Gu Yanxi: Facebook's stable currency Libra brings opportunities, challenges and a visible future

Written by: Gu Yanxi, a multi-year practitioner in China and the US financial market, a researcher and practitioner of blockchain and encrypted digital assets, served as the deputy director of information technology at Huatai United Securities and several financial services companies COO, once served in the United States An option settlement company that provides clearing services for all options trading in the United States.

Facebook, the world's largest social networking company, announced the launch of Libra, a far-reaching and influential event that could affect the lives of billions of users and revolutionize our familiar financial and currency distribution systems.

What are the mechanisms, opportunities, challenges and future impacts of the project? I hope this article will analyze the reader one by one.

Understand current currency issuance and clearing mechanisms

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There are two types of currencies, one is commodity currency and the other is credit currency. Commodity currency is a currency issued on the basis of commodities, such as the currency that was once issued on the basis of gold. The credit currency is the currency issued by the central bank based on its own credit, which is now known as the legal currency.

The circulation of money is circulated in the form of physical currency and electronic accounting. The physical currency is coins and banknotes made by various central banks. Electronic accounting is the holding and circulation of currency based entirely on electronic technology.

In the process of payment, the process of paying in real money is called the process of payment and payment, which is commonly known as the first-hand delivery of money. The electronic payment method is that the two parties in the transaction perform corresponding accounting in their respective bank accounts. The bank of both parties to the transaction and an intermediate clearing company record the completion of the transaction to ensure that the accounting is correct. The underlying clearing network that supports this payment is usually a clearing network between banks. The clearing network between the banks in the United States is ACH. Banks exchange data through this clearing network to ensure that the accounting data is correct.

In such a market structure, the bank conducts money lending business by attracting users' deposits, and the loan business is the bank's main profit model. Among the various services provided by banks to users for obtaining deposits from users, free payment is one of them. In our daily economic life, when paying with banknotes and bank debit cards, on the surface, this payment is free, but in fact it is obtained through deposits in the bank.

Credit card payments are based on credit payments. When a user makes a payment using a credit card, his card issuing bank pays the money to the other party. The user will return the money to his credit card issuing bank for a period of time thereafter. Credit card companies typically charge 2% to 3% of the service fee to the payee of the credit card payment. The role of a credit card company is actually a clearing network that provides credit card payments. It works with the issuing banks and collection banks of individual credit cards to complete the process. Such credit card companies include Visa and Mastercard.

In addition to the payment methods provided by banks, there are some other service providers on the market. One of the main types is the integration side of the payment client, such as PayPal, Stripe and Square in the United States. The products of these companies collect the customer's payment on the payment client, and then transmit the payment data to the bank of both parties through the bank's clearing network and credit card clearing network.

What is the currency mechanism of Libra?

Currency attributes : Libra is a digital stable currency issued on the basis of legal currency and short-term government bond pledges, so its essence is still credit currency. Libra's monetary policy is best described in the following section of the white paper: "Our goal is to have Libra coexist with the existing currency. Since Libra will be a global currency, the association decided not to develop its own monetary policy, but instead Follow the policy of the central bank represented by the basket."

Circulation : The release and destruction of Libra is entirely dependent on market demand.

Pricing : Libra's price will be a standard currency, and the mechanism in this regard will be similar to the Special Drawing Rights (SDR). However, the Libra white paper does not specify which currency and specific quantities Libra will currently target.

Seigniorage tax : For the coinage of the mortgaged asset, the coinage tax should come from its various business income based on Libra.

Bottom Clearing Network : The underlying clearing network for Libra Stabilized Coins is an open licensing chain.

Governance Mechanism : The Libra Association, a non-profit organization registered in Switzerland, manages all aspects of Libra Stabilizing Coins. There are about 100 members in the association.

What are the advantages and opportunities of Libra?

Achieve a more reasonable coinage mechanism

Bitcoin's coinage mechanism is a very fair and reasonable mechanism. Anyone and any institution can obtain the newly produced bitcoin by providing bitcoin billing services. This is actually a process in which everyone participates in coinage. In the current financial society, the coinage rights are owned by the government. Only the government has the power to cast legal currency according to its credit. The government has thus acquired a large amount of wealth and the right to use these wealth in the process of coinage. Ordinary individuals and other organizations cannot participate in coinage and therefore cannot obtain a coinage tax. Libra offers an opportunity for everyone to participate in coinage and receive a coinage tax accordingly.

In Libra's design, each node needs to pledge $10 million in its own funds to participate in the coinage. It is estimated that Libra's first wholesale volume will be Libra worth about $1 billion. Thereafter, participating nodes or authorized resellers can use DeFi's coinage model to allow more institutions and individuals to mortgage their owned and accepted assets to participate in the coining process. The coinage threshold is therefore greatly reduced, thus providing an opportunity for everyone to participate in the coinage and obtain the corresponding coinage tax .

