Babbitt Column | How to create a new stable currency that competes with Libra

table of Contents

First, the two forms of future digital currency

Second, the digital asset exchange is the basis of the new stable currency

2.1. Exchange provides asset base for stable currency

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2.2. Exchange provides application scenarios for stable coins

2.3. The technical basis of the exchange

2.4. The organizational model of the exchange

Third, the mechanism of the new stable currency

3.1. Value base

3.2. Stabilizing currency prices

3.3. Monetary policy

3.4. Number of issues

3.5. Coinage tax

Fourth, the comparison between the new stable currency and Libra stable currency

4.1. Different value bases

4.2. The initial weight of the underlying blockchain is different

4.3. Different initial application scenarios

4.4. Different impacts on the existing financial system

In the Libra project analysis report ( Libra project research analysis report ), I pointed out that there is still a very good opportunity to develop a new stable currency that can be aligned with Libra. The Libra project is definitely not the end of the stable currency project, but a milestone in this process. Since then, more stable currency projects have emerged to provide more stable currency product options for the market. In terms of the mechanism for generating stable coins, other stable currency products can be substantially different from Libra stable coins. In the application scenario of the stable currency, a more suitable application scenario can also be adopted. Given that the stable currency is still at a very early stage and the risk factors of the Libra project itself, other stable currency products still have a very high probability of success. As long as the correct strategy is adopted in the design of stable currency products, promotion organization and cutting-in scenarios, it is very likely that the new stable currency against Libra will be better accepted by the market. This article discusses some of the factors related to the new stable currency.

The first thing to be clear is that the Stabilizingcoin project should not be a stand-alone infrastructure stable currency project. In other words, you should not start a special stable currency project just to make a stable currency. Because of the characteristics of the currency of the stable currency, it cannot be hoped to make a profit from the stable currency itself. Stabilizing coins should emerge as a tool to support the better development of other businesses. Only when such a business develops can the stable currency develop simultaneously. This is just like the development of Alipay with the development of online shopping. The development process of stable currency should also be the same. Such a mechanism is also the motivation for Facebook to develop stable currency.

The Facebook Stabilization Coin project was not launched to provide a globally stable digital currency in circulation worldwide. Although the purpose of the project white paper is to provide financial services to 1.7 billion users without financial services worldwide, for Facebook, this project will help Facebook provide financial services to its users, so it can achieve more increase. This is the purpose of Facebook to develop this product. So the actual goal of this stable currency project is to be used by Facebook's main business, not just to develop a stable currency. But such a business logic does not seem to be seen by all the stable currency providers in the market. For service providers who only offer a stable currency solution and no other main business, the profitability challenge will be enormous.

First, the two forms of future digital currency

Future digital currencies will exist in two forms (see my article on the development of stable currency from monetary theory ). One is a digital version of the legal currency issued by each central bank based on its legal currency. The essence of this digital stable currency is the credit currency. The other is a stable currency in the market that is distributed in a distributed manner and based on the mortgaged digital assets. The essence of this stable currency is the commodity currency. This mechanism for generating stable coins continues the mechanism for the generation and circulation of bitcoins, and provides and guarantees the generation and circulation of such stable coins in a technical and market manner.

The various stable currencies in the market are currently issued on the basis of legal currency mortgages and are subject to standard currency. The difference between them is only a single legal currency or a standard basket of legal currency. Such a stable currency is actually a derivative of the legal currency, and its essence is still the credit currency. The attributes of such a digital stable currency still depend on the attributes of the legal currency that it is collateralized. I think that such a stable currency is still a transitional state of the stable currency product. After the central banks have issued their own digital currencies, the current market demand for these stable currencies will be greatly reduced. The stable currency that really has lasting vitality must be in a distributed manner and based on the stable currency generated by the mortgaged digital assets.

Second, the digital asset exchange is the basis of the new stable currency

With the development of blockchains and encrypted digital assets, it has been found that digital rights can be used to represent various real rights and assets in a digital way. The digital assets represented by smart contracts on the blockchain not only have richer attributes, but also embed business rules in them. Most importantly, the digital assets represented by smart contracts can be traded on the blockchain, trading directly in accounts and accounts on a global scale.

