the haircut discount is greater than or equal to all the mortgage discount rate. The sum of the converted short-term liquid liabilities. King recommends an asset-presetting mechanism, in which commercial banks expose their own set of assets to the central bank in advance, which continuously evaluates the mortgage discount rate of assets. When commercial banks need liquidity support, the central bank can immediately base on the pre-defined asset portfolio and then mortgage. The discount rate is quickly provided to avoid the asset "selling the sale of the hotline" and improve the efficiency of liquidity supply. The Australian Central Bank has begun to implement such a mechanism. Turner believes that banks should be more restrictive in their ability to create money. Banks should require higher capital adequacy ratios, such as 25-30%. It is considered that the requirement of 1-2% countercyclical capital buffer is too small to be practical. Richard Verner criticized the European Central Bank for implementing the new agreement, which is actually going to reverse the elimination, and is “killing” German community banks that are operating steadily but cannot afford the new agreement compliance costs. The German banking system and the US-British banking system are quite different. The governance structure has a strong decentralization feature and has a strong reference for the bank governance structure of encrypted digital currency.

Prior to GFC, the shadow banking system created a large amount of currency equivalents but did not receive effective supervision by the central bank. After the GFC, the FSB promoted the development of regulatory measures for the shadow banking system , including regulation of money market funds and securitization, with the aim of reducing the systemic risk of non-bank financial intermediaries and transforming shadow banking into flexible market-based financing institutions. Turner criticized that financial innovations such as securitization, structuring, and derivatives of the banking industry were excessive. Although they were not the culprit in GFC, they blocked risks, increased capital costs, and increased systemic risk.

The FSB has also promoted regulatory policy development in the derivatives market in an effort to make it safer and more transparent, with new requirements including transaction reporting, central clearing, platform trading and margin and higher capital requirements for derivatives that are not centrally cleared.

After the GFC, the central bank developed unconventional monetary policies, such as QE and credit allocation guidance, which also reflected changes in monetary and financial theory after the crisis. QE refers to the central bank injecting liquidity into the market by purchasing financial assets (such as bonds and stocks) from the open market. Although the United States, Britain and Europe (Europe refers to the "Eurozone", the same) the central bank relies on multiple rounds of large-scale QE operations to barely break away from the economic recession, but the QE transmission mechanism is very suspect, the most direct result is to push up asset prices, let business Banks have an excessive amount of reserves but have not been able to effectively stimulate the demand for commercial banks to lend.

Revisit the Chicago Plan and other civil currency reform movements

The monetary and financial industry and the private sector are also pushing for the reform of many currency movements. Although multiple project names are different, such as The Narrow Bank (TNB), Limited Purpose Banking [25], and Positive Banking, most of them contain a common feature – the full reserve bank (100% reserve bank). The Italian-funded currency finance scholar Patrizio Lainà's doctoral thesis "Full Reserve Bank" summarizes and compares all historical and current programs with full reserve banking characteristics.

After the Great Depression in the 1930s, many economists, including Henry Simons, who later became the founders of the Chicago School of Economics, proposed abolishing part of the reserve system after profoundly rethinking the lessons learned by commercial banks in creating excessive money and triggering financial crises. The full reserve bank plan is called the "Chicago Plan." Later, several economists including Irving Fisher and Milton Friedman also endorsed the plan. Regrettably, at the time, the plan was too radical and met with strong opposition from the banking industry, which ultimately failed to implement. After the GFC, various forces are rethinking the possibility of a full reserve bank. Michael Kumhof, then the deputy director of the IMF's research department, has the most complete work and attention, so this article focuses on this work.

The original intention of the full reserve bank is to separate the bank's monetary and credit functions (in the context of the credit currency mentioned in this article, currency and credit can be exchanged, which also fully reflects the core characteristics of contemporary credit currency), requiring banks to deposit all deposits of depositors. Provide 100% support from government-issued (non-debt-based) currencies. Kumhof used the superb DSGE modeling tool to model the Chicago project, and the simulations validated Fisher's four advantages of the Chicago project:

First, the central bank can better control the credit cycle by avoiding banks creating money during the credit boom phase and destroying the currency during the subsequent contraction phase (meaning to eliminate the ability of commercial banks to create money);

Second, completely eliminate bank runs;

Third, the government is allowed to issue currency directly at zero interest rates instead of borrowing money from banks and paying interest. This not only reduces the interest rate burden of government financing, but also significantly reduces the government's net debt, because the currency issued by the government represents the government's assets rather than debt;

Fourth, because money creation no longer needs to create (private) debt on the bank's balance sheet, the entire economy will see significant reductions in public debt and private debt.

In addition to the above four points, Kumhof's simulation results also found that Chicago plans additional benefits, interest rate traps no longer exist, can maintain zero inflation stability without affecting the implementation of monetary policy.

In the Chicago plan, the government-issued debt-free currency is called the treasury credit and is considered the government's equity rather than debt. A thorough understanding of non-debt currencies is extremely important for understanding the essence of the Chicago program. We know that the currency on the Fed's balance sheet belongs to the debt, and the national debt belongs to the assets; on the balance sheet of the US Treasury, the national debt belongs to the debt, and the currency belongs to the asset. If the Fed is considered part of the US government (though not actually), and the balance sheet of the Treasury is merged, then most of the national debt and currency are offset, and the remaining equity (which may be positive or negative) is The real equity assets of the US government, the composition of the Treasury credit in the Chicago program.

