Starting | Deng Jianpeng: Risks and Regulatory Paths of Stablecoin Libra

(Author: Deng Jianpeng, Central University of Finance and Law School professor, doctoral tutor; Deng Jiyan, Inner Mongolia Autonomous Region Higher People's Court of Justice, the Central University for Nationalities PhD)

This article was published in "Journal of Chongqing University (Social Science Edition)" No. 2 of 2020 , authored by the author and published by Babbitt Information Network

 

Summary: Facebook's stablecoin Libra project has aroused the attention and vigilance of financial circles and regulators in various countries. Libra has advantages in technical maturity, stability, security, and application scenarios. It will also bring a variety of potential risks, increase the difficulty of foreign exchange control in various countries, weaken the implementation of monetary policies in various countries, and increase the anti-money laundering and anti-terrorist financing Difficulty. In this regard, Chinese regulators should first clarify the legal attributes of Libra stablecoin. Second, China needs to adjust its supervision methods and specific ways of foreign exchange management. Finally, Internet giants with blockchain and digital currency technology research and development capabilities can try to issue stable currency linked to RMB 1: 1. Before the regulatory agencies formulate corresponding laws and policies, they can first guide and promote the above-mentioned business giants to create their own stablecoin governance rules. Based on the mature experience and business model of Chinese Internet giants exploring stablecoin issuance, the central bank of China will learn from it and finally build a legal digital currency issuance system.

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Keywords: blockchain; stablecoin; financial supervision; regulatory sandbox; Libra

The Risk and Regulatory Path of Libra

Abstract: Libra, Facebook's stable coin, has attracted the attention and vigilance of financial circles and regulators in various countries. Libra has advantages in technology maturity, stability, security and application scenario equalization, which will also bring various measurement risks, increase the difficulty of foreign currencies exchange control, weaken the effect of monetary policy implementation, and increase the difficulty of anti-money laundering and anti-terrorist financing. In this regard, China's regulators are suggested to make clear the legal nature of Libra firstly. Secondly, China needs to adjust the regulatory means and the specific way of foreign currencies exchange management. Finally, Chinese internet giants with the strength of blockchain and digital currency technology research and development should be encouraged to try to issue stable coin linked to RMB 1: 1. Regulators can guide and promote the above business giants to create their own governance rules of st able coin before formulating and issuing corresponding laws or policies. Based on the mature experience and business model of Chinese Internet giants in exploring stable coin issuance, People's Bank of China will draw experience from them and finally establish a legal digital currency issuance system.

Key words: blockchain; stable coin; financial regulation; Regulatory Sandbox; Libra

introduction

On June 18, 2019, Facebook, the world's largest social networking platform, released the Libra (Libra) project white paper through its independent subsidiary Calibra, which immediately attracted the attention of financial circles and regulators in various countries. Libra starts with “Building a simple, borderless currency for the 1.7 billion people who have no access to the financial system and ca n’t enjoy traditional banking financial services worldwide, and a financial infrastructure that can serve billions of people.” 2020 A low-volatility cryptocurrency and smart contract platform based on blockchain technology will be launched as a collateral for physical assets such as a basket of currency deposits and short-term government bonds. In recent years, the infamous social giants Facebook and Libra plan have caused global regulators' alarm due to the uncertain risks of reserve asset management, governance structure, consumer rights protection and prevention of financial crimes.

On July 16, 28 days after the Libra white paper was released, the U.S. Senate held its first hearing on Facebook's Libra. The Banking, Housing, and Urban Affairs Committee questioned Libra project leader David Marcus on the data privacy issues involved in Libra. At the hearing, Mike Crapo, chairman of the Senate Committee on Banking, Housing, and Urban Affairs, said Libra's goals in HP's finance and convenient payments are commendable, but before Libra decides what to do next, policymakers and regulators need to establish clear regulatory rules . Sherwood Brown, deputy chairman of the Senate Banking Committee, pointed directly at Facebook, the initiator of the Libra project, leaking user privacy and abusing user data, saying that the Libra project initiated by Facebook is difficult to guarantee that it will no longer be accepted. ^{[ [1] ] The} next day, the US House of Representatives Financial Services Committee held a second hearing on how the Libra project operates and its impact on US investors, consumers, and the US financial system. Patrick McHenry, deputy chairman of the House Financial Services Committee, said that innovation cannot be banned because we are temporarily unable to understand technological innovation. Libra, launched by Facebook, confirms that blockchain technology innovation is real. ^{[ [2] ]} On October 23, Facebook founder Zuckerberg was asked to attend a hearing of the US House of Representatives Finance Committee to answer questions about the potential risks of the Libra project, policy oversight, and reasons for the withdrawal of members of the association.

In addition to US regulators, central banks and regulators of the world's major economies have also expressed their attitude towards Libra. Mark Carney, Governor of the Bank of England, stressed the deficiencies of the current traditional financial system and suggested that the global financial system be changed by using a digital currency like Libra instead of the US dollar.

