Depth | Libra positioning, application value and external influence

On June 18, 2019, Facebook officially released Libra's white paper and test network for its long-established internal project. According to the official white paper, Libra's mission is to create a simple, borderless currency and financial infrastructure for billions of people by creating a new decentralized blockchain, a low-volatility cryptocurrency. And a smart contract platform plan to open up new opportunities for financial services innovation. Before the release of the Libra white paper, the Blockchain Research Center of the Institute of Financial Science and Technology of Tsinghua University discussed the needs and implementation of Facebook's transformation of the stable currency and payment system . This article, combined with Libra's official white paper, reinterprets the Libra project's reasons, project features and advantages, discussion of the impact of monetary policy in the economy, potential applications of Libra, and discussions among regulators, scholars, and practitioners on key issues. Libra project.

Facebook launches Libra project analysis

On June 18, 2019, Facebook officially released Libra's white paper and test network for its long-established internal project. According to the official white paper, Libra's mission is to create a simple, borderless currency and financial infrastructure for billions of people by creating a new decentralized blockchain, a low-volatility cryptocurrency. And a smart contract platform plan to open up new opportunities for financial services innovation.

As the world's largest social platform with nearly one-third of the world's user information, Facebook's social business covers almost all developed countries, as well as most developing countries. In the first quarter of 2019, the number of daily active users was 1.56 billion, and the number of active users per month was 2.38 billion. The continuous precipitation of data generated by a large number of users is the core competitiveness of the stable development of the platform. Why should such an Internet giant take the lead in an inclusive financial project?

Although Facebook is the most abundant organization of social information today, it is also due to its rich user social data, which has always faced the problem of user data compliance. In recent years, user data privacy has been leaked to third-party organizations and internal data security incidents have occurred frequently, making it necessary to consider transforming other businesses. In addition, Facebook's revenue is mainly based on the realization of advertising traffic. This business model needs to be profitable by analyzing the personalized privacy data of users. The bigger the business is, the more it will be questioned by the community. Facebook has also tried several times to develop new businesses in the field of Internet finance and e-commerce, but has always lacked an efficient, convenient and low-cost financial infrastructure – electronic payment systems.

In 2011, Facebook founded a subsidiary, Facebook Payments, which specializes in virtual currency payment services. Since then, Facebook has launched a series of products related to virtual currency, virtual gift cards, and payment, such as Facebook Credits, Facebook Gifts, and Facebook Messenger Payments, but it is difficult to achieve the expected cost or convenience. This has made Facebook still unable to have built-in fast payment functions like China's Alipay and WeChat.

On the other hand, as Facebook continues to acquire star products in the social field, its explosive apps such as Messenger, Instagram, and Whatsapp have brought a huge number of users. How to break through the social transformation of users into the Internet business and financial sector is a question that Facebook must answer in the future to continue its rapid growth.

As an Internet company that has grown to be a huge monthly active user, relying solely on expanding the market and increasing users can no longer meet the needs of future development. The company that is engaged in Internet business has been striving to seize the Internet's entrance and two important infrastructures: identity authentication and payment channels. The emergence of blockchain and encryption technology has enabled Facebook to restart its plan to build a global financial infrastructure, and this time Facebook is prepared to be more complete than ever, and the overall architecture design is even more ambitious. Today, more than a decade after the birth of cryptocurrency, the meaning of cryptocurrency has been widely recognized. The underlying blockchain technology has relatively sufficient attempts in technology, and people have achieved alliance and win-win cooperation with blockchain. Thought also has a high positive evaluation. In this case, Facebook is keenly aware that the new technology architecture and the new governance structure will be able to build a new financial infrastructure like never before. On the basis of fully acknowledging the potential and value of such technologies, through the extensive linkage of various related party resources, it is expected to launch an Internet-based efficient financial service infrastructure that breaks national borders under the framework of multi-party governance – Libra blockchain And starting with the most basic media currency of business and finance, Libra, a purely digital currency with stable value, is independently issued and managed through low-risk financial asset collateral to create a new system independent of the current payment system. Once this infrastructure is widely accepted and adopted, Facebook's voice and competitiveness across the Internet will be qualitatively improved. This kind of competitiveness comes from the inspiration of the new blockchain technology ideas, such as inclusiveness, co-construction, mutual trust and reciprocity. Of course, this coincides well with the idea of ​​the community of human destiny proposed by General Secretary Xi Jinping. Only when the company's vision is great enough to meet the global interests of common maintenance, the alliance that transcends national boundaries can work together to solve the global challenge. Maybe Facebook is not good at currency issuance and currency scene promotion. However, in recent years, the continuous exploration experience of countless startup companies in the blockchain industry has taught us that a private enterprise can hardly complete an infrastructure that requires mutual trust from all walks of life in the world. It is possible for all relevant institutions in the industry to make competitive new infrastructure. Based on the above reasons, it is not difficult to understand and speculate on why Facebook is creating Libra, and what kind of project Libra is. It is not difficult to understand why the White Paper’s function in the Libra Association is low-key. “An additional goal of the association is to develop. And to promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite for financial inclusion and competition."