The creation of debt is very easy , and several inputs to modern computer systems can create new debt. A debt-based monetary system, whether controlled by the government or the private sector, claims for short-term (political) interests or human greed, may trigger a surge in debt and lead to excessive money supply. Non-debt-based monetary expansion is limited by the creation process of its reserves due to reasons such as productivity or raw material supply, whether the reserve is physical gold, or accumulated fiscal surplus, or bitcoin.

After the implementation of the Chicago plan, commercial banks will no longer be able to “kidnapple” the economy. In the Chicago plan, depositors' deposits are 100% supported by government-issued non-debt currencies and are therefore absolutely safe; money creation and supply are more stable and unaffected by the bankruptcy of commercial banks. Therefore, the bankruptcy of commercial banks will not affect economic stability, and the Chicago plan can indeed solve the fundamental systemic risks of modern banking. The traditional bank system's deposit protection plan and government bailout plan can be abolished, further reducing the overall cost of the banking industry.

Because the central bank no longer provides deposit protection plans and government bailout plans for banks, depositors will be more proactive about the safety of their own funds and will actively participate in the risk management of bank lending. Commercial banks will also be forced to manage credit risk more responsibly and reduce speculative investments. The moral hazard of traditional commercial banks will be fundamentally eliminated. Depositors with the same risk appetite will be pooled to participate in credit investments that match their risk appetite, and commercial banks may be required to invest their own funds (equity, profits or borrowed funds, etc.). Therefore, in the Chicago plan, the business structure of the bank lending function will be significantly different from the traditional lending, and may be closer to the current mutual fund. The Limited Purpose Banking and Positive Banking suggest business forms similar to mutual funds.

Chicago plans to eliminate the underlying causes of instability in modern banking systems – debt-based monetary systems and commercial banks creating credit currencies. The cumbersome and lengthy regulatory framework of the modern banking industry, such as the Basel Accord, can be understood as how to reduce the risk of the financial system under the premise of "defending" the commercial bank's privilege of creating credit currency. The implementation of the Chicago program can greatly simplify banking regulation. Most macro-prudential strategies related to leverage ratios, liquidity ratios, and capital adequacy ratios can be eliminated or significantly simplified, with central banks focusing on micro-prudential strategies such as fraud and consumer protection.

The Chicago plan does not clearly define the account system of commercial banks, and still retains the current secondary clearing system of central banks and commercial banks. Different full reserve banking schemes may differ in the setting of the bank account system, but this is only a technical level difference and does not affect their substantive identity. For example, Positive Banking recommends that bank accounts be divided into trading accounts and investment accounts. The trading account is actually the central bank's reserve account and is responsible for payment. The investment account is similar to the deposit account in the form of a mutual fund as described above. Therefore, Positive Banking actually proposes to open the central bank reserve account to the whole society.

There are also private sponsors to set up and operate real full reserve banks. For example, Plaintiff TNB Bank, initiated by former New York Federal Reserve executives in 2018, sued the New Zealand Federal Reserve for refusing to open a reserve account. The bank has implemented TNB's business model, which aims to collect depositors' funds into the Reserve Bank's reserve account, and only lend money from these funds (that is, not to create money through loans but only to lend existing deposits). These deposits enjoy the Fed’s reserve interest (or excess reserve interest). In March 2019, John H. Cochrane, a well-known economist at Stanford University and author of Asset Pricing, wrote a slam on his blog "The Evil Economist" and slammed "The Fed is the protector of monopoly banks." "These vague, unscientific, speculative and incoherent arguments — many of which would make easy spot-the-fallacy exam questions — make you look foolish" [26] .

Central Bank's research on blockchain and digital currency

BIS began research in 2003 on areas such as central bank money, digital currencies, and retailer fast payments and access to central bank services. In 2017, BIS presented the famous “the money flower” in its quarterly commentary [27] , and a comprehensive review of the central bank digital currencies ( CBDCs) in March 2018. , analyzed its impact on payments, monetary policy and financial stability. Since then, the world's major central banks have been working on research on CBDCs. In 2016, Bank of England Kumhof calibrated pre-crisis US macro data through DSGE modeling in paper [29] , and found that CBDCs based on 30% of GDP issued by treasury bonds can permanently increase 3% of GDP, in addition to the price and quantity of countercyclical CBDCs. As a secondary monetary policy tool, the rules can significantly enhance the ability of the central bank to stabilize the business cycle. The ECB is essentially a driving force for the research work of BIS internal BBs. The research topics include liquidity management for CBDCs, interest rate payments, and currency exchange/concurrency/excessive phase execution plans.

A brief summary of the key areas of interest to CBDCs by global monetary policy and governance institutions:

The issuance of CBDCs is essentially the power of the central bank to “recapture” currency issuance from commercial banks;

The central bank issues CBDCs to make the creation and supply of money more stable, the monetary policy transmission mechanism is more effective, and it is easier to realize unconventional monetary policy including negative interest rates;

支付 Payment and clearing systems based on blockchain technology are more effective and reduce the cost of market infrastructure;

The blockchain technology provides the central bank with stronger control over the monetary system, including KYC, anti-money laundering, and counter-terrorism financing.