3. European Central Bank (ESCB) Executive Committee member Yves Mersch expressed concerns about Libra's own liquidity risk, financial monopoly risk, and central bank monetary policy at the ESCB legal conference in Frankfurt. ↵

The Swiss financial market regulator, FINMA, provides indicative regulatory requirements for the Libra project based on assets that support stablecoins (such as currencies, commodities, real estate or securities) and the legal rights of their holders.

5. The Global Securities Regulatory Organization "International Securities Commission Organization" (IOSCO) states that Libra benefits market participants, consumers, and investors, along with consumer protection, market integrity, transparency, conflicts of interest, and financial crime, and Potential systemic risks, etc. ↵

Anatoly Aksakov, chairman of Russia's State Duma Financial Markets Committee, said Libra would not be legally accepted in Russia because it could pose a threat to the country's financial system.

7. India currently bans the use of blockchain-based digital currencies. Libra may not be able to list and trade in India. ↵

Bank of Japan Governor Tokuhiko Kuroda said he will further evaluate Libra's impact on the existing financial and payment system.

9.

Zhou Xiaochuan, president of the China Finance Association and former governor of the People's Bank of China, expressed doubts about Libra's ability to provide financial infrastructure services and stressed the importance of strengthening the coordination and cooperation mechanism of global central banks. ↵

Wang Xin, director of the Research Bureau of the People's Bank of China, said that if Libra had gained market trust and had the function of value storage and even credit, it would have a great impact on monetary policy.

11. From the comments made by the regulators of the above countries, it can be seen that, in addition to the positive attitude shown by the United Kingdom, most national regulators and international organizations have a cautious and vigilant attitude towards Libra. Libra was not able to be officially issued before strict financial regulations.

Under the circumstances of whether Libra can be officially launched through regulatory requirements or not, there are few academic studies on Libra's financial policy and supervision at home and abroad, but there is a certain degree of classification, legal attributes, risks and supervision of the stable currency that Libra belongs to the study. Many Qi (2019) believe that the essence of Libra is that the private rights of the super platform challenge the right to issue currency. Based on the analysis of Libra's systemic risks and the dilemma of the current regulatory system, regulatory recommendations are given. ↵

Qiao Yide (2019) analyzed the rise and fall of the monetary system and the evolution of the international monetary system, and the risks of privacy, data and financial management of Libra, and concluded that Libra is difficult to pass the review of regulatory authorities.

13. Wu Tong and Guo Jianyi (2019) conducted an economic analysis of Libra's stabilization methods, technical characteristics, and governance mechanisms. They believed that Libra would have an impact on the fiat currencies, commercial banking systems, and dual-pillar frameworks of various countries and increase global systemic Financial risks also stimulate countries to develop legal digital currencies. ↵

Liu Jin (2019) analyzed USDT as an example to analyze the risks and market outlook of stablecoins.

15. Wang Huaqing and Li Liangsong (2018) combed the rise, shortcomings, and theoretical origins of digital stablecoin, and put forward suggestions for China's response. ↵

However, there is still room for discussion on the legal attributes of Libra in practice, its potential risks to China's financial market, and China's response. For example, is stablecoin essentially a security, ETF or foreign exchange? How is it regulated? Current Chinese laws and regulations do not give a clear legal definition, and so on. For this reason, we try to discuss this further.

I. Overview of the types of stablecoins

Blockchain is a technology with the characteristics of detrust (which can be executed without a trusted third-party organization), programmable value (you can set up smart contracts), and decentralization.

17. Bitcoin is the first successful application of blockchain technology. Bitcoin has received widespread attention for its decentralization, point-to-point transfers, immutability and anonymity, but its sharply fluctuating prices have also attracted many criticisms. The price of cryptocurrencies represented by Bitcoin usually depends on market liquidity, application scenarios, and the confidence and acceptance of investors in global markets, so their prices often fluctuate significantly. Crypto-cryptocurrencies with sharply fluctuating prices have become speculative and investment vehicles, and have lost basic payment functions.

In recent years, fiery stablecoins, such as USDT and Libra in the planned issuance, have designed reserve asset mechanisms and anchored fiat currencies, mainstream virtual currencies or physical assets to maintain currency stability. Libra involves cross-border, multi-currency, and peer-to-peer. It will reconstruct the traditional financial trading rules and trading habits. Traditional regulatory rules are difficult to define and implement effectively. Virtual currency based on blockchain technology can be transferred between any wallets, without the need for traditional financial intermediaries. The wallet account is not recorded in the so-called accounts of traditional financial institutions, but is recorded in the Libra blockchain verification node that has reached consensus. The traditional regulatory rules for financial institutions are difficult to adapt to globally distributed verification nodes, not only because the verification nodes may not be within the jurisdiction of their country and have no jurisdiction or difficulty, but also because a small number of verification nodes in the blockchain consensus network cannot be controlled privately. Account data, traditional supervision objects are "decentralized", or many "centers" are derived, which is difficult to regulate in practice. The inherent financial supervision method with financial institutions and traditional bank accounts as the key “grabbers” will face the huge challenge of Libra's decentralization of financial services.