Have the opportunity to develop into a commodity currency

Libra's current assets are based on legal currency and short-term government bonds, so it is still a legal currency. The value of Libra itself is inevitably affected by the potential disadvantages of credit currencies. Since the quality of the legal currency depends on the policy of the issuing government, the uncertainty of the policy will definitely affect the value of Libra. For example, the US government has caused a sharp depreciation of the US dollar due to the large expenditure of the Vietnam War. However, after birth, Libra has its own unique identity, which can adjust the future acceptable mortgage assets, and it is possible to gradually develop into a complete commodity currency, whose value will be determined by the pricing of the global market.

Establish financial market infrastructure worldwide

The underlying blockchain technology that supports Bitcoin circulation has proven to be more valuable than Bitcoin. The underlying blockchain network that supports Libra's circulation may also be more valuable in the future than the Libra Stabilizer.

One of the biggest highlights of the Libra project is its underlying blockchain technology network. The Libra project white paper also explicitly defines this network as a financial infrastructure. Such a network is actually what the financial industry usually calls the Financial Market Infrastructure (FMI). Such an underlying network will support not only the simplest financial variety, namely money, but also the circulation of various complex financial products. Given Facebook's social network of more than 2.7 billion users and the participation of various members of the Libra Association, if there are several commercially available stable currency-based financial applications, it will attract a large number of users to use the network. And given that the network is open, it is likely to become a strong competitor to compete with Ethereum.

At present, various public chains are hoping to become the universally adopted public chain and become the second in Ethereum. But among the various reasons that hinder the widespread adoption of a public chain, the lack of killer applications is a major cause (see my article: "So many public chains, so few applications" ). Now the Libra project provides an underlying chain and a stable currency running on top of it, as well as various applications on top of it; more importantly, the project also has direct 2.7 billion potential users, then such an underlying chain is The probability of widespread adoption in the market is very large.

Internationalized social networks match the attributes of digital assets

Encrypted digital assets are internationalized from the very beginning, and their generation and circulation are not restricted by national boundaries. Facebook's social network is also global, and its network members are spread across countries around the world, which is in line with the internationalization of digital assets. In Facebook's social network, users have become accustomed to the exchange of information between peers, and on this basis, it is much easier to further exchange value between peers. So this is very beneficial for Facebook to promote its stable currency products, this migration mechanism is very similar to WeChat users start using WeChat payment.

Achieve opportunities for the convergence of the Internet and blockchain

The Libra-enabled network supports the circulation of stable currencies and various financial products. The first financial product on this network is clearly Libra stable currency. Then, users on the Facebook social network can make direct transfers between accounts through Libra. This migration process is essentially a process in which Internet information network users gradually adopt a blockchain-based value exchange network. This process is fundamentally different from WeChat users' use of WeChat payment. The essence of WeChat payment is still based on the information exchange of the centralized system. The process by which Facebook users use stable currency is the process of turning to a direct value transaction between an account and an account.

With the increasing use of stable currency users, the integration of Internet-based information networks with blockchain-based value networks has actually been achieved (see my article: “Transition from Centralized Information Networks to Distributed Value Networks” ).

The current development of blockchain networks has much room for improvement in terms of usability. One aspect is the need for asset information that can help ordinary users visually see and use blockchains. The process of using Libra by Facebook users is a process of merging the information-based Internet network with the blockchain network for value exchange. Therefore, the popularization of blockchain usage will also have a qualitative improvement.

Provide an entry into the future digital financial world

The future digital financial world must be a world based on digital assets. In this future unified digital financial network ecosystem, the generation, circulation, storage, trading and use of digital assets are all in one chain. Users only need one client to manage and use their digital assets and digital currency for retail payments and securities transactions, as well as to easily convert between digital assets and digital currencies. If Libra is widely used, Facebook's current client terminals, whether Facebook, WhatsApp or Instagram, will be such an entry point.

In my previous article, I thought that Facebook should continue to strengthen its user-client advantage in its stable currency strategy, rather than developing its own stable currency products (see my article: "Facebook's Stabilization Strategy Analysis" ). Libra Stabilizers are now managed by the Libra Association. Facebook established for this purpose is only one of the members of the association. This way Facebook is not the exclusive operator of Libra's stable currency, so it won't be the target of other stable currency products. Facebook can therefore further expand its user-client advantage based on Libra, and other social networks will be more difficult to shake Facebook's market position.

Correct organization

Libra's organization is one of the biggest highlights of this project.

Instead of adopting an exclusive approach to this stable currency product, Facebook has specifically registered an association to promote the stable currency. And this organization is not-for-profit, providing basic services only for members' businesses.