The blockchain technology of interest to policy institutions is mainly alliances rather than public chains. The fundamental reason is that the governance structure of the monetary and financial system does not match the decentralization mechanism of the public chain.

Chapter II Libra Project Evaluation

The attitude of the mainstream monetary authorities is clear, and the regulators of the Bank of America and Britain have expressed a clear supportive attitude. The agency that represents the G20's observations and policy development recommendations for the global financial system is the BIS-sponsored FSB. The current chairman of the FSB is the vice chairman of the Fed, and the governor of the Bank of England is the former chairman of the FSB. The FSB's recent report on encrypted digital currencies stated that “the current market value of the (encrypted digital currency) is not large and the current stability of the global financial system. No effect". The FSB claims that "the introduction of Facebook's stable cryptocurrency Libra requires a new regulatory framework." So you can be cautious and optimistic, even if FSB publishes an evaluation report for Libra, it is positive. The attitude of BIS/ECB 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.

Libra release mechanism

According to the white paper, Libra's issuance “takes a mortgage with a series of low-volatility assets – such as cash and government bonds from a stable and reputable central bank”. So it is clear that Libra has adopted a mechanism for issuing stable currency based on asset collateral, and the collateral is cash and government bonds. According to the white paper, each user on the Libra public chain can have multiple anonymous accounts, and the accounts can be transferred, paid and cleared directly.

According to the description of the “Chicago Plan” in Chapter 1, if the Libra Association is regarded as a central bank that stabilizes the cryptocurrency, then Libra belongs to the full reserve bank , its reserves are legal or government bonds, and Libra also opens reserves to the whole society. Account. This means that Libra is the only “coin” institution in Libra's monetary and financial system, and other institutions have no coinage rights. Traditional financial services, such as payment/loan and loan, are facing fundamental changes. Because the user can be regarded as the central bank reserve account at the Libra public address, the user account payment and clearing are completed immediately in the public chain, the payment service provider will no longer have the opportunity to create a pool of funds, and can not control the user's account, can not create financial lever. This forces service providers to focus more on providing account management services to users and developing other types of profitable businesses. Deposit and loan institutions (Libra Bank) will no longer be able to create currency , they can only lend existing deposits, which can be Libra Bank's share capital, accumulated undistributed profits and other funds borrowed. As a central bank, the association will no longer provide deposit protection plans and rescue plans for Libra Bank. The bankruptcy of Libra will result in the loss of the depositors themselves.

Chicago plans to emphasize that reserves must be non-debt-type currencies. Libra reserves, although debt-based legal or government bonds, can be considered as zero-risk credit assets to a certain extent, but they cannot be considered unleveraged. Commercial banks or shadow banks in the legal currency system can leverage leveraged funds to enter the Libra system for arbitrage. Libra reserves can also enter the shadow banking system through money market funds, which is Libra's biggest system vulnerability.

As a huge user group and social behavior data owned by social media giants, Facebook's financial behavior data combined with Libra project will likely form the most complete and most massive user behavior data. And all financial behavior data is trackable, auditable, and non-tamperable on the Libra blockchain. This is in full compliance with all the reasons why the central bank loves the blockchain, providing the central bank with unprecedented control , especially KYC, anti-money laundering and counter-terrorism financing.

Libra, as the full reserve bank of the world of currency, monopolizes the power of money creation. On the one hand, it does not bring additional systemic risks to the legal currency system, and on the other hand greatly simplifies the regulation of the cryptocurrency system. In the face of the unstoppable historical trend of cryptocurrency, the Libra project provided so much convenience to the central bank, and the author could not find a reason for the central bank to hinder its development.

Although Libra will not bring additional systemic risks to the traditional financial system, Libra is still unable to prevent commercial banks or shadow banks from bringing leveraged funds into the Libra system for arbitrage, nor can it prevent Libra reserves from entering the shadow banking system through the money market. Part of the global financial system risk.

Mint tax and coinage tax attributable to Libra's monetary system

Libra's issuance is based on 100% of the currency and government bond reserves, so every Libra issued in the Libra monetary system necessarily corresponds to a set of legal currency cash and government bond reserves. From the perspective of the legal currency financial system, using a set of legal currency reserves, the money user needs to pay the cost to the money creator, which means the coinage tax.

Combined with the description of the credit currency coinage tax in Chapter 1, we look at the generation and distribution of the coinage tax in the Libra system. To simplify the discussion, let's assume that Libra's reserve is 1:1 USD, assuming a US dollar policy rate of 2% (meaning the cost of a commercial bank creating a US dollar currency), and a commercial bank spread of 3% (meaning a commercial bank) To create a dollar-currency profit/credit tax, the average cost of using the dollar in the whole society is 5% (2%+3%).

Every time a Libra is issued, it needs to use one dollar as a reserve (the reserve means to be retained instead of one-time use), so it will increase the use of one dollar of currency for the real money financial system. The real monetary and financial system creates a dollar of currency for Libra users, and users who use this dollar to convert to Libra bear the cost of using this 5 cents (the 5 cents is the loss of user opportunity costs). This 5 cents is used for the cost of funds, of which 3 cents is reserved for the profit created by commercial banks, and the remaining 2 cents is paid to the net saver as the cost of creating money for commercial banks. Who is the net saver? Libra users exchanged a dollar for a Libra produced by the Libra Association, and the Libra Association now "owns" the dollar and entrusts it to a qualified custodian. This process can be understood as the association's cost-free access to a dollar of currency, which is transferred to the commercial bank savings system, so the association can be regarded as a net saver of commercial banks, which ultimately obtains the 2 cents of coins. tax. Of course, the Libra Association can get this full 2 ​​cents, and the association's dollar reserve needs to be the financial provider of commercial banks through the money market, but this is only technical details and does not affect the overall understanding.