Stablecoin is a digital currency with relatively stable price. It guarantees that the price fluctuates slightly above and below the price of the fiat currency it targets, through model design, so as to play a role in capital hedging, transaction intermediation, payment settlement, etc. Features. ↵

The stablecoin inherits the characteristics of traditional encrypted digital currency transaction data such as Bitcoin and Ethereum, which can be searched, immutable, and anonymous throughout the network, while controlling price fluctuations through various "stability" mechanisms. In 2014, the United States Tether Corporation issued the first USDT-secured USDT (also known as "Teta"), which claims to be linked to the USD 1: 1 on the official website. At present, the total market value of the stablecoin USDT has jumped to the fourth place in the global digital currency, with a market value of nearly $ 4.1 billion, and its daily turnover ranks first. [1] indicates that there is a strong demand for stablecoins in the market. After the issuance of the stablecoin USDT, stablecoins based on digital assets and algorithm-based stablecoins have gradually appeared. For example, the decentralized stable coin DAI issued by MakerDAO in 2017 with different types of digital assets as collateral. Unlike the lack of supervision of USDT, in September 2018, the stable currency Gemini Dollar (GUSD) issued by the United States Gemini Company and the stable currency Paxos Standard issued by Paxos Company both obtained the approval of the New York State Financial Services Authority, allowing the stability of their launch Currency is exchanged for USD at a 1: 1 exchange rate. Although the regulated stablecoin credit is higher, USDT has an incomparable first-mover advantage and has long occupied the largest proportion of the stablecoin market.

At present, according to the different "stability" mechanisms of stablecoins, they can be roughly divided into the following three categories: off-chain mortgage, on-chain mortgage, and algorithmic. Among them, the off-chain mortgage-type stablecoins use assets such as reputable fiat currencies, national bonds, or commodities as collateral to issue blockchain digital cryptocurrencies corresponding to their value. Off-chain mortgage-type digital stablecoins are often collateralized by sovereign currencies, such as the US dollar and the euro, which are issued at a certain percentage, similar to 100% reserves of commercial banks. The most typical off-chain mortgage-type digital stablecoin is USDT, which is issued by Tether, an affiliate of Bitfinex, a virtual currency trading platform. Tether Company has stated that it reserves US dollars as collateral at a ratio of 1: 1, that is, the amount of USDT issued is the same as the USD deposited in the bank for collateral, and the circulation of USDT in the market is equal to the collateralized USD reserve.

figure 1

USDT circulation life cycle [2]

As shown in Figure 1, the user deposits US dollars into the Tether company's reserve account, and Tether issues a corresponding amount of USDT to transfer to the user's wallet, which is "coin"; entering the circulation field, USDT can be transferred between different users; when users need to redeem When returning to USDT, the user transfers USDT to Tether's wallet. Tether will pay the corresponding USD and destroy USDT at the same time. As the first publicly issued stablecoin, USDT has a long-term advantage and relatively stable price, occupying about 80% of the stablecoin market for a long time, and has a huge influence in the virtual currency trading market. Figure 2 shows the price fluctuations of USDT in recent years. It can be seen that the price fluctuations denominated in US dollars in most of the time are relatively small. The off-chain mortgage stablecoin is a fiat currency with a certain real value, so the stability of the value of the collateral determines the stability of the off-chain mortgage stablecoin value. Off-chain mortgage-type stablecoins are responsible for issuing stablecoins and managing mortgage assets through a centralized institution, which runs counter to the spirit of decentralization in the blockchain area. Centralization brings a crisis of trust. USDT has been criticized for the transparency and over-provision of US dollar reserves. [[19]] In addition, there are liquidity risks in anchoring stable-coin coins that have weak liquid assets such as gold and oil.

Figure 2 USDT price changes from March 2015 to November 2019 [3]

On-chain mortgage-type stablecoins are realized through blockchain smart contracts, and are issued with mainstream virtual currencies such as Bitcoin and Ethereum as collateral. It can be seen from the virtual currency trading platform in recent years that the price of mainstream virtual currencies as collaterals fluctuates greatly. Therefore, the price of the stablecoin anchored with the collateralized virtual currency also fluctuates with the price of the collateral, and the stablecoin is no longer "stable". Therefore, on-chain mortgage-type stablecoins usually require over-collateralization to hedge the risk of collateral price fluctuations, and use smart contracts to implement a similar way to central bank management to stabilize prices. The DAI issued by Maker is a typical on-chain mortgage-type stablecoin. When the DAI is issued, another token MKR is issued. The holders can jointly determine the price parameters such as the mortgage rate, liquidation rate, and stabilization fees (similar to the central bank decision-making agency). ) To regulate the supply and demand relationship of DAI, and finally stabilize the price of DAI

20.