Members of the alliance to date include companies in different public sectors, such as Visa and Mastercard for credit card companies, Uber and Lyft for consumer applications companies, PayPal and Stripe for payment application companies, e-commerce companies, investment companies and non-profits in Argentina. Sex companies and so on. The participation of related different types of companies will be very helpful in stabilizing the promotion of coins .

Of particular importance, the design of the Libra Association is clearly to ensure the fairness of the decision-making of the association, so among the initial members, direct competitors of some industries are involved in the association, such as Visa and Mastercard, Uber and Lyft. The association therefore determined the inclusiveness of the association in accepting members from the outset.

The organization of the alliance is a mainstream form of organization. This form is actually prevalent in the current business community, from credit unions to the Federal Reserve Bank. This is the case, for example, in the organization of the Options Clearing Corporation that I have served before. It is a non-profit company formed by the first five options exchanges in the United States. It serves the options exchange and settlement members. The annual profit on the account is returned to the shareholders and clearing members.

But the current form of organization exists only in an industry in a small area or a jurisdiction. The emergence of blockchain technology has given this organization a new dimension (see my article: "Why Circle and Coinbase-supported USDCs will develop into real stable coins" , a milestone in the evolution of Fnality's financial market infrastructure ). The blockchain supports the automatic operation of smart contracts on top of it. In this form of alliance form, business rules can be predetermined and then automatically run on the chain through smart contracts. Since there is no human intervention, the way such rules are enforced is fair to any party involved.

The most representative application in this regard is the distribution of revenue among multiple servants . Since smart contracts automate the distribution rules, more service providers can confidently participate in providing this service. The scalability of the business is therefore very strong. Alliance members are no longer restricted by regional and supervisory jurisdictions. Individuals in any place can join as long as they meet the rules of the alliance. Libra's service network is therefore able to attract service organizations around the world to participate in the provision of Libra-based services, so the ecosystem can grow quickly and steadily.

Feasible promotion strategy

The promotion of an innovative financial product must have a suitable application scenario. Existing financial instruments do not provide a good solution in this application scenario, and this innovative financial product has the opportunity to generate and develop. The most representative example of this is the creation of Alipay. As an online payment and clearing method, Alipay filled a blank field where financial payment could not be serviced at the time, and this blank field was in the field of rapid development at that time, and Alipay gradually developed.

1 Promotion area

In terms of geographic scope, Libra's biggest opportunity is in the areas with the weakest traditional financial strength. For example, a regime with weak monetary management capabilities has led to a large number of currency issuances, such as Germany after World War I and Venezuela not long ago. In order to protect their assets, local people have a very high demand for stable currencies around the world. Of course, if Libra is in the market from the beginning, the ability of the local regime to spam money will be greatly limited.

Another situation is in the newly established small country. In these newly independent small countries, each government has a very strong incentive to issue its own credit currency. However, because of its small economic volume and economic ability, the credit currency it issues is difficult to accept. Libra's quality is much higher than the creditworthy currencies of these emerging small regimes. In such a geographical area, the market will definitely pay a premium for Libra.

The worst area of ​​promotion for Libra applications is the daily payment activities of people in economic entities like the United States. It is very difficult to replace the habit of using credit cards in this area with Libra.

2 Business areas

In terms of business, the biggest application scenario of digital stable currency is still the trading of digital assets. The application scenario for the original stable currency Tether was digital asset trading. In the past year or two, the compliance stable currency that has emerged in the US market is also primarily used for transactions in digital assets. When digital asset trading is on the rise, the market's demand for stable coins is even stronger, which is also reflected in the market's willingness to pay a higher premium for stable currencies. But in the field of digital asset trading, Facebook does not have the advantage in this regard. Therefore, it chose the next important application area of ​​digital stability currency, namely the transfer remittance transaction between different legal currencies.

Currently, the transfer of funds between different legal currencies in the financial market is done through a centralized clearing system, the most famous of which is SWIFT. The current process is costly and inefficient. This is an urgent problem that needs to be solved in the market. The emergence of blockchain and encrypted digital currency technology provides a good means of solving such a problem. A consensus has been formed in this market. The USC and JPM launched by financial institutions are the first to solve the remittances of different legal currencies between institutions. WorldWire, which IBM has partnered with Stellar, also supports remittances between different legal currencies between banks. Facebook's choice of this field as the first entry point for its stable currency is therefore very natural.

In the field of cross-border remittances, Facebook does have its incomparable advantages. Facebook social networks have 2.7 billion users worldwide, with the largest number of users in India and 260 million Indian users. One such advantage is that no other company can. The retail cross-border remittance market is more than $600 billion a year. This market is in great demand and will continue to grow. In addition, according to the World Bank, India received $80 billion in remittances from overseas in 2018, ranking first in the world, and such remittances are expected to continue to grow. So it is logical for Facebook to choose India's retail cross-border remittance business as its first application for stable currency.