What is the role of an authorized distributor? It is from the association "wholesale" Libra and then adds a certain price difference after "retail" to Libra users. Because Libra is positioned as a legal currency equivalent, the cost of money used by Libra users should not exceed the legal currency system (even if it is exceeded, it must be a very small amount). When using the legal currency for Libra, the user has already assumed the “full amount” of the legal currency currency cost (ie 5%), so the price difference of the authorized distributor must be “narrow” or the association’s own coin The “profit” in the tax credit is either imposed on the user by an authorized distributor.

To sum up, every time a Libra user converts a Libra to a Libra, he needs to bear the cost of 5 cents in the real money financial system. 3 cents of this 5 cents is allocated to commercial banks as their profit to create a dollar of currency (the coinage tax), and the association receives 2 cents of interest income (coinage) because it provides one dollar of funds to the real money financial system. Tax), authorized distributors as financial intermediaries between associations and users to earn a narrow price difference. The profits of authorized distributors can be made by the association or added to the user.

The above example was slightly modified, and now Libra's reserve pool is US dollar (short-term) national debt. Assuming that the user has converted the legal currency into an equivalent government bond based on the immediate price, the exchange process does not involve the creation of the coinage tax, and the handling fee is negligible. The yield on short-term government bonds is approximately equal to the policy rate, set at 2%. Now the association has obtained a dollar-equivalent bond at no cost and entrusted it to a qualified institution to earn interest. After the expiration, the association receives 2 cents of bond interest, which is considered part of the association's harvesting of the coinage tax. The interest income of this US dollar bond is actually the opportunity cost of the user holding a one-dollar bond, so it is regarded as the cost of money used by the user.

It seems that users will bear less cost, but this will create an arbitrage opportunity between the legal currency system and the Libra system. Libra is a legal currency equivalent. If there is a gap in the final capital cost of the two equivalent monetary systems, there will be arbitrage among market participants to drive the capital costs of the two systems to be equal. This arbitrage is an authorized distributor. Before the capacity of the Libra economy is large enough to affect the traditional economy, the capital cost of the final equilibrium will be 5%. Therefore, even in the case of selecting government bonds as a reserve, the final cost of capital for users will return to 5%. We know that 2% of them belong to the Libra Association, and the extra 3% will be shared by the Association and authorized distributors. In the process of distributing profits with authorized distributors, the association may gain a strong share, and may also facilitate the authorized distributors. Controversy or profit, this is at the discretion of the association. The 3% of the coinage tax will be dynamic between the association and the authorized distributors. In general, the central bank sets a mortgage for a mortgage-issued currency bond, and the association can set a marginal mortgage tax (which is more than 2%) for a less favorable mortgage discount rate for the same bond.

A similar conclusion can be drawn by extending the above example to a basket of legal and government bonds.

From the above analysis, we can draw the following important conclusions:

Libra's process of creating Libra (currency equivalents) is accompanied by the creation of a coinage tax, which is borne by Libra users; this cost is equivalent to the average social cost of use in the legal currency system;

If the reserve needed to create Libra is a combination of legal currency, the coinage tax can be broken down into two parts, one is the income generated by the commercial bank to create money, and the level of the interest rate difference of the bank; the other part is the cost paid by the commercial bank to create money. Related to the central bank's policy interest rate, the association has become a net saver to harvest this part of the proceeds because it has no cost to obtain legal currency reserves;

If the reserve needed to create Libra is a government bond portfolio, the association will enjoy most of the coinage tax and share a small portion to authorized distributors;

Authorized distributors' revenue comes from the narrow price difference of Libra distribution. The price difference can come from the association's profit or pass on to the user; in the case that the reserve is a bond portfolio, the association enjoys more space to distribute the authorized distributor.

The relationship with the legal currency system (mainly commercial banks) is mainly determined by the composition of the reserve pool, and the legal currency is still a bond. At the two extremes, all the choice of legal currency will protect 100% of the commercial bank's existing interests . The latter does not even need to explicitly participate in the alliance. The Libra economy's monetary income can be transferred without any omission; for example, all the bonds are selected , the Libra system is actually etc. In the parallel system of the legal currency, there is no such thing as a commercial bank. The part of the coinage tax revenue of the commercial bank is essentially allocated to the association. The commercial bank can not drink a soup in the Libra currency system . Therefore, the proportion of bonds in the reserve pool depends on the Libra Association's demands and needs commercial banks to cooperate or compete with them.

It can be expected that in the initial stage, the reserve pool will be dominated by French currency. When Libra's wings are hardened, it will gradually choose more debts to make reserves. Regardless of whether the choice of legal currency or government bonds as a reserve, the association “empty gloves white wolf” obtained the reserves from the Libra users and thus obtained the interest income of the reserves (as their own coinage tax), the difference is in the case of choosing the creditor’s rights. Next, the coinage tax previously allocated to commercial banks was transferred to the association.