Algorithmic stablecoins get rid of their dependence on other assets. Through sophisticated algorithms, they simulate the traditional central bank's control of the money supply and realize the stable currency issuance volume on the blockchain to automatically adjust with its price fluctuations to achieve the purpose of price stability. However, the operation mechanism of such stablecoins is too complicated, which is prone to design flaws and the trust risk arising from them. BASIS is the most typical algorithmic stablecoin. It has been favored by many well-known venture capital companies, and has raised $ 133 million in financing. There are three kinds of tokens in the BASIS system: the basic stablecoin Basis, the bond token Bond Token, and the share token Share Token. The basic stable currency Basis is the basic currency in the system and is anchored to the US dollar. The bond token Bond Token is similar to the bond issued by the central bank and used to repurchase the basic stable currency Basis. The share token Share Token is similar to the stock issued by the central bank. In crowdfunding. BASIS adjusts the supply of stablecoins based on the price relative to the US dollar. When the price of the basic stablecoin Basis is less than $ 1, the system sells the bond token Bond Token at a lower price. Users can use the basic stablecoin Basis to purchase the bond token Bond Token, and the recovered basic stablecoin Basis will be destroyed. The supply of the basic stablecoin Basis in the market reduces the price increase. When the price of the basic stablecoin Basis is higher than $ 1, the system recovers the bond token Bond Token at a higher price. The user uses the bond token Bond Token to exchange for the newly issued basic stablecoin Basis, the basic stablecoin Basis circulating in the market. Increasing supply and falling prices. BASIS uses this to regulate the supply of stablecoins and achieve the purpose of stabilizing the price of coins. In fact, without any assets as collateral, it is difficult to guarantee buyers' trust and investment enthusiasm for the basic stablecoin Basis and bond token Bond Token. In the US regulatory system, BASIS tokens are classified within the securities regulatory framework, meaning that they must be registered as securities issuers in accordance with SEC (United States Securities and Exchange Commission) requirements, not only requiring KYC (user identification), but also for investors Higher eligibility requirements are proposed. In December 2018, the BASIS project party announced that it would stop returning investment due to regulatory concerns.

. At present, algorithmic stablecoins are still in the early development stage, and their market share is almost zero. The "stability" mechanism of algorithmic stablecoins is complicated, and it is difficult to gain the trust of investors under difficult circumstances.

Second, the connotation and operating mechanism of Libra

On June 18, 2019, the Libra Association led by Facebook announced that it will launch the stable coin Libra in 2020. Unlike the other stablecoins mentioned above, which are mainly used as a virtual currency transaction medium, Libra claims that its mission is "to build a simple global monetary and financial infrastructure to serve billions of people" for better financial inclusion. In terms of it, "more people should have access to financial services and cheap capital." According to the white paper, Libra consists of three parts: one is based on a secure, scalable, and reliable blockchain; the second is backed by an asset reserve that gives it intrinsic value; and the third is managed by an independent Libra association. [[twenty two]]

Libra blockchain is a consensus mechanism based on Byzantine Fault Tolerance (BFT), and can use the Move programming language to customize transaction logic. It has a high-throughput, low-latency, high-capacity, secure, reliable, and flexible blockchain . The Move programming language is used to write smart contracts that conform to the author's intent and are secure. The Byzantine Fault Tolerance (BFT) consensus mechanism enables all permitted verifier nodes to verify transactions and maintain the consistency of recorded data. As long as more than two-thirds of the nodes are operating normally or the data has not been tampered with, the BFT consensus mechanism can maintain the entire block Data security of the chain network. Unlike traditional digital cryptocurrencies, such as Bitcoin, the energy-consuming POW (Proof of Work) consensus mechanism is used. The BFT consensus mechanism used by Libra stablecoin achieves high throughput and low latency while saving energy.

The use of real assets (called "Libra Reserves") as collateral makes Libra a “stable” digital cryptocurrency with a low volatility and reputable fiat currency and short-term government bonds. Choose a basket of different fiat currencies, similar to the Special Drawing Right (SDR) of the International Monetary Fund (IMF). SDR also uses a basket of currencies composed of a certain proportion as a reserve. Member States can use SDR to provide international funds when needed. IMF withdraws foreign exchange in response to the balance of payments deficit, or uses SDR to pay and repay debt directly ^{[ [23] ]} . A package of fiat currencies as collateral can not only stabilize the price when Libra exchanges with fiat currencies, but also allow Libra to gain the trust of users in the early stage and obtain better liquidity. Libra reserve asset investment income will be mainly used for Libra network operation, maintenance and Libra promotion activities, and will not be distributed to holders of Libra stablecoin. The Libra Association, headquartered in Geneva, Switzerland, is an independent non-profit organization that is mainly responsible for the operation of the Libra blockchain, network verification nodes, and management of reserve assets. Members of the Libra Association are also verification nodes of the Libra blockchain. As of October 15, a total of 21 founding members have officially signed the charter of the Libra Association. At the same time, the Libra Association has formally established a board of directors, elected a board of directors, and appointed members of the executive team. [[twenty four]]