3 technical factors

Facebook chose cross-border remittance services as the first business application, which is also suitable for the underlying support of the required blockchain technology.

Cross-border remittance services have low performance requirements for the underlying clearing system, and blockchain technology can fully meet such business requirements at the current level. Compared to the current cross-border remittance at least one day, the real-time settlement of blockchain technical support has been greatly improved in terms of time. Compared with the cross-border remittance business, the retail payment service in the same market has higher performance requirements for the underlying clearing network. The current level of blockchain technology is simply unable to meet such business requirements.

Services are currently not available to financial services

The Libra White Paper believes that Libra will serve more users worldwide, which is very reasonable and predictable.

On top of this underlying clearing network, the application of stable currency will not be limited to payments between accounts. The loan business can also be carried out. Since the users of the stable currency require identity authentication and anti-money laundering certification, the real identity of the users of the stable currency will be recorded in the chain, and the lending behavior of these users will be recorded in the chain, and the credit of the borrowing user is therefore It is very easy to find out. This will solve a very big problem in real financial life, which is to help those unbanked and underbanked user groups. Because a major factor hindering the access of this group to financial services is the high cost of credit reporting. The credit level of each borrower can be easily obtained on Libra's chain, so a good credit user can get financial services corresponding to their credit level ( see my article: "How to use the blockchain as a global individual The credit industry has brought about a paradigm shift .)

Avoid excessive credit from commercial banks

On the Libra network, one of the benefits of using Libra Stabilized Coins for credit business is to avoid the ability of commercial banks to create credit currencies. Because Libra is required to have equivalent legal currency collateral in the bank, Libra will not have an additional situation. When the credit institutions in the chain use Libra for lending, it must first have a corresponding amount of stable currency. In the real banking market, commercial banks actually created more money through lending. The ability of commercial banks to create credit loans at different times is subject to different restrictions. Before the 2008 financial crisis, this restriction was very small.

Excessive lending by commercial banks is a major cause of the financial crisis, but in Libra's distribution network, credit institutions in the network do not have the ability to create credit currencies. This also eliminates a major cause of the financial crisis.

What is Libra's business model?

As a basic service in the financial market, Libra Stabilizer and its underlying clearing network can only earn the most basic service fees. It is ridiculous to hope that the stable currency products themselves will obtain high profits. Nor can they expect the Libra Association to allocate new stable coins to distribute between nodes every year. It is equally impossible to expect the Libra Association to leverage the new currency as a bank. Libra's reasonable profit income should be derived from the revenue generated by various business applications based on this, such as cross-border remittances and loans .

Facebook's first application scenario for Libra is India's cross-border remittance market. According to the World Bank report, in 2018, India is the world's largest cross-border remittance business. During the year, it received $80 billion in remittances from overseas. The cost of a cross-border remittance business is usually 2% to 3% of the remittance amount. Given that Facebook has more than 200 million users in India and 2.7 billion users worldwide, it is reasonable to assume that many Indian users inside and outside India who use cross-border remittances are using Facebook. This provides a very good foundation for Libra's application in this cross-border remittance.

When the stable currency is circulated between accounts, the underlying network that supports its circulation can be charged or not charged. The method of charging also includes charging the parties to the transaction or charging the payee. In the existing digital asset circulation method, the network circulation fee is basically free. For example, the purpose of the Ethereum gas fee is to prevent attacks, rather than earning network service fees. The same is true for the design of transaction fees on the Stellar network that directly supports cross-border remittances. If Libra chooses a charging method, it will reduce its competitiveness relative to other stable currencies .

It is estimated that Libra will not charge when it is in circulation. Only when a user converts a stable currency into a legal currency will the node providing the service charge. This revenue will definitely be distributed between the nodes that provide this service and the network, and the nodes that provide the services directly will receive the majority of the revenue from this service, and the network will get a small portion of it. The portion of the revenue allocated to the network must be evenly distributed among the nodes. In this way, the ROI of each node in this business should be limited .

Of course, other stable currency-based businesses generate reasonable revenue. For example, when the market has a strong demand for stable value, the market will pay a higher premium for the stable currency. Given the current turmoil in global financial markets, the odds of this premium are very high.

What are the Libra project risks?

Risk 1: High-risk project management

If the Libra project fails, project management is definitely one of the main reasons for its failure.