This is a very important conclusion, which provides an important basis for us to assess the relationship between Libra projects and commercial banks and central banks, as well as the Libra system's interest pattern, governance and democratization.

So where is the motivation for commercial banks to participate in the Libra Alliance? The participation of commercial banks in the Libra Alliance can motivate users to use Libra, which translates into more demand for French currency use and increases the revenue of the commercial bank's coinage tax. In addition, because the exchange/transaction of fiat currency and Libra involves more regulatory compliance issues, the involvement of commercial banks can significantly reduce compliance and transaction costs. The Libra white paper also mentions that “it is actively negotiating with major banks to turn them into authorized distributors”. If a commercial bank becomes an authorized distributor, it may reduce/even eliminate the Libra distribution price difference for the purpose of creating more Libra usage requirements, thereby reducing the cost of obtaining Libra for users but expanding the commercial bank (French) coinage tax revenue.

Libra Reserve Pool Management

The Libra White Paper mentions that it will “invest in some low-risk and high-liquid legal tenders and government bonds”. Judging from the current US cryptocurrency compliance requirements, the US Treasury Department requires stable cryptocurrencies to place US dollar reserves in FDIC-protected banks. If implemented according to regulations, Libra's US dollar reserves can only obtain 0.01% interest income in the bank. Even if the first batch of 100 founder nodes successfully raised US$1 billion, the bank's annual interest income is only US$100,000. It is impossible to support the Libra project. Financial plan. Therefore, it is speculated that Libra may put the US dollar reserve into the money market fund. With the improvement of the US macro economy and interest rate hike in the past year, the author is cautiously optimistic that the association will receive an annualized income of 1.5 to 2%, which will provide sufficient financial support for the Libra project. Although money market funds can be defined as “low risk and high liquidity” investments, the Libra white paper lacks a clear explanation, which makes the author question the transparency of the Libra project. If the reserve enters the money market, it will no longer be protected by the FDIC. At the dawn of the black swan, money market funds may be the first victims (GFC was first triggered by the depletion of money market funds in 2008).

In most of the past stable cryptocurrency projects, most of the general expectations of reserve management require “locking in” reserve assets to ensure asset security and avoid misappropriation. Even for infamous projects like Tether/USDT, the white paper only mentions “hosting legal currency assets into eligible banks” rather than explicitly indicating that they need to invest in reserves. If Libra implements a radical investment strategy, reserves may face higher risk mismatches and maturity mismatches, worsening their liquidity and even liquidity. (Detailed in the next section)

Libra project financial stability

As a stable cryptocurrency project, the Libra project has many potential financial stability defects.

Although Libra is based on 100% French currency reserves, Libra has a significant gap compared to the Hong Kong Monetary Authority's currency board system. The HKMA supports a monetary base of up to $450 billion in foreign exchange reserves, more than seven times the total amount of currency in circulation. In addition, as mentioned below, in order to maintain the stability of Libra and the linked basket of French currency, Libra needs to maintain a certain range of exchange commitments with the reserve currency. This conversion commitment must be a speculator arbitrage tool; Libra also needs to be in the market frequently. Reverse operation, therefore also brings additional financial costs. So Libra may lack sufficient financial resources to deal with even Libra's normal market operations .

The Libra project claims to “be able to withstand inflation and maintain value stability,” which reflects the Libra project team's lack of awe in the challenge. Monetary finance theory and practice have evolved to the present, and there is not yet a basket of linked monetary schemes, or the currency board system, proved to be able to fight inflation. In the description of its functions, the Hong Kong Monetary Authority only listed "maintaining monetary stability" as one of its main functions without involving inflation/price stability . The Libra project's statement “can withstand inflation and maintain value stability” reflects the fact that its project team may lack the correct understanding of problems and challenges and lack the most basic awe. The monetary and financial system is an extremely important social public infrastructure. The Libra project team's scorn and ignorance make people doubt the prospects of the project. If you can't even see the problem, don't expect to solve the problem.

Libra's "currency stabilization adopts a passive policy, and currency exchange/redemption is driven by the needs of distributors." This completely passive exchange rate automated tracking mechanism is too hasty , and it is difficult to achieve the goal of Libra and the relatively stable basket of coins. The market may have short-term speculative demand for Libra's demand, and the cryptocurrency market is more speculative. Compared with the practice of the Hong Kong Monetary Authority in the past 30 years, the Bank has developed a variety of tools to actively maintain exchange rate stability, including strong exchange guarantees, weak exchange guarantees and emergency liquidity for banks through repurchase. To actively maintain the stability of the exchange rate. Including the 1997-98 Asian financial turmoil, the HKMA took unconventional measures to stop the automatic floating of the Hong Kong dollar to withstand the impact of the financial turmoil. Libra lacks a similar institutional arrangement that raises doubts about the Libra project team's expertise in monetary finance and policy.

If a radical investment strategy (such as more high-risk long-term or low-liquid assets) is implemented for the Libra project to pursue investment income, Libra may lack sufficient liquid assets to cope when it faces a large number of redemptions or “crowdings”. Therefore, the Libra Association may need to discount the “fire line” reserve assets, which will worsen the liquidity risk and even liquidity of the Libra system. The traditional central bank has a “final lender” mechanism to provide emergency liquidity. The HKMA’s currency board system also has seven times more foreign exchange reserve assets than the currency in circulation to temporarily create the required liquidity, but the Libra project lacks similar arrangements. One possible solution is to enhance the Libra project's ability to absorb losses by increasing equity, accumulating Libra's undivided profits, or borrowing capital.