Currently, the release of the Libra white paper has indeed received good results, successfully attracting the interest and extensive discussion of experts and practitioners from various fields such as finance, internet, blockchain and so on. I believe that the Libra project will bring a huge amount of inspiration and help to make it more stable and face the various difficulties that are not yet fully understood. This is also the way in which the Libra currency and governance are not fully written in the white paper, and this part is wisely The problem is open to anyone who has the ability to solve the problem. WeChat relies on QQ's huge user base to instantly defeat other competitors, and Facebook can also make full use of its existing users to fully trust Libra's promotion and customer acquisition capabilities.

Libra project features and benefits

The previous discussion mainly explained the fundamental motivation for the birth of Libra project from the perspective of Libra project leader Facebook. But as mentioned earlier, the Libra project's vision should be much more ambitious than Facebook's own development. And the amount of information in the Libra white paper is actually very large. Here are a few brief introductions to some of the features and benefits of the Libra project.

From the technical aspects of the Libra blockchain, the Libra blockchain is committed to solving current blockchain projects with relatively secure programming languages, efficient consensus algorithms, self-developed security contract languages, and standardized code architectures. The problems encountered are slow processing speed, low scalability, high compliance risk, unstable asset value, and easy exploitation by malicious people.

In terms of the value of Libra's currency, Libra has chosen a legal currency and a government bond of a strong sovereign state as a collateral for its own value stability and scale, and issued a stable virtual currency that pledges a variety of low-risk legal financial assets, and introduced a number of financial asset custody. Institutional decentralized hosting. Unlike sovereign currency, Libra is native to the digital space. Its books are based on blockchain construction, combined with smart contracts for governance. Naturally, it has the excellent characteristics of payment and clear settlement, and the system consensus is simple, so the transaction and payment costs are extremely low. (This is also an important reason why blockchain technology is widely used in the issuance and circulation of digital currencies.) In addition, Libra is designed to be independent of a single government, so its political color and sovereign risk are relatively weak relative to sovereign currencies, and once it appears more easily Considered as a relatively politically neutral currency, users in different countries pay for cross-border scenarios. Unlike unsecured cryptocurrencies such as Bitcoin, Libra's value is clear and easily agreed upon, and its total value is equal to the full value of the underlying collateral assets, so its value is more stable, trading risk is lower, and it is easier to pay differently. The scene is used by the counterparty. Unlike the virtual currency stabilization ratio issued by a single institution such as USDT, Libra operates as a number of institutions.

Unlike the sovereign currency, the central bank behind it exercises monetary policy, regulates the internal economy of the country through currency, and the foreign trade environment (such as the Fed’s goal is to effectively promote employment, stabilize prices, and maintain stable interest rates for a long time), Libra’s Libra Association Explain that it will not formulate any monetary policy. It only adopts a banking system similar to 100% reserve. Therefore, the Libra currency policy can be said to rely entirely on the currency and treasury assets behind it, and does not create more money, but in the form of money. The conversion is only (Note: Of course, Libra will have its own currency multiplier of 1, in the future, depending on whether a financial institution acts as a bank with Libra as a deposit and provides a deposit reserve ratio of less than 100%). As stated in the Libra white paper, Libra's circulation can be freely changed according to supply and demand. The Libra Association is only responsible for providing the best liquidity and security, ensuring liquidity when expansion and contraction are required. Although there is no active monetary policy implementation, the Libra Association can strengthen or suppress the central bank monetary policy corresponding to a legal tender or national debt in the Libra circulation area by changing the weight of the underlying assets.

This part of the discussion involves more assumptions, and different assumptions lead to different conclusions. We will try to analyze this in some simplified assumptions in the next chapter.