There are usually two ways to manage project progress: one is progressive and the other is big. Gradual project management is carried out step by step, starting from small scale and local. After the gradual completion of the various components and the gradual realization of the phased objectives, the ultimate goal of the project is naturally achieved. The big bang is the way to achieve the ultimate goal as the first goal. The various tasks of the project are carried out for this purpose. The ultimate goal of the project is achieved in a one-off manner. For example, the so-called Battle of the National Games and Bi Qigong in this battle refer to this approach. Comparing the two methods, it is clear that the first type of risk is much smaller, while the second type is risky. The Libra project actually uses the second approach.

The Libra project is a large and complex project. Facebook has a global network of 2.7 billion users. The nature of a stable currency project is much more complicated than a social networking site. It covers aspects such as technology, currency generation mechanism, financial market structure, business model, organizational model, promotion model, communication and coordination with local supervision. Now that Facebook plans to implement Libra in its various terminals, it can be seen that the scope of the project is huge, and the scope of the project is one of the biggest risks of project management.

From the existing reports, Facebook's success expectations for this project are very large. For this reason, it is talking with various agencies, including commercial companies and regulatory agencies. In terms of project management, Facebook actually uses a big bang to manage projects. This type of project management has its advantages, but the same risks are also very high. Because a large project requires close coordination with all aspects, any small detail can lead to overall delay or failure of the project. Therefore, the gradual approach is a more secure approach to project management. The development of Facebook itself is actually a gradual project management model. It starts with a university campus in the United States, then expands to other campuses, and finally expands globally. If the Facebook social network is launched globally from the beginning, it will definitely fail.

Risk 2: Resistance from existing interests in various countries

Facebook chose India's cross-border remittance business as an entry point for Libra. Although the choices in terms of region, business and technology are reasonable, Facebook's biggest resistance in this regard may come from the existing forces in Indian society.

The Indian social system is a fully democratic system. It is characterized by the fact that any decision needs to be fully implemented and formed into a consensus before it can be implemented. Introducing a new type of digital currency in Indian society is obviously a very important thing. Libra and its underlying clearing network will directly impact India's financial market base. Many of the existing benefits will therefore be affected. In such a situation, it is impossible to form a consensus in a short period of time. This factor will be one of the biggest risk variables in Facebook's Libra app promotion strategy.

The information in Facebook's social network is freely circulated. But in a country, if a new currency appears, this is something completely different. The free exchange of values ​​affects a society far more than the free flow of information. Governments must definitely assess its impact on its currency and financial policies. Therefore, the Libra Association needs to communicate with each country's financial regulation. Libra's free circulation around the world is not a natural occurrence.

For the US dollar that is currently dominant in global trade, Libra is a benchmark for a package of legal currency, not just the US dollar, so its promotion will inevitably affect the market position of the US dollar. In addition, because the Libra Association is an organization registered in Switzerland, outside the supervision of the US government, this will also attract the attention of the US government. Finally, given Facebook's previous user privacy issues, it is expected that the Libra project will have a longer communication and coordination with the US government in the future.

Risk 3: Competitive risk

The Libra project definitely competes with existing stable currencies in the market. The USDC, TUSD, GUSD and GUSD are all stable coins of the same type. They are all based on US dollar mortgages, linked to the US dollar, and stabilized by the ERC20 standard. Given the nature of these stable currencies and the organizations behind them, these stable currencies will not form a strong competition for Libra.

One competitor is the alliance World Wire between the banks led by IBM. This alliance is a remittance alliance between banks in various countries, and the underlying technology is based on Stellar technology. Stellar technology also supports the issuance of stable coins on its network, and in fact banks and third-party companies are issuing stable coins based on Stellar technology. However, these issuers have far less influence in the global market than Facebook, and World Wire is mainly positioned to support the transfer business between financial institutions. It is a low-level clearing and settlement network, not a stable currency, so IBM's World Wire and Libra's positioning. It is totally different.

However, World Wire will be Libra's important competitor from the banking community. First, banks participating in World Wire can issue stable coins based on their own national currency on the basis of this network. Second, the stable currency circulation costs on Stellar's World Wire are low. Therefore, World Wire will be a competitor to Libra in terms of participation in national bank support, stable currency diversity and distribution costs.

Another type of potential competitor for Libra should be a stable currency issued by a banking institution. In this field, the most famous ones should be the USC jointly sponsored by JP Morgan and financial institutions such as UBS. Although the current positioning of these two stable currencies is for clearing and settlement between banking institutions, the two stable currencies can be further developed into the retail payment field, which will directly compete with Libra. Among the two stable currencies, USC and JPM, USC will be more competitive in the market because USC is jointly supported by some well-known financial institutions. This organizational model is more in line with the trend of blockchain technology development. The supporters of JPM are mainly based on JP Morgan, which is still the traditional organizational management model. This model of operating alone is hard to beat the mode of joint operations.