Libra essentially strengthens international financial integration, liberalizing capital controls in Libra's supported economy and allowing free movement of global capital. But global financial integration may bring only illusions rather than measurable obvious benefits. Adair Turner has pointed out in "Debt and Devil" that " international financial integration is not an infinite benefit… some types of capital flows will cause economic harm if they are excessive. " If the global capital market is excessively free, it may create too many wrong capital flows. Global debt capital flows may undermine financial stability in emerging market economies. The large-scale inflow and outflow of capital in a very short period of time will make monetary policy implementation and liquidity management in emerging market economies more complicated. Even in developed economies such as the United States, Britain and Europe, capital flows may support unsustainable consumption, extravagant investment, and speculation in existing assets, thereby increasing the scale of unsustainable debt creation and exacerbating debt in post-crisis periods. Backlog.

Viewed from within the Libra monetary system (ie, regardless of the association with the legal currency system), Libra realized the full reserve bank and removed the ability of all participants in the Libra Ecology to obtain financial leverage. However, in the legal currency system, commercial banks and shadow banks have the privilege of financial leverage, and they have the incentive to enter the Libra system to participate in Libra casting. The association's reserve pool (whether legal currency or bond) also has the incentive to gain leverage through the money market into the shadow banking system. Compared with commercial banks, shadow banking has not yet been effectively regulated. The FSB work report [30] outlines market and financial stability issues with regard to the core mechanisms of shadow banking – securities lending and repo. So while Libra itself does not increase the risk of existing financial systems, it will be part of the existing financial system . European Parliament German Congressman Markus Ferber said that Facebook with more than 2 billion users may become a "shadow bank" and regulators should remain vigilant.

Libra governance mechanism

The Libra project is actually an equity-based company, and Libra token holders have the right to distribute and decide on the company. Understanding the interests of Libra's monetary system helps to understand its governance mechanism, so we first understand the Libra system's coinage tax and its attribution from the long-standing text. For ease of understanding, the US dollar system is used as a comparison.

In the US monetary and financial system, (without considering the shadow banking system), the Fed created banknote cash and reserves, commercial banks created nearly 95% of the currency in circulation, and net savers, US governments and commercial banks became the main source of coinage. Beneficiary. In 2018, net savers, the US government, and commercial banks were allocated nearly $200 billion, $80 billion, and $350 billion in seigniorage taxes, respectively. The top five US commercial banks account for nearly 54% of the total assets of the banking industry, so their shareholders and executives are essentially the biggest beneficiaries of the dollar system's coinage tax. The US 2018 GDP is 20 trillion US dollars, so the coinage tax (paid to the US government) accounts for about 3% of GDP. This can be understood as the cost of using money in society (including governments, businesses and households).

In contrast, in the Libra system, the Libra Association monopolized the currency casting rights. If the reserves are all government bonds, then if the Libra economy is equal to the US, the Libra Association will receive all the coinage taxes for net savers and commercial banks, $200 billion + $350 billion = 5,500 dollars, accounting for the entire GDP. 2.75%, commercial banks get 0; if the reserves are all legal, the Libra Association will receive a net saver's coinage tax, 200 billion US dollars, accounting for 1% of the entire GDP, commercial banks will still receive 350 billion US dollars. Although in both cases, the Libra Association has obtained a coinage tax equal to the net saver, unlike the legal world, the net saver in the legal world is actually owning its own currency, while in the Libra economy, the association saves. Sourced from all users of the Libra economy. The only holder of the Libra token that can participate in the Libra system is the holder of the Libra token.

So the Libra Association created a Libra-based stable cryptocurrency financial system that allows Libra token holders to enjoy the full or major monetary benefits of the entire Libra economy, accounting for about 3% of the total Libra economy. The Libra system's reserves come from all Libra users .

Specific to the Libra governance architecture, only a few points of view.

As the number one power of financial capitalism, the United States is already very developed in corporate governance. An organization can skillfully design a corporate governance structure that satisfies the superficial democratization and actually concentrates power. Everyone has different understandings of openness/enclosure, democracy/centralization, influence/lobbying and bribery, and leadership/manipulation. Therefore, it is beyond the scope of this paper to evaluate the quality of a governance system. Therefore, this article gives more inspiring examples and explanations for further analysis and reference. From all major monetary and financial textbooks, the Fed's governance structure can be consulted, which satisfies the characteristics of decentralization, checks and balances, and broad representation. Some even comment that the Fed structure is a model for the central economy of the generalized economy. So does most people feel that the Fed is indeed affected by some mysterious power? Can anyone tell who the actual controller of the world’s most influential monetary policy institution is? The average person, even the US Congressman, has been unable to access the basic registration information of the New York Federal Reserve, which has a detached status in the Fed, for decades.