Libra's potential impact on fiat currency policy

First of all, if Libra coins are successfully promoted and used around the world, their characteristics are unprecedented as described above, and they are naturally global, digital, and highly available. The author believes that the above characteristics make Libra's influence on an economy different from the impact of a traditional world currency (such as the legal world currency such as the US dollar and the euro) on an economy. Libra was born in cyberspace and does not completely coincide with the circulation environment of the legal currency. In order to analyze the impact of Libra on the monetary policy of the economy, we first need to consider a new economic system – a variety of economic systems that are easy to obtain currency . Here, the easy-to-acquire currency, in addition to the legal currency of the traditional region, also includes a globally circulated, low-cost currency similar to Libra. Even if the Libra project is not well promoted and developed, there will be a similar Libra-like currency in the future, and this currency will have both the widely available features of Bitcoin and the ease of trading of stable coins.

We first discuss the impact of Libra's popularity on monetary policy within an economy. Compared with the traditional monetary policy model, the currency in a variety of economic systems that are easy to obtain currency coexistence will no longer be the only major value payment method in the local legal currency. Therefore, in the economics, we study the identities of the quantity of money in the relationship between the currency and the total production and price of an economy: MV = PY, where M is the amount of money, V is the rate of money circulation, P is the price, and Y is the total output. Below we consider a simplified form of a variety of economic systems that are easy to obtain currency coexistence: in two economic systems that are easy to obtain currency coexistence, the above equation can be rewritten as follows, where the M*V item is split into two, here we Assume that the two currencies are the local currency LC (local currency) and Libra. Since the existence of Libra is inherently made Litra's circulation rate is faster than that of the legal world currency, the hypothesis V of deriving the quantity theory of money is not applicable, and will not be applicable in the face of currency created by Libra, a new technology. Libra's impact on the traditional monetary system may be reflected in this change.

M LC *V LC +M Libra *V Libra ↑=P↑*Y

To simplify the discussion, we assume that Libra's model assumes that an economy consists of local currency LC and Libra, and Libra's mortgage assets are 100% local currency. According to the Libra white paper, 100% asset collateral, the total amount of LC is unchanged, assuming Y is not increased by Libra's use, and assuming that the market share of different circulation rates does not change much in the short term. Since Libra's liquidity is better than the US dollar and the circulation rate is higher, according to the following identities, the rapid spread of Libra will cause price increases if the above assumptions are established.

In reality, price increases may be weakened. For example, due to the increase in the circulation rate of money, people do not need to prepare too much liquidity of cash, increase time deposits or use for investment, resulting in a part of the legal currency of the MLC. Decline to weaken the rise of P. Since the effects of the two effects are reversed, it is difficult to judge whether inflation will actually occur and the direction in which monetary policy is adjusted.

If we consider the classic open small-scale economic system in economics, it is limited to the length of the article. Here, the analysis conclusions under certain assumptions are given directly in the form of pictures. In short, in the case of various economic models, the easy access to virtual assets driven by the world-wide emerging technologies such as Libra will have certain influences and impacts on sovereign currencies, as well as monetary policies and even fiscal policies of sovereign countries. The degree of substitution of currency in currency.

Image source: Tsinghua University Financial Technology Research Institute Block Chain Research Center

Libra's potential application scenarios

Cross-border payment

Libra's white paper mentions that “Libra's mission is to build a simple, borderless currency and financial infrastructure that serves billions of people.” “Now due to cost, reliability and remittance fluency, it is urgent People who need financial services often get insufficient financial services or are limited. If the vision of Facebook can be realized, the most realistic financial scenario should be cross-border transfer. The number of global immigrants has grown steadily year by year, and the demand for cross-border transfers has also increased. However, the traditional cross-border transfer process is inconvenient and costly, and it is unable to effectively serve areas with poor infrastructure. This is also the scenario in which many blockchain startups and stable currency issuers such as IBM and Stella are working together.

Although Facebook is more based on the experience of predecessors in the field of cross-border payment, Facebook's dominance in social software makes it a natural user base for opening personal payment transfers. Facebook has 2.7 billion users across borders. According to Hootsuite, a social media service provider, Facebook Messager is the number one communications software in 72 countries and regions, and its Whatsapp ranks first in 128 countries and regions. Communication software in only 25 countries and regions around the world does not belong to Facebook.

Image source: Hootsuite

Domestic payment

Domestic payments can also be one of the first scenarios that Facebook has landed.