One of Libra's potential competitors should be Jack Dorsey. Jack Dorsey is also the CEO of Twitter and Square. Twitter is a social network that rivals Facebook. The number of monthly users is 320 million, and about 80% of Twitter registered users are overseas. Another very important factor is that Twitter is the favorite social network for cryptocurrency enthusiasts, and its advantage in this area is definitely ahead of Facebook. Square is the terminal of the very popular retail payment market in the United States, with 45 million downloads as of the beginning of 2019. And Jack Dorsey has always been a Bitcoin enthusiast, and in Square's terminal, has begun to support Bitcoin sales and payments, so Jack Dorsey should have a better chance than Facebook to promote a digital stable currency globally (see My article: "The most should be a stable coin should be Jack, not Mark" ). Among the reported members of Libra's alliance, the relevant financial institutions are Visa, Mastercard, PayPal and Stripe, but there is clearly no Twitter and Square. For Libra, there is a potentially very strong competitor.

Risk 4: Lack of a unique application scenario

Libra's application lacks a strong demand in the market, but the existing banking services are very weak. It now appears that the best application scenario for Facebook in its ecosystem is cross-border remittances. The current inefficiency of cross-border remittances is well known, but it is also well known to use stable coins and blockchains to solve this problem. Previously, IBM and Stellar teamed up with a number of banks to establish World Wire to solve cross-border remittance problems.

Facebook is now using the same solution to participate in this business. Facebook's solution doesn't have a strong first-mover advantage in time, and it's not that one is operating alone. In addition, whether it is USC or JPM, these stable coins will be further extended to cross-border transfers between retail customers. Given the fierce state of the market, it is difficult for Libra to have enough time to build its edge in the field of cross-border transfers. In contrast, Bitcoin has many years of development time alone. This will help to ensure the absolute leading position in the cryptocurrency market today.

Think more, better understand Libra

Libra vs. Bitcoin

The original intention of Bitcoin was to become an electronic cash, which was later developed into a digital asset. But Bitcoin's philosophy and mechanism have inspired all subsequent digital currency projects, and more innovations have been derived from the Bitcoin mechanism, which of course includes the current Libra Stabilization Coin project.

In terms of the value attribute of money, Bitcoin is not associated with any other asset, and its value is entirely the result of market consensus. Bitcoin is actually a virtual commodity, not a currency. Libra is based on a legal currency mortgage, which is actually a derivative of the existing legal currency, so the essence of Libra is still based on the legal currency of credit issuance.

In terms of the stability of value, since the value of Bitcoin is formed through constant transactions in the market, its volatility is inevitable, and Bitcoin is therefore not suitable as a value exchange medium. Libra's price is worth a basket of legal coins, so its value is much more stable, so it is suitable as a value exchange medium.

In terms of governance mechanism, Bitcoin's governance mechanism is completely pre-set, and is automatically controlled by no one or organization. Libra's governance mechanism is governed by a 100-member association. Such a democratic decision-making mechanism, although far from Bitcoin, is more reasonable than the existing governance mechanisms of some French currency.

As a digital asset, Libra's biggest advantage over Bitcoin is that it can convert existing legal currency into digital form for use in the market in a more reasonable way. Bitcoin, as a virtual asset, is linked to existing legal currency and assets, so it is impossible to digitize real-world currencies and assets, and thus cannot be linked to real economic life. But Libra can successfully complete this grafting. This will greatly advance the process of digitalization of money.

Can't overestimate Facebook's user advantage

The Facebook social network has 2.7 billion users in almost every country in the world, which provides a very strong user base for Libra products. However, it cannot be inferred that Libra products will naturally succeed. Facebook's previous financial service attempts such as Facebook Pay and Facebook Credit have shown that this is not the case. The content and aspects of the Stabilized Coin product are more complex than the previous two financial products. So Facebook's advantage in terms of users can't be over-expected.

Pursuing profits or pursuing the growth of online users?

One of the first choices for Libra's business is to pursue profit or to pursue an increase in network users. These two goals are mutually exclusive and only one of them can be selected. According to the Internet business model, the growth of network users is the first choice, but Wall Street's expectations are obviously profits. Amazon's success has proven the tremendous value that the Internet business model can create. So in this regard, I think Libra is more likely to choose the growth of users, and its stable currency business will provide more value than competitors, in order to attract more users to start using Libra's underlying clearing network, so that more can be provided thereafter. Value-added financial services.

Libra cannot replace credit card payments

Earlier reports said that one of Libra's stable currency targets was to replace the 2% to 3% service charge that credit card companies charge merchants during credit card payments. If this is the case, I think this logic is unreasonable.

First, credit card payments are mainly people who are used to this type of payment. This type of payment is actually beneficial to consumers and not beneficial to the recipient. However, the payment method of the stable currency is the payment mode of the payment, which is completely different from the credit-based payment. In the current economic life, the use of credit card payments and the use of cash and debit card payments (that is, the stable currency payment model) are completely different. It is difficult for a user population currently paying with a credit card to change their existing payment habits because of the stability of the currency.