Libra's white paper states that Facebook will abandon the leadership of the Libra project by the end of 2019, and in fact Libra's white paper clearly stipulates the terms of the executive director's "three-year term of the executive director". The white paper states that the Libra Association Board of Directors will prevent related entities from investing as two different founders to prevent them from circumventing the above measures. This is a worldwide problem. If Libra can be realized, they really deserve to gain the knees of the world. According to the white paper, the council of the association also allocates one-third of the board's total voting rights to SIP and research institutions, and becomes the threshold for such institutions, or the top 100 charitable/non-profit organizations in the US or their annual budget exceeds 50 million US dollars. what does this mean?

Published more than 40 years of reprinted seven times, "Who rules the United States", analyzes the power composition of the United States from a social science perspective. The author is a leading scholar in the field of American elite research, Professor G. William, Professor of Psychology and Sociology, University of California, Santa Cruz. Domhoff.

Thousands of large companies, banks, and other financial companies that harness the nation's economy can be seen as a form of community that consists of all profitable organizations that connect to a single network through overlapping directors. Owners and executives in the corporate community are the company's richest. The company's richest people fund and hold a variety of non-profit organizations, such as tax-free foundations, think tanks, and policy research groups, to help them develop policy options that are in their own interest. These organizations are part of a policy planning network that is linked through common donors, directors, and expert consultants. The highest-level employees in the policy planning network, the board members of various organizations, and the leaders of the corporate community and the upper class form the leader team of the company's wealthy. These leaders are collectively referred to as power elites who gain power through the board of directors of companies and non-profit organizations controlled by the company's wealthy.

The corporate community has thus become the core of the Fortune 500 companies and the private companies and financial companies associated with these companies. However, the Fortune 500 companies and the 5044 directors in the complete database of the six major business groups are the general leadership groups. In 2010 , the thousands of Fortune 500 companies at the core of the corporate community were mostly company managers, commercial bankers, investment bankers and corporate lawyers, but a few were university administrators and foundation presidents [31 ]

The author suggests that readers further analyze the current membership of the board of directors of the Libra Association's “founders” (including non-profit organizations) and see the real impact behind Libra.

The author has reason to believe that the Libra core team can design a governance structure that is superficially democratic enough, but at the same time guarantee their long-term influence and absolute control over the project .

Libra's democracy and openness

The foregoing has examined the nature of Libra from the perspective of the coinage tax. The author can be cautious to conclude that Libra's degree of democratization is not satisfactory.

Libra does not treat the contributions of all participants fairly and fairly. The Libra system is a deposit of all users' contributions for coinage, but the coinage tax proceeds are all allocated to Libra token holders. While it is necessary to recognize and reward Libra token holders for their early financial investments and other contributions to the project, it is clearly unfair to take all of the system's coinage tax to reward. Reserves give real, long-lasting, and stable value to a stable cryptocurrency, and the contribution of reserves is no less than that of the early Libra infrastructure. Libra users also have a wider acceptance of Libra, which also contributes to the value of the Libra system. It is unfair to completely deprive Libra ordinary users of the right to participate in the coinage tax sharing.

Being a Libra token holder also has a high threshold. It is known that the first founders of the association are successful large enterprises, well-known multilateral organizations and non-profit organizations, and all have good financial resources. The Libra Association also limits the number of 100 founders. Under the premise that the blockchain world has developed a token financing model based on a wide range of participants, it also deliberately raises the threshold to exclude the long-tail users of the Libra system, which is incompatible with the widespread and democratic advocated by the blockchain. Libra's token investment does not represent the democratic spirit of the blockchain, but is a tool for traditional equity investments.

The design of the Libra system also deliberately differentiates participants by forming “classes” through “institutionalization” arrangements and protecting the vested interests of traditional financial institutions. Authorized distributors are granted the privilege to earn a narrow price difference, while ordinary Libra users are arranged to pay all of the system's coinage tax. There is no reasonable technical reason for the design of this hierarchical distribution mechanism. It runs counter to the open financial concept advocated at present, and more is to take care of the vested interests of traditional financial institutions. The Libra system's full reserve bank design eliminated the ability of all participants in the Libra ecosystem to create currency and obtain financial leverage in addition to the association. However, commercial banks and shadow banks have legal leverage in the legal currency system and are motivated to enter the Libra system for arbitrage. They either become Libra token holders or assume the role of authorized distributors. Therefore, Libra's institutionalization has maintained the privilege of using financial leverage in commercial banks and shadow banking systems in the legal currency system, but it has limited the leverage of ordinary users.

It is not possible to interpret the “openness” that Libra claims. The association monopolizes the power of currency casting in the Libra economy and centralizes the distribution of power and interests in the Libra monetary system to a small group – Libra token holders. While other financial services, including payments, deposits and loans, are open to all Libra users, coinage is the most important power in the economy. The broader coinage is the most important power on the planet, and it transcends all government and military power. A banker in the United States once said that I don’t care who rules the world. I am fucking as long as the coinage!

The Libra public chain's plan to switch to an unlicensed network is meaningless. Because the Libra ecosystem is tightly coupled to the legal currency system, Bank of England Governor Mark Carney said “Libra will face the highest standards of regulation”. Therefore, all participants in the Libra ecosystem, including associations, users, authorized distributors, and various financial services developed in the future based on Libra (such as payments, deposits, loans, insurance, etc.) are inevitably subject to administrative, legal, regulatory, and Compliance constraints.

Libra's technology

There are many comments on Libra technology, and this article is not a big deal, just looking at the technology infrastructure needs from the Libra system business needs.