The way smart contracts represent digital assets is now in place. Delaware, USA, has legally recognized company shares registered on the blockchain. The ST market in the United States is financing and listing a portion of alternative assets in the form of ST within the existing US securities system. The types of alternative assets currently circulated in this way are mainly real estate and private equity funds. Due to the limitations of US securities regulations, the types of assets that such assets can be digitized, as well as the trading venues and investment users of assets, are subject to very large restrictions. However, two companies are now applying to the SEC for the registration of a digital stock exchange. Such digital stock exchanges will use digital methods to market their shares in circulation. In Switzerland, the Swiss Stock Exchange has established the Swiss Digital Asset Exchange SDX. The Swiss Stock Exchange expects that the product categories of SDX transactions will cover the types of securities currently traded on the Swiss Stock Exchange in the next decade.

Future digital assets will be traded within the exchange to obtain fair pricing in the market. The exchange will be global in nature and will be more transparent. The mode of operation of the exchange must be a mode of centralized trading and distributed clearing. This provides a solid foundation for issuing money based on digital assets.

The digital assets listed and traded on the exchange provide an asset base for a commodity-based digital currency. In the history of currency development, the currency before the French currency is the commodity currency. The basis of such commodity currencies is usually gold and silver. It is only the foundation of the currency that is the credit of the government. A major potential problem with credit-based currencies is the government's unrestricted issuance of currency. This situation has existed since the emergence of the currency. It has appeared in the history of China and other parts of the world. And it still continues to happen. Currency overshoot inevitably leads to financial crises and economic crises. This is the inherent flaw of the French currency itself. Of course, this is definitely not the value of the legal currency. The legal currency played an important role in the development of the modern economy. However, in today's society, with the development of the Internet and blockchain technology, there is now an opportunity to produce money in a new way based on actual assets, providing a widely circulated and stable value exchange medium for global economic development. This will avoid the destructive effects of some sovereign countries on the stable development of the economy due to mismanagement of monetary policy. In the future money market, digital currency based on sovereign government credit and digital stable money based on digital assets in the market will coexist and compete. This will force each currency to increase its value. The stable development of the global economy has therefore provided a better guarantee.

2.1. Exchange provides asset base for stable currency

In the current US securities market, ST has been used to digitize real-life assets and circulate them in the secondary market. Although the types of assets currently developed in this way are part of alternative assets and are only a small fraction of all assets in reality, the benefits that this approach can achieve are already significant. These alternative assets, such as real estate and private equity funds, are segmented and standardized by means of a pass, especially since these asset passes can be traded on a more efficient and low-cost network. Both sex and premium have been significantly improved. Such a mechanism for asset digitization can also be applied to mainstream asset types such as company equity. Such an application will not only increase the liquidity and premium of mainstream assets, but also significantly increase the overall efficiency of the capital market (see my article, Nasdaq's dusk ). In fact, the current global capital market has formed a consensus on this. The Swiss Digital Asset Exchange is the leading practitioner in this area. There are also two companies in the United States applying to the SEC to establish such a digital stock exchange. The two companies are the US exchange-controlled company Miami International Holdings (MIH) and Templum, and the BOX exchange with tZERO.

2.2. Exchange provides application scenarios for stable coins

The digitization of assets and currencies is a trend. But where does this trend start? The application of digital currency must begin at the beginning of the weakest place in the existing currency application. Such weak areas include areas where sovereign currencies lose their credibility, such as current Venezuela, or areas where sovereign currency is inconvenient to flow, such as cross-border transactions and transfers. In various cross-border transactions, transactions of digital assets on a global scale are inconvenient for existing French currency applications. In fact, the initial stable currency, Tether, was created to facilitate the trading of digital assets by users around the world. The main application scenarios for some stable coins that have emerged since then are also in the field of digital asset trading. Most importantly, an emerging field of digital asset trading worldwide. It has shown a strong growth trend. This growth in trading business will therefore certainly drive the growth of stable currencies. This is like the rapid growth of online commodity trading, and there is an urgent need for a mechanism to ensure the completion of transactions. This led to the emergence of Alipay. Alipay has grown with the growth of online commodity trading business. Later it developed into an independent payment instrument and clearing network.

2.3. The technical basis of the exchange

Such a digital asset exchange must be a combination of centralized trading and distributed clearing. Users manage their digital assets on the underlying chain or host them on a chain of third-party asset escrow companies. When the user conducts a transaction, the centralized matching mechanism performs the transaction matching, and the transaction order is directly cleared and settled between the chain account and the account. The secondary clearing mechanism in the current securities market is not needed. The efficiency of the transaction will be higher, the cost will be lower, the market risk of the client's funds will be smaller, and the utilization rate of funds will be higher.