Second, if Libra positions itself as a credit card, then such a strategic decision is wrong. The place where credit card usage is common is also the place where traditional financial power is strongest. The stable currency and the underlying clearing network that supports its circulation are the biggest challenges to the centralized financial market structure. So there must be the strongest resistance from traditional financial forces. In addition, in terms of the user population, the user community in this region has become accustomed to using existing financial services. When a new type of financial services emerges, it is difficult for these user groups to change the existing methods to adopt new financial services without significant benefits. This is also why the QR code payment first rose in China, and now it is gradually infiltrating into the US market.

Current Libra alliance members include Visa and Mastercard credit card companies. I think the credit card company's judgment is that Libra and its underlying clearing network will provide a very competitive payment and payment model, namely cash and bank debit card payment mode, but will not produce a credit-based payment method. Direct competitive impact. In addition, the application of blockchain technology and digital assets is a clear trend, and its fundamental changes in financial markets are also very obvious. As a financial market infrastructure service provider, credit card companies should grasp the changes that Libra can bring to this and be at the forefront of this change.

Missing digital stock exchange

The digital stock exchange is an important part of the Libra product strategy. Such an exchange is not the current cryptocurrency exchanges like Coinbase and Kraken, but rather a variety of securities-based token exchanges in the United States, which can digitize various assets and interests in the real world. And then conduct an encrypted digital asset exchange for secondary market transactions. These products are now known as securities tokens, but I think these products are more likely to be called digital securities in the future, or "digital security." At present, two companies in the US securities market are applying to the SEC to establish such a digital stock exchange.

In the future financial world, various assets and interests in reality will be digitized and then traded in the secondary market in the form of digital securities. Since the structure of the future securities market is global and the liquidity has increased substantially, some of the smaller securities trading varieties in the past will also be circulated in the secondary market by means of centralized trading. The asset class is not only the company's equity and fund shares, but also alternative assets such as real estate. In addition, since the secondary market in the future is a global 7×24-hour transaction, the value of various assets is to be priced at any time and on a fair global basis. Such a wide variety of assets and fair pricing in the market provide a solid basis for the issuance of commodity currencies based on these assets. This will also provide Libra with a solid foundation for over-commodity currency.

Digital stock exchanges not only provide underlying assets and pricing for the issuance of stable currencies, but also provide a major application scenario for the use of stable currencies. Due to the nature of the global trading of digital stock exchanges, stable currencies are therefore more suitable for use in such exchanges than any kind of legal currency, so digital stock exchanges and stable currencies are two mutually reinforcing aspects.

In addition, in the future financial world, the user's retail payment scenario will be inseparable from the securities trading scenario. Users can use a client terminal to perform retail payment and securities trading operations, and can exchange the digital stable currency and variable value digital assets at any time. Therefore, the exchange is also an indispensable part of supporting users' financial activities.

But in the current Libra strategy, the digital stock exchange has not become a major component of it. I think this is a missing part of Libra's strategy. Of course, it is also possible that Libra is waiting for the further development of the digital stock exchange, which has already left a proper place for such a future exchange in the current design.

Interestingly, Bakkt's strategy happens to be at the other extreme. Bakkt's vision is to create a network of digital asset generation, storage and distribution, and Bakkt also foresees the convergence of future digital asset transactions and payments (see my article: “Is Bakkt's pursuit of Starbucks worthy?” ). But Bakkt's strategy ignores the tandem role of stable coins in this ecology (see my article: "The missing part of the stable currency Bakkt strategy" ). Therefore, Bakkt definitely needs to be improved in this area.

What kind of members does the alliance need?

Members of the current Facebook Alliance can call it "All American but no banks," or "all-American star teams without bank participation." Members of the current league are very well known, and each member has provided $10 million and nominal support. So in order to promote this stable currency, what members of the alliance need in the future?

The most important application scenarios for stable coins are digital asset transactions and cross-border remittances and payments. If Libra is currently not widely available for digital asset trading for regulatory reasons, then the second option should be cross-border remittances and payments. This field is where the various French currency applications are weak, but there is a strong market demand. So the biggest organization for Libra's application promotion should be companies that conduct cross-border transactions and payment services, such as travel and cross-border e-commerce. In this respect, Uber and Lyft are very good choices. A user pays for the same taxi client and a digital currency in different countries, which is much more convenient than the existing taxi payment process.

The current lack of participation of members of other members of the Alliance is a need for improvement in the current membership of the Alliance. However, I believe that the Libra Association definitely has a clear understanding of this, and the recruitment and participation of other members of the country is already in the promotion plan.