Figure 3 Libra stablecoin issuance and destruction mechanism process

As shown in Figure 3, the user realizes the two-way exchange of fiat currency and Libra stable currency through the authorized agent of the Libra Association. That is, after the user purchases Libra stable currency from the authorized agent using the national legal currency, the authorized agent converts the fiat currency into Libra reserve currency. The Libra reserve currency is paid to the Libra Association, while the Libra Association issues a corresponding amount of Libra stablecoin in exchange. The process for users to redeem the Libra stablecoin is the opposite of buying. The Libra Association, as the "last buyer", recovers and destroys the Libra stablecoin, ensuring that the Libra stablecoin in circulation is consistent with the legal currency package in the Libra reserve. Users buy and sell to realize the two-way exchange of Libra stable currency and fiat currency. In addition to the stable currency Libra, there are also tokens held by investors in the Libra network. The tokens are used by the Libra Association to issue project income to investors. According to the classification of stablecoins above, Libra stablecoins that are pledged with a basket of real assets are off-chain mortgage stablecoins.

On the surface, Libra stablecoins are similar to traditional off-chain collateralized stablecoins. They are both stable blockchains based on blockchain and real assets issued by non-governmental organizations, but in essence, the two are technically mature and stable. There are huge differences in security, security, and application scenarios. In terms of technology, Libra re-developed a blockchain network with higher throughput and smart contract scalability based on the technology of traditional stablecoins and mainstream encrypted digital currencies. Stablecoin Libra overcomes the technical deficiencies of traditional stablecoins, such as the current stablecoin USDT with the highest market value. Its network is based on the Bitcoin and Ethereum blockchains. Therefore, Bitcoin and Ethereum are safe, reliable and highly recognized by the public. At the same time that the blockchain brings USDT advantages, long transaction confirmation times, unexpandable, and high transaction fees also become its inevitable disadvantages. For the stable currency Libra, users do not need to pay any transfer fees, and the costs of various links in the network are paid by the investment income of Libra reserve. In addition, although Libra can process up to 1,000 transactions per second, it still lags far behind traditional payment service providers such as Visa with 56,000 transactions per second. However, with Libra's 7 transactions per second or 15 transactions per second, Compared with Ethereum, there has been significant progress. In terms of stability and security, Libra, a stablecoin pledged with a variety of real assets, can enter the market only after it has been approved by the regulatory authorities of various countries. In the future, its value is likely to be less risky and more stable.

Most traditional off-chain mortgage-type stablecoins are anchored with only one type of off-chain asset, and the price is greatly affected by the rise and fall of the anchored asset. Most traditional stablecoins are issued through highly centralized institutions. For example, the USDT issuer Tether Corporation has absolute power to issue or destroy. In the absence of effective supervision at present, it is extremely prone to risks such as random issuance, insufficient reserves, and even private use of reserves by the issuer or its affiliates. The issuer of the stablecoin Libra is an independent association composed of well-known global network technology companies, socially influential partners (SIPs) and academic institutions distributed in different geographical regions. The stablecoin issued to a single institution has a moral hazard Smaller and easier to gain global market trust in Libra. In terms of application scenarios, the current USDT and other stablecoins are mainly used as virtual currency trading platforms, and fiat currency and virtual currency transaction intermediaries and hedging tools are widely used. In the case of direct transactions between fiat and virtual currencies, USDT usually acts as an intermediary for fiat and virtual currencies. Investors first buy USDT with fiat, and then use USDT to denominate and exchange intermediaries to buy or sell virtual currencies. When leaving, sell USDT for fiat currency, similar to chips in a casino. When the virtual currency falls, investors sell the virtual currency and exchange it back to USDT, which can play a hedging role. Due to transaction efficiency, transaction costs, stability and other reasons, USDT applications are mainly concentrated in the virtual currency trading market, but have not yet expanded to other fields. Libra has great advantages in application scenarios. Libra is launched by Facebook, a global social giant with 2.38 billion monthly active users. As long as the social software app is updated, hundreds of millions of social platform users can automatically own the Libra wallet immediately and expand to its partner institutions Internet users. The white paper defines Libra as a simple, borderless currency. Blockchain-based Libra can achieve efficient, free cross-border remittances, and can also be used for real-world payments, similar to Alipay and WeChat payments, which may pose some form of challenges and risks to China.

Potential risks of Libra

Libra's design philosophy is "to integrate the characteristics of the best currency in the world: stability, low inflation, universal acceptance and interchangeability." ^{[ [25] ]} As a fully functional currency, it Not only a means of payment, but also a means of storing value and a unit of account. We believe that Libra stablecoins have the dual attributes of currency and investment certificates. Libra, which has monetary attributes, also needs to face similar risks that commercial banks usually have. The first is the risk of oversupply. The Libra Association issues the corresponding Libra stablecoin according to the value of the mortgage assets deposited in the Libra reserve. If the regulation is not in place and the reserve assets are not transparent (such as the lack of independent third-party audits), it is difficult to guarantee the issuer. Libra will not be issued over the mortgage assets. The stable form of Libra is computer code, and the value of Libra comes from its anchored assets. The process of linking Libra with the value of certain types of underlying assets cannot be separated from a trusted and centralized institution. To use Libra to carry assets, the issuer must issue Libra strictly based on the underlying assets in a 1: 1 relationship. In terms of the two-way conversion rules, the issuer must ensure that Libra and the underlying assets can exchange 1: 1 in both directions. In terms of credibility rules, the issuer must regularly accept independent third-party audits and disclose financial and other key information to ensure the authenticity and adequacy of the underlying assets of the issuance reserve. Based on this, one unit of Libra has the value of one unit of the underlying asset. Failure to comply with the above requirements will inevitably lead to Libra over-risk.

The second is liquidity risk. Once there is a node member, asset custodian bankruptcy or negative news, the stable currency Libra holders may have panic. In the short term, large-scale runs of Libra holders will cause Libra liquidity risks. The third is privacy and user data risks. As long as anyone follows the code rules of the blockchain, he can own or even infinitely generate arbitrary blockchain addresses. Judging from the white paper currently disclosed, a certain blockchain address will be anonymous in the future and will not be associated with a particular identity of a Libra holder. This model helps to protect the privacy of Libra holders. The Libra blockchain only records necessary information such as wallet addresses, transaction amounts, and time, but Libra wallets will be regulated by KYC (user identification), anti-money laundering, and anti-terrorist financing. Requirements, or Libra wallet providers collect personal information of users for their own business purposes, and even include users' cross-border payments, transactions, transfers and other data. A large amount of user data aggregates are at risk of leakage and illegal use.

Libra reserve is actually a large international money market fund that focuses on international bank deposits and short-term government bonds. Therefore, the stable currency Libra can be regarded as an investment certificate. Compared with the traditional investment certificate, Libra stable currency The special advantage is that it can be used as an international payment method to directly transfer shares between customers based on the Libra blockchain. From the perspective of Libra stablecoin holders, the value of the investment portfolio held in Libra reserves is mainly determined by two factors: the price of the reserve assets and the exchange rate of the currency in which these assets are denominated. In the long run, the exchange rate between the US dollar and the euro in Libra reserves is quite stable. However, the exchange rate between the US dollar and the euro in Libra reserves fluctuates by 30% in the short term. Therefore, in the short term, Libra holders face a great risk of exchange rate fluctuations. ^{[ [26] ]}

Some scholars believe that the proposal of the Libra currency project plan may make Hayek ’s “denationalized creation” competitive currency concept possible.

27. Libra is led by Facebook. The Libra Association actually controls the issuance and destruction of Libra stablecoins and the proportion of assets in the reserve. Libra has a typical "denationalized creation" characteristic. When the use range and credit of Libra stablecoin reach a certain level, it is likely to impact the existing monetary system and regulatory system: First, it replaces the sovereign currencies of some countries. For sovereign currencies with a small economy, severe inflation, backward financial infrastructure, limited capital opening, and poor credit, the public will choose to use the stable currency Libra, which has better credit and greater value preservation, and the use of domestic sovereign currency will gradually decline. . In extreme cases, Libra may eventually replace the sovereign currencies of these countries. The second is to increase the difficulty of foreign exchange control in various countries. The stable currency Libra's peer-to-peer transmission and its two-way exchange with fiat currencies provide a convenient channel for citizens of countries with strict foreign exchange controls to illegally trade foreign exchange, which may cause the foreign exchange control policies of these countries to fail. Third, Libra may weaken the effectiveness of the implementation of monetary policies in various countries. The Libra Association claims that "never make its own monetary policy, but inherit the policies of the central bank represented in its reserves." Taking into account that Libra corresponds to 50% of the legal currency composition, Libra's monetary policy will reflect the US Federal Reserve-led, including the European Central Bank, the Bank of Japan and the Bank of England's sovereign currency monetary policy weighted according to the proportion. In practice, Libra is likely to transfer its influence to the monetary policies of reserve currency countries. For example, if the user purchases Libra currency in U.S. dollars, the Libra Association deposits these funds into a bank outside the United States. The bank will continue to lend in accordance with the remaining balance of the deposit reserve ratio, that is, the stable currency Libra in circulation increases and the US dollar is in circulation. There is no reduction in the corresponding amount, which will cause a currency multiplier of reserve assets. Therefore, the large-scale use of Libra will affect the effectiveness of national financial policies. The fourth is to increase the difficulty of anti-money laundering and anti-terrorist financing. Libra's anonymity and cross-border peer-to-peer transmission will pose challenges to countries' anti-money laundering and anti-terrorist financing. According to the white paper, the Libra blockchain network only records transaction necessary information such as the wallet address, amount and time of the user's transaction, and the user identification required for anti-money laundering and anti-terrorist financing is handed over to the Libra wallet. Wallet developers need to comply with the laws of the host country's regulatory requirements for KYC, anti-money laundering and anti-terrorist financing. Countries have different anti-money laundering and anti-terrorist financing regulatory standards. In order to avoid supervision, wallet developers may register companies in countries with the lowest regulatory standards. In addition to the borderless nature of the Libra network, global regulation has formed a "bucket effect" and the regulatory "short Board "or used by offenders.

4. Libra from the perspective of Chinese law

At present, China's relevant regulations do not clearly define various types of stablecoins, but those stablecoins that anchor the US dollar or other foreign currencies have already impacted domestic corresponding mechanisms. We have adopted stablecoins within China's existing legal system and regulatory framework. Libra's legal analysis proposes a legal regulatory framework for stablecoins.

Libra is similar to Bitcoin, which is also based on blockchain and digital encryption technology, in many aspects, such as distributed accounting, network-wide consensus, and point-to-point transmission. Therefore, Bitcoin's research methods and research results have similarities with Libra to learn from. As early as September 2013, the People's Bank of China and other five ministries and commissions jointly issued the "Notice on Preventing Bitcoin Risk" (hereinafter referred to as the "Notice"), which defines the nature of Bitcoin as "a specific virtual commodity that does not have Currency has the same legal status and cannot and should not be used as currency in the market. "Bitcoin is defined as a virtual commodity in the Notice. The specific electronic information data has the general attributes of “things” in the property law, such as non-copyable and tamperable, through blockchain technology and encryption algorithms. In addition, investors' recognition and acceptance of Bitcoin realizes the currency's unique transaction medium. And value storage function, these attributes determine that it has broken through the category of "virtual goods". The Bitcoin blockchain is a fully decentralized public chain, while Libra will be a multi-centralized alliance chain in the future. Any device that meets the hardware and software requirements can join the Bitcoin network as a verification node, and the Libra network system requires the Libra Association's permission to become a verification node. The price of Bitcoin is determined by the level of investor recognition and acceptance, while Libra is determined by the value of the mortgage asset. According to the regulatory logic of the "Notice", the stable currency Libra with virtual currency characteristics should also be defined as a "virtual commodity", but its real asset mortgage is more similar to the credit certificate based on mortgage assets, although it is not specified in the Libra white paper Stablecoin Libra holders' claims on mortgage assets.

According to the white paper, the stablecoin Libra is born for payment and has the function of circulation means. The stable currency Libra issue and circulation mechanism is similar to prepaid cards. In 2012, the "Administrative Measures for Single-Purpose Commercial Prepaid Cards (Implementation)" promulgated by the Ministry of Commerce defines single-purpose prepaid cards as "issued by an enterprise that meets its requirements, and is limited to the enterprise, its own business premises, Prepaid vouchers for redeeming goods or services within the group mentioned in this enterprise, or within the same brand franchise system. "According to this, the issue and use of prepaid cards should meet the following requirements. First, the use and circulation of prepaid cards is limited to the business scope of the card issuer Within; secondly, centralized commercial institutions are responsible for issuing prepaid cards. The stablecoin Libra can be transferred between any two nodes in its blockchain network, that is, the stablecoin Libra can be transferred between any wallets that support the Libra blockchain network, so the stablecoin Libra cannot be controlled to a certain use range. Obviously, the stablecoin Libra should not belong to the prepaid card.

Fiat money is essentially a liability of monetary authorities to money holders. ↵

The white paper does not explain whether the holders of the stablecoin Libra have bonds to the Libra Association and Libra reserve assets. Article 18 of the current "People's Bank of China Law" stipulates: "The RMB is uniformly printed and issued by the People's Bank of China." Article 20 states: "No unit or individual may print or sell token tickets as a substitute. Renminbi circulates in the market. "As scholars say, legal tender is a currency specially regulated by national or regional laws, and it has the effect of unlimited settlement and settlement.

^29. At present, Chinese law does not recognize the use of digital currencies issued by institutions other than the People's Bank of China in place of the RMB. Therefore, the stablecoin Libra is issued by the Libra Association, which is not a legal currency under current Chinese law. However, from the perspective of the economic functions of the stablecoin Libra, it has three basic functions of payment currency, bookkeeping unit and value reserve. The point-to-point transmission based on blockchain technology makes the stablecoin Libra have the function of payment means; the real reserve asset mortgage determines that the stablecoin Libra has the function of value reserve and bookkeeping unit. We believe that when the stable currency Libra users reach a certain size and gain public trust, it will constitute a substantial currency and even replace fiat currency to a certain extent.

According to the white paper, Libra will provide users with a convenient two-way exchange of fiat currencies. Under China's existing currency supervision rules, only through the domestic banking system can large foreign currencies be exchanged and remitted abroad. If the stable currency Libra is successfully issued in the future, after the user uses the domestic currency to purchase the stable currency Libra, the authorized currency will be redeemed by the authorized agent to redeem the stable currency Libra in exchange for a reserve fiat currency. This process does not require the participation of banks, and even the domestic foreign exchange control system cannot be monitored. . The stablecoin Libra will act as an intermediary for buying and selling domestic currencies and foreign exchange. In mainland China, there are strict regulations for domestic institutions, resident individuals, institutions in China and foreigners to handle foreign exchange settlement, purchase of foreign exchange, opening of foreign exchange accounts, and external payments. Effective February 1, 2019, the Interpretation of Several Issues concerning the Application of Laws in Criminal Cases of Illegal Engagement in Financial Payment and Settlement Businesses and Illegal Foreign Exchange Trading (hereinafter referred to as the "Interpretation") clarified the criteria for determining and punishing illegal foreign exchange transactions and sentencing. . The "Interpretation" stipulates that "Illegal foreign exchange transactions such as buying and selling foreign exchange or disguising foreign exchange in disguise, in violation of state regulations, disrupting the order of the financial market, and the circumstances are serious, shall be illegally operated in accordance with the provisions of Article 225 of the Criminal Law Convicted and punished. "Libra authorized agents will provide users with convenient cross-border payments and two-way exchange with fiat currencies, and exchange of fiat currencies between different jurisdictions, which is suspected to constitute disguised foreign exchange transactions.

Fifth, think and respond

On October 24, 2019, in the eighteenth collective study of the development status and trends of blockchain technology by the Political Bureau of the Central Committee of the Communist Party of China, General Secretary Xi Jinping emphasized during the study that "the integrated application of blockchain technology in new technologies Innovation and industrial change play an important role. We must take blockchain as an important breakthrough in independent innovation of core technologies and accelerate the development of blockchain technology and industrial innovation. " ↵

The collective study of the Politburo pointed out the direction for the development of the blockchain industry. At the same time, we should make clear that the various sub-sectors involved in the blockchain cannot be separated from reasonable and effective supervision.

In response to the risks that foreign stablecoins may bring, China's regulatory mechanism should change the extensive approach of “disregarding chaos and dying once” in the past. It should be based on the principle of “same risk, same rules” and prudent supervision. If the Libra stablecoin is launched as scheduled, Libra stablecoin with peer-to-peer, cross-border transactions may penetrate any country, and China is inevitable, so it must be brave to face the risks and challenges brought by Libra. Rather than remedial supervision after the fact, it is better for the regulator to introduce a comprehensive supervision policy and countermeasures after analyzing Libra in advance. To this end, the legal characterization of the stablecoin Libra should first be clarified. Judging from the white paper, treating Libra as a foreign currency may be more practical. Therefore, supervisory authorities should contact Libra in a timely manner to express China's relevant legal and policy requirements. At present, not only is there no clear legal definition of stablecoins, but even the legal positioning of virtual currencies such as Bitcoin and Ethereum, which have been hot for many years, is vague, which has negatively affected the implementation of supervision. China can learn from the classification of the Swiss regulator FINMA based on the economic function of the token in the future

31. Clarify the legal status of digital currency (or virtual currency) with different functions and the corresponding regulatory rules. These legal regulatory rules should be consistent with existing regulations.

Second, China needs to adjust its supervision methods and specific ways of foreign exchange management. Libra stablecoins will make illegal foreign exchange trading more covert and rapid. Regulators should improve the technology supervision methods and effectively implement the management of foreign exchange and stablecoins based on the technical characteristics of Libra's blockchain technology. For example, to enhance the in-depth understanding of the development status of cutting-edge fintech by supervisory officials, supervise the information system by self-building (or outsourcing to supervising technology service companies), and connect it with the database of the supervised object. Through new technological methods, the state of the industry is continuously monitored, risks in the foreign exchange field are analyzed, and risk warning information is provided in a timely manner. As the commentator said, regulatory science and technology should be committed to achieving the transition from "post-event supervision" to "real-time supervision" and from "bypass supervision" to "active intervention". ^↵

Finally, Libra puts pressure on the path of RMB internationalization. In the case that the RMB has not become the Libra reserve currency, if the users of the Libra stablecoin have formed a large scale and global liquidity has greatly improved, the demand for RMB reserve by central banks in various countries will be reduced, and the internationalization of the RMB will be further hindered. China should speed up the process of the central bank issuing digital currency (CBDC) and establish a Chinese digital currency system to cope with Libra's impact on the internationalization of the RMB. Regarding the specific response of China's digital currency issuance, we believe that it can be explored and responded in the following ways.

The first is to set up a regulatory sandbox in financially developed cities such as Shenzhen, and encourage Chinese Internet giants with blockchain and digital currency technology research and development strength to try to issue 1: 1 offshore stablecoin linked to the RMB and simulate it through financial regulators. Test and evaluate its risks in a real market environment. Since China's reform and opening up, there have been reform mechanisms such as "pilots." This political wisdom is similar to the regulatory sandbox.

33. After passing the risk test, such stablecoins are encouraged to be promoted overseas, and corresponding asset custody and third-party audits of asset reserves are established. We believe that private Internet giants are encouraged to “test the water” stablecoins because commercial institutions are generally more market dynamic, flexible, and capable of timely risk response. "Combatting" overseas stablecoins by Chinese business giