During this time, Facebook released the Libra White Paper on Cryptographic Money, and plans to release the digital currency Libra on a global scale in the next few years. This has not only caused concern in the financial industry, but also caused worldwide thinking. Some people think that Libra will create a "new generation of financial services," and some warn about the financial risks and regulatory challenges it brings. So what is Libra and digital currency? How to understand the impact of Libra? Today, let's talk about this professional topic.
To understand the characteristics of Libra, you first need to understand the digital currency and blockchain. This involves many technical problems such as mathematics, cryptography, and computer programming. We can skip these technical problems, use the "first-principles" thinking method, and use basic principles to think about complex phenomena. We can simply understand the blockchain as a shared ledger shared by all participants, which can realize the immutability of the transaction information, the trace of the whole process, and traceability; while the digital currency is based on a set of encryption based on the underlying application of the blockchain. The algorithm is actually the transaction medium on the blockchain. With the blockchain, the shared ledger and the digital currency, the buyer and the seller can implement a “peer-to-peer transaction” without a third party on the blockchain, thereby enabling decentralized smart contracts and execution mechanisms.
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However, digital currency such as Bitcoin has a natural flaw, that is, no sovereign institution endorses its value, which causes the price of Bitcoin to be easily speculated, resulting in large fluctuations. We know that money has three main functions, namely, value storage, pricing units, and trading media. The currency in human history, whether it is gold or the currency of various countries, must fulfill these three basic functions if it is to become a universal currency. The precondition is to maintain the basic stability of the currency. If the value of the currency fluctuates greatly, it will not be able to perform these three functions, and it will not become a currency. Since the issue of Bitcoin, the price has been like a roller coaster. It rose to an all-time high before 2014. This year, it fell sharply due to the theft of the exchange. In recent years, it has risen to an all-time high. Random and large-scale volatility makes bitcoin-based transactions face great uncertainty, which also restricts the development prospects and applications of digital currency and blockchain.
From this background, Libra of Facebook can understand it more clearly. In the white paper, Facebook describes three components of Libra: one is based on a secure, scalable and reliable blockchain, the other is backed by an asset reserve that gives Libra intrinsic value, and the third is by independent Libra. Association governance, the mission of the association is to promote the development of this financial ecosystem. Compared to traditional digital currencies such as Bitcoin and Ethereum, Facebook’s innovation is that “for each newly created Libra cryptocurrency, there is a basket of bank deposits and short-term government bonds with corresponding value in the Libra reserve. This builds people's trust in their intrinsic value." That is to say, Facebook wants to find the endorsement of offline assets for the online digital currency, to solve the problem of the lack of credit endorsement in the past digital currency, thus eliminating the large volatility of the value of the digital currency, allowing Libra to undertake the value storage and pricing unit. And the currency function of the trading medium. To put it simply, Facebook wants to treat digital currency and blockchain separately, and use offline asset endorsement to solve Libra's currency fluctuations, while still using blockchain to achieve “decentralized” peer-to-peer trading and smart contracts. Obviously, Facebook wants to break the application bottleneck of digital currency through this method.
However, can Libra really become the world's digital currency in the future? Can Zuckerberg really realize the vision of “transferring funds around the world as easily as sending text messages or sharing photos”? I am afraid I have to make a big question mark. International regulators, the Financial Stability Board and the UK Financial Market Conduct Authority, have stated that they will not allow the world's largest social network to launch its planned digital currency without critical scrutiny. At the same time, the US Senate and the House of Representatives will also hold hearings on the digital currency proposed by Facebook. The governor of the Bank of England said that to treat Libra, you should open your brain instead of opening the door. In fact, Libra brings a variety of known risk challenges and unknown consequences, and there must be a clear understanding of this.
Second, Libra may bring financial monopoly and regulatory difficulties in the future. Facebook has nearly 2.4 billion users worldwide. Based on user advantages, Facebook's Libra is likely to quickly form a scale advantage, and even form a financial monopoly. Who can restrict Facebook from abusing its monopoly position? At the same time, how does Libra ensure that it does not threaten global financial stability while facilitating cross-border payments and transactions? How to ensure that Facebook has sufficient control over money laundering?
Finally, Facebook's Libra release may reduce the monetary sovereignty of developing countries. As some experts have pointed out, "any parallel currency will weaken the sovereign institutions that control the currency to some extent." If a country's citizens use Libra extensively for commercial transactions and cross-border payments, it will seriously reduce the status of the country's legal currency, while intervening in the ability of the central bank to govern its financial system and implement normal monetary policy. In response, the Financial Times pointed out that "the potential risks of Libra's system will require it to accept the most rigorous review." This is especially worthy of the vigilance of developing countries.
Now, in the face of the media's doubts and the review of central banks and regulators, Libra's ability to issue as scheduled is still uncertain. But as the network section said, "The one who beats you is never an opponent, but a newbie." In the face of new things like Libra, we need to keep an eye on it and think.
This article is transferred from the public number "People's Daily Review"