It is not surprising that there are no banking institutions among the members of the alliance. After all, currency and currency-based financial services are the home of banking institutions. Now that the Libra Alliance is going to enter this field and fundamentally change the rules of the game, it is sure to alert the banking institutions. What's more, there are already digital currency generating and circulation schemes based on blockchain technology in the financial sector. Banking institutions in various countries definitely need further evaluation before they can make a choice. More importantly, the banking system is not very independent of the other industry. It is strictly regulated and protected by regulatory policies. Without the permission of the bank's location, banks will be very cautious about participating in such an organization that changes the financial market base.

Comparison with WeChat payment

The success of WeChat payment is obvious to all. I believe this is also a reason to motivate Facebook to make stable coins. Facebook's previous similar product was Facebook Pay, but that product was not warmly welcomed by the market. The Libra project is another attempt by Facebook to provide financial services. Compared to WeChat payment, Libra is fundamentally different.

In terms of user attributes, the WeChat user population is a Chinese-speaking crowd, with the main user population in China. The Facebook client community is a global client community of 2.7 billion users in many countries around the world, and a significant proportion of them live in areas where communications and finance are not developed. So Facebook can take advantage of its social network to provide a variety of financial services based on stable currency directly to a wider range of users in these regions.

In terms of financial business, WeChat payment is essentially a payment client built on the existing banking system. It provides retailers with a more convenient payment method, similar to PayPal, Stripe and Square in the United States. The payment medium for WeChat payment is RMB, and the balance in the WeChat payment account actually corresponds to the RMB deposit of the user in the bank account. The underlying clearing network of WeChat payment is the clearing network between banks. When WeChat payment is used for currency payment other than RMB, the underlying clearing network needs to connect with the underlying clearing network where the merchant is located through system docking.

Libra is a digital form, and its value is a standard package of legal currency. The Libra stable currency exists independently and is recorded in the account on the underlying clearing chain and is not associated with the user's deposit in the bank. Libra's circulation is based on a blockchain-based clearing network that does not use clearing networks between banks. Therefore, Libra's circulation is not restricted by the network between banks (see my article: How do Squares bypass the legal currency settlement? ). Because this underlying clearing network is global, users with Libra can trade directly between each other anywhere in the world. In addition, because Libra's underlying clearing network is based on distributed accounting technology, this clearing method is superior to the existing centralized mode clearing network, which also includes the clearing network of WeChat payment.

As pointed out earlier, one of the biggest highlights of the Libra Stabilization Coin project is its underlying clearing network, which not only supports the circulation of stable coins, but also supports the circulation of more complex financial products. Therefore, this bottom-level clearing network is likely to develop into a global financial market infrastructure (FMI). Such an advantage is unmatched by WeChat payment.

How to build a stable currency that competes with Libra?

Libra, whether it is successful or not, will be a milestone in the history of digital currency development. Based on the current understanding of Libra, it has a certain chance of success, but it is at a very early stage, and there are still some high-risk factors in the project. In addition, its current advantages are also its biggest disadvantage. These risk factors are likely to cause overall delays in product launch, and even fail to achieve its expected results.

Libra is still far from the goal of its unification. In the course of its development in the next few years, the stable currency that competes with it still has a great opportunity to emerge and become a major value exchange medium in the market, and such a stable currency is likely to have the following characteristics:

1. Recently, it was issued on the basis of legal currency mortgage, and the future is based on the issuance of digital asset mortgages.

2. In the near future, it is a benchmark for a series of legal coins, in order to eliminate the risk of a single legal currency.

3. The underlying blockchain that supports the circulation of this stable currency must be open source.

4. A digital asset exchange that will appear on a global scale. The exchange provides a fair global asset and digital currency trading and pricing mechanism. This digital asset exchange must be a global brokerage alliance (see my related article: "A hundred times the Nasdaq-sized exchange, the next blockchain-based cross-border financial alliance ")

5. The legal currency and digital assets that are mortgaged still need to be hosted in trusted trust institutions around the chain and globally.

6. The underlying blockchain supports multiple asset custodians. Users choose to host their own digital assets among these asset managers.

7. In view of the imbalance in global economic development, the minimum unit of this digital stable currency should be suitable for supporting economic activities in financially underdeveloped regions.

8. The governance mechanism of the stable currency is of a coalition nature, and adopts a mechanism for managing tokens to make voting decisions. Alliance node members should be regional compliance brokers, able to provide exchange services between local and stable currency.

9. The appeal of the alliance is not based on the influence of existing alliance members, but on the implementation of business rules by relying on blockchain technology. This will attract brokers from different parts of the world to participate.

The identity of the user on the 10 chain is provided by the participating node broker or a third party identity authentication company.

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