2.4. The organizational model of the exchange

The development of blockchain technology has led to innovation in more fields. One of them is innovation in organizational form. The accounting in the blockchain is passed through the consensus of all nodes before it can be recorded on the chain. Such bookkeeping methods have spurred the development of membership-type organizational forms. In the development of Ethereum, it has tried to decide the voting decision mechanism of Ethereum development direction by means of DAO (Distributed Autonomous Organization). Although The DAO organization is not going well, it has inspired more attempts in this area since then. Coinbase and Circle jointly support CENTER ( why does Circle and Coinbase support USDC develop into a real stable currency? ), UBS initiated Fnality ( Fnality, a milestone in the evolution of financial market infrastructure ) that supports USC applications, and Facebook The Libra Association, a stable currency promotion organization, can be said to be the inheritance and development of this organization.

Of course, membership-based companies have long existed. For example, credit cooperatives in the financial industry and US option settlement companies that I have served before are such organizations. However, such an organizational form was usually within a small geographical area or a legal jurisdiction. Such organizations cannot expand globally. The emergence of blockchain technology provides a solid foundation for supporting the expansion of this organizational form on a global scale. Various rules in such an organization can be fixed and automatically run through smart contracts. The fairness of this organization can therefore be guaranteed. Any company in the world that meets the requirements of such a association can join, and can believe that the fairness of this organization can be guaranteed ( see the basic principles of DAO from Vikings ). The Libra Association can be said to be a recent attempt in this regard. Its current governance mechanism is still the traditional way, but I believe that it will gradually fix more governance rules in the form of smart contracts.

In the securities industry, I believe that the future digital asset exchange must be a digital asset exchange (the next blockchain-based cross-border financial alliance ) formed by a consortium of securities brokers around the world. Its organizational form will also be a governance mechanism supported by blockchain technology. The goal of such an exchange is to attract more brokers to participate and make this ecology bigger on a global scale. Fair and reasonable business rules based on blockchain technology support are the basis for attracting brokers from all over the world. With the participation of brokerage investment banks around the world, assets worldwide can be listed on the digital asset exchange. This also provides sufficient underlying asset support for the issuance of stable coins.

Third, the mechanism of the new stable currency

3.1. Value base

In the scenario of this exchange, the value of the new stable currency is based on the digital assets traded on the exchange. Since the exchange's transactions are 7 x 24 hours worldwide, the pricing of these digital assets is therefore entirely fair pricing in the market. The value base of the stable currency issued under these digital assets is therefore a consensus result of the market.

In the current banking and securities industry, collateral management is a day-to-day business. The asset collateral will mortgage the assets to the other party and obtain certain funds for use. After the funds are used up, the mortgagor will repay the funds to the lender and redeem the assets they have mortgaged. In the stock exchange market, one type of asset that is often mortgaged is securities. High quality securities and good liquidity make them ideal for lending as collateral. In the context of digital asset trading, some high-quality digital assets can also be used to generate stable coins. At present, there is a distributed mode represented by MakerDAO, and based on the mortgaged assets of the Ethereum. As technology evolves, more types of digital assets can be used to coin the coin in the same way. Even for digital assets that cannot be coined in this way, in this exchange scenario, coinage can be done in a centralized mortgage and custody manner. Therefore, the asset base of the stable currency is even greater. The number of coins that can be minted is also more.

Libra is based on legal currency and short-term government bond collateral. This model of issuing stable currency based on asset collateral is a model commonly used in the market today. Prior to Libra, digital stable currencies such as USDC were generated based on US dollar mortgages. So Libra is an improvement in stabilizing the mortgage assets issued by the currency. The new stable currency is based on the actual assets listed and traded on the exchange, so the value base of the new stable currency is a further improvement over the Libra stable currency.

3.2. Stabilizing currency prices

The Libra price will be the price of a basket of legal coins. Libra's previous stable currency is to mark its price against the US dollar. Therefore Libra's price is more stable. The new stable currency will still be a standard basket of legal currency for a long time. Such a mechanism is a viable mechanism. The difference between the new stable currency and Libra is the type of legal currency in a basket of legal coins and their respective weights.