Image source: The Block

In the first batch of organizations that joined Libra, e-commerce, payment, travel, music and other consumer-related scenarios have been added. In the future, it is expected that these scenarios will be the first to open Libra's payment mechanism, according to the white paper. Libra's incentive program, Libra may be distributed as a reward to merchants willing to accept Libra. This is exactly the same as the way in which the domestic drip taxis are subsidized to cultivate habits.

Alternative legal currency requirements

Although not mentioned in the white paper, Facebook has the potential to become an alternative currency for countries with political instability and economic regulation failure. Bitcoin, the originator of cryptocurrency, is a digital asset that achieves trust through a consensus mechanism. Since it produces a block of about ten minutes, it is not attractive in countries where the legal currency is stable and electronic payment is developed. But even if the payment efficiency is low, the price fluctuates drastically. Bitcoin is increasingly being used as an intermediary for value storage and circulation for people in countries with high inflation and national sanctions in the international financial system. For example, in Argentina, Venezuela, and Mexico, due to the high inflation, the price of French currency is highly volatile, and Bitcoin is considered to be a relatively stable currency for circulation. In the relatively low-frequency environment of bitcoin in the first half of 2019, the trading volume of these countries with unstable currency status has gradually increased.

A few days before the release of the inflation rate, the Cointrader Monitor (a monitoring tool that analyzed the price changes of the country's bitcoin) on April 10 said that the Brazilian digital currency exchange had more than 100,000 bitcoin transactions on the day, Brazilian currency — – Brazilian Real is the largest amount of French currency exchanged in the past 24 hours, totaling $315 million.

In addition, Bitcoin is also used as one of the intermediate currencies for foreign exchange transfers. For example, it was founded in Kenya, Bitpesa, which serves African payments, and Veem, which invests in Google Ventures, are emerging companies that use Bitcoin for cross-border transfers.

However, Bitcoin's price volatility and clearing efficiency are still unsatisfied, but it has become the most used digital currency with the most trustworthiness. Facebook is grasping the inefficiency of Bitcoin's non-licensed chain confirmation and the volatility of currency fluctuations, trying to build a digital currency with stable currency value and high transaction efficiency. We believe that Libra is likely to replace local currency. effect.

Network economy, chain economy

Libra's blockchain technology and smart contracts give the chain an infinite imagination. If Facebook's ecosystem and economic flows can be closed-loop, then it can be assumed that the goods and services on the chain will be valued in Libra. Libra will become the currency of the chain economy.

For example, financial services such as lending, wealth management, smart insurance and crowdfunding can be born on the financial infrastructure with Libra as the common currency. P2P will become a borderless P2P, and any individual on the network can receive loans from investors around the world through data credits left in the Libra system. Libra coins can also buy services provided by Facebook, such as removing advertisements, or rewarding articles, videos, and so on.

How do industry experts see the impact of Libra?

Libra did not elaborate on the currency and reserves that the outside world is most concerned about. The white paper is more about setting a goal and handing it over to the founders of the association and the feedback and ideas of the researchers and the Libra community. This is why the introduction of the Libra white paper has led to a multi-faceted discussion and raised many opposing views from the financial, regulatory, technical and philosophical perspectives. We have gathered a variety of perspectives and tried to answer the following questions.

Can Libra challenge the existing sovereign currency system?

The most worrying aspect of the Libra project is whether it can challenge the existing sovereign currency system.

The Economist said that if Facebook's 2.4 billion users use Libra for shopping and money transfers, it could become one of the world's largest financial entities, which would destabilize the existing financial system and undermine the government's economic sovereignty. The Bank of International Settlements also expressed concern that large technology groups such as Facebook may quickly establish a dominant position in the global financial sector, posing a threat to competition, financial stability and social welfare. Andrew Bailey, director of the Financial Conduct Authority (FCA), a UK financial market regulator, said Libra's potential impact is enormous and could cause problems for governments and public policies around the world.

Some experts and scholars also expressed concern about the potential impact of Libra. Meng Yan, vice president of CSDN and deputy director of the National Chain Reform Committee of the Ministry of Industry and Information Technology, said that Libra's positioning is a super-sovereign digital currency that challenges monetary sovereignty. If Libra's supporting assets can be linked to the US dollar and support the exchange rate, this is equivalent to supporting the US dollar. The China Blockchain Application Research Center (CBAC) stated that Libra's establishment of a simple borderless monetary and financial infrastructure is to establish a global monetary system and ecosystem beyond sovereignty. The convergence of Facebook users and encrypted assets will lead to a blurring of the concept of traditional sovereignty.