Libra is a fully controlled system, and the consensus mechanism only needs to exist between authorized authentication nodes (even if there are a small number of non-authenticated nodes). In the short term, the number of verification nodes is around 100, and even if it expands to thousands of verification nodes in the future, it is a small-scale network. The consensus mechanism of this scale network, even if Libra needs to serve billions of users, the general alliance chain technology can be solved very well. Note that in Libra's scenario, it is only the controlled verification nodes that need to form a consensus, not the end user. Therefore, the underlying blockchain technology supporting Libra can satisfy such a goal.

Coping mechanism for Libra

The Libra system design protects the vested interests of traditional commercial banks and meets the expectations of the central bank for the regulation of encrypted digital currency. Therefore, Libra can be expected to encounter major regulatory obstacles in countries such as the United States, Britain and Europe.

From the perspective of super-sovereignty, the US dollar is the current global reserve currency king, the British pound is the former king, and the euro is the second-ranked global reserve currency. Each of them has a strong global appeal, and there is indeed a certain conflict of interest within them. The dollar and the euro have the biggest conflicts, but their values ​​are converging and in a larger pattern (responding to the rise of the renminbi and extending the influence of the local currency to a wider range of developing and less developed countries/regions, as well as dealing with the challenges of cryptocurrency, etc.) There is a consistent fundamental interest, so they can form a realistic compromise, and the IMF special drawing rights are proof. Therefore, as long as Libra does not break through the existing pattern of IMF in terms of super-sovereignty, there will be no obstacles in super-sovereignty within the US, UK and Europe. In the context of the Federal Reserve and the Bank of England Governor, and the FSB's continued and relatively high-density comments on Libra, the BIS/ECB will eventually support it. In fact, the attitude of the FSB is to set the tone for the G20.

So the question was thrown to the other pole of the monetary system, how to deal with it?

For the other powerful sovereign currency, there are many obstacles to participating in Libra. First, the renminbi is still subject to foreign exchange control and cannot be freely exchanged. For example, allowing domestic users to participate in Libra will have a huge impact on the current Chinese monetary and financial system. Equivalent to overnight capital project liberalization and domestic financial market liberalization, the global financial system and the unstable two-way transmission of the Chinese financial system may bring unpredictable risks to the global financial system; second, China is unlikely to be in the Libra Association. The internal status has an influential position, and the signs of influential status are the managing director, the board of directors, the voting rights of the board of directors, the scale of Libra tokens, the proportion of RMB assets in a basket of reserves, etc.; China’s GDP in 2018 has been Close to 70% of the United States, from the perspective of the United States and Britain, it is impossible to give China such influence in the Libra system; third, the Facebook-based application ecosystem and user base are basically not in the country, of course, this is a minor detail.

If it is confrontation, then what is China’s strategy? Copy a Libra and improve on Libra's shortcomings. Improvements include:

First, improve the Libra coin tax allocation mechanism, extending from minority monopolies to a wider group, such as Libra users can participate in the distribution of the coinage tax, stimulating the use of the wider population and promoting Libra's enthusiasm;

Second, increase the participation of the Libra system, allowing a wider range of sovereign governments/institutions/people to participate in the Libra infrastructure (ie Libra tokens are more dispersed and longer tails);

Third, the reserve pool is mainly based on bonds, which reduces the legal currency. This can reduce the cost of user funds and transfer the real benefits to the public, but there is a capital arbitrage risk of the legal currency system and the Libra system (though considering the Chinese government’s foreign exchange and The effectiveness of monetary management, this risk can be controlled, which is an advantage that the United States, Britain and Europe do not have);

Fourth, increase non-debt assets into reserve pools, such as gold and bitcoin (the author regards bitcoin and gold as equivalent non-debt assets, but this article does not discuss), reducing the color dominated by Libra sovereign countries;

Fifth, strengthen the Libra reserve pool risk management mechanism, such as restricting the commercial bank/shadow banking leveraged funds into the Libra system arbitrage, more specifically, if the reserve pool is a bond, restrict Libra Association to only benefit from bond interest (not allowed to enter The result of the shadow banking system is that Libra becomes a truly independent central bank and a more stable class-like reserve bank (stocks that limit leveraged debt rather than non-debt assets) and can effectively reduce financial system risks;

Sixth, restricting the free flow of international capital in the Libra system and maintaining a certain degree of division of the financial system between different economies within the Libra ecosystem (this is in line with China's existing RMB and foreign exchange management policies). Reducing the free flow of international capital brought about by Libra facilitates disrupting the financial stability of relevant economies, ensuring the effectiveness of existing monetary policy implementation and liquidity management, and preventing unsustainable debt creation.

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About the author: Long Baiyi, Bachelor of Computer Science, Master and Ph.D. He is interested in researching blockchain and cryptocurrency technology and monetary and financial theory; he has worked in financial technology fields such as financial cloud computing, quantitative investment, and machine learning; he served as chief technology officer of Zhongjin Jiazi Investment Fund before he started business; Co-founder and Chief Strategy Officer of Tonglian Data; previously a senior executive in the financial services field at Accenture Consulting and IBM Global Consulting Services, providing long-term technical, business and strategic consulting services to clients in China's financial services industry, representing Accenture The chief designer of the new generation trading system project of the Shanghai Stock Exchange.