3.3. Monetary policy

Libra clearly stated in its white paper that it does not have an independent monetary policy. Libra's monetary policy is entirely dependent on the monetary policy of the legal currency in the standard basket of legal currency. Similarly, for a long time, the new stable currency will not have its own independent monetary policy. It will also depend entirely on the monetary policy of each of the French currency in a basket of legal coins. In this respect, Libra has improved compared to the previous stable currency, because the monetary policy of the previous stable currency is completely dependent on the US dollar, and Libra's fluctuations due to changes in monetary policy are much smaller.

3.4. Number of issues

The amount of Libra's circulation in the market is entirely dependent on the needs of the market. This quantitative mechanism is the same as the previous dollar-based stable currency. The new stable currency is no exception in this respect. The current mechanism for stabilizing such coins is actually a derivative of existing legal currency, so the liquidity in the market should also depend entirely on the market liquidity in a basket of legal coins.

3.5. Coinage tax

Libra's direct coinage income is the proceeds of its legal currency and short-term government bonds that can be obtained through cash management. The resulting benefits are not high and may even be negative. The coinage tax on Libra's previous stable currency is also the interest generated by the bank in the mortgaged dollar. The new stable currency is able to obtain a slightly higher income from the seigniorage tax because it is issued and circulated in the exchange environment. The exchange can support the coinage business in the form of collective coin lending. In other words, the exchange provides a stable currency-based financing transaction business. Traders can borrow stable currency from the exchange for their own leveraged trading. The exchange derives revenue from this business and allocates a portion of the proceeds as a coinage tax to the participating mints.

Fourth, the comparison between the new stable currency and Libra stable currency

The table below shows a comparison of the new stable currency with the Libra stabilized currency.

	Libra stable currency	New stable currency
Value basis	a basket of legal coins	Digital assets
Currency essence	credit	commodity
issue number	Market decision	Market decision
Coinage tax	Mortgage currency interest	Market premium generated by the transaction
Mint participation mechanism	Everyone	Everyone
Circulation infrastructure	Blockchain	Blockchain
Promotion agency	Libra Association	Digital asset exchange
Initial user	Global unbanked and underbanked groups	Global digital asset trading user
Initial application scenario	Various financial services	Digital asset trading

4.1. Different value bases

The fundamental difference between the new stable currency and the Libra stable currency is the value base. The Libra Stabilizer is still essentially a credit currency. The value of the new stable currency is based on digital assets, so its essence is the commodity currency. Both currencies have their own characteristics. The coexistence and competition between the two in the market will bring better choices for the market in terms of currency.

4.1. The initial weight of the underlying blockchain is different

Libra's underlying blockchain was developed for the circulation of Libra stable coins. But it also supports the application of smart contracts. Therefore, more complex financial products, including stocks, can be circulated in this blockchain. The underlying blockchain of the new stable currency must first support the clearing and settlement of digital assets. So it needs to support digital currency and more complex financial products from the start.

4.2. Different initial application scenarios

The goal of Libra Stabilization Coin is to provide a financial infrastructure on a global scale to serve the world's 1.7 billion people without financial services. This is indeed a viable business strategy to promote stable coins. I analyzed this in a previous article ( How do I use the blockchain to bring paradigm changes to the global credit industry? ). This area is currently an area that financial institutions cannot serve. The emergence of blockchains and encrypted digital currencies now provides an opportunity to improve financial services. Facebook can use its social network to provide stable currency-based financial services to its users worldwide. The initial application scenario for the new stable currency is digital asset trading. Such an application scenario is in line with the actual needs in the market and is an area of ​​strong growth. Therefore, the new stable currency will gradually increase.

4.3. Different impacts on the existing financial system

Although the initial application of the two stable coins will focus on the weak areas of the existing legal currency services, the new stable currency has a smaller application range and its spillover effect is therefore smaller. The circulation of Libra Stabilizers is global. Although it will focus first on the people who are not able to access financial services, its actual application in the real world will certainly not be carried out in full accordance with the expectations of the project parties. Therefore, the impact of Libra stabilized currency on the existing financial system can be very large. In addition, since Facebook is a standard basket of legal currency and accepts legal currency mortgages to generate Libra stable coins, it will certainly have an impact on the existing legal currency. This will bring a lot of uncertainty to every kind of legal currency circulating in the market, which is unwilling to be seen by existing legal currency issuers.

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