However, many experts have doubts about Libra's potential prospects. Wang Yongli, the former deputy governor of the People's Bank of China, said: Libra is facing a bigger challenge with a basket of currencies. It is difficult to shake legal tenders and faces many difficulties in management. Libra's payment clearing system will face many challenges.

Federal Reserve Chairman Jay Powell mentioned different opinions. He said at a press conference on June 19 that the Fed is not worried about the cryptocurrency Libra due to legal tender. Powell said: "Digital currency still has a long way to go. Basically, (I) is not too worried about the central bank's inability to implement monetary policy because of digital currency or cryptocurrency."

What is the relationship between Libra and the US government?

The relationship between Libra and US government agencies is also delusional. Although Libra's white paper does not mention the US dollar, but refers to assets such as Hong Kong dollars and Euros, Libra's stable currency is unlikely to involve US dollars and US debt. Let everyone be curious about the dollar and US debt ratio in a basket of currencies. In addition, Libra's first partners are all US companies. The relationship between Libra and the US government and the Fed is questionable. Does the US already support Libra's issuance?

Cai Weide, an honorary tenured professor at Beihang University, and an honorary tenured professor at Arizona State University, said that Libra must support the US dollar and is an aid to the US dollar. Since it is a US dollar tool, the US government and the central bank will certainly support it.

Meng Yan, vice president of CSDN and deputy director of the National Chain Reform Committee of the Ministry of Industry and Information Technology, said that the connection between the US dollar and Libra is a high probability event when the two sides need each other. Technically speaking, the possibility of an alliance with the US dollar is theoretically very large. To be frank, as long as a relatively clear support behavior on the exchange rate, linked behavior, this is equivalent to supporting the dollar.

However, the US regulators are mainly opposed to the voice of Libra. Democratic Senator Sherrod Brown called for strict supervision of Libra. House of Representatives Financial Services Commissioner Maxine Waters indicated that he would hold a hearing for Libra, and House Patrick McHenry expressed the same will. A related person from the US Commodity Exchange Commission (CFTC) also said that Facebook's digital currency Libra is forcing US institutions to struggle with blockchain.

What are the risks of Libra's project?

As soon as the Libra project was launched, it caused waves in the regulatory authorities around the world. Major regulators have indicated that Libra will not be allowed to operate in the country in the absence of compliance review.

French Central Bank President Francois Villeroyde Galhau said that the establishment of the encryption working group will be led by members of the ECB's board of directors to study how to regulate cryptocurrencies to avoid money laundering and other issues. French Minister of Economy and Finance Bruno Le Maire warned Libra to become a “sovereign currency”. A German politician also called Facebook "shadow banking." The Australian central bank governor Philip Lowe said that Facebook's proposal still needs a lot of problems to solve, there must be a reliable case. The Indonesian central bank said it should review the company's plans. Bank of England Governor Mark Carney said Facebook's encryption project will face the highest standards of regulation. The US Senate Banking Committee called on Facebook to attend a hearing about the company's creation of virtual currency.

For the stability of assets behind Libra, Zou Chuanwei, chief economist of Wanxiang Blockchain & Platto Cloud Chart, said that if the Libra currency reserve pool pursues aggressive investment strategies for the pursuit of investment income (such as high proportion of investment in high risk, long term or low flow) Sex assets), when Libra faces concentrated and large redemption, the French currency reserve pool may not have enough high liquidity assets to deal with. As a result, Libra's currency reserves will be prudently regulated, reflecting the requirements for bond types, credit ratings, maturities, liquidity and concentration.

to sum up

The birth of Libra currency is an infinite imagination for the global economic system, especially for cross-border transfers and blockchains. From the information currently disclosed, Libra's project vision is very ambitious and plans to become a global tool like Facebook. But the tools in the financial sector are different from the development of social tools. Try to be more careful, comprehensively consider the impact of new things on national economies and monetary systems and macroeconomic policies, and the possibility of opposition from some governments. The specific plan of its basket of money reserve plans, the planning of the landing scenarios, the attitude of national supervision and the launch of other competitive currency plans will become the key factors for the future development potential of the project.

The Blockchain Center will continue to track the Libra project and release the latest Libra news and related in-depth research reports. Relevant research content will be launched in the “block technology and supervision” public number, so stay tuned.

Source: Block Technology Research and Supervision

Author: Financial Technology Research Center, Tsinghua University Liu Yingge block chain Dai Yi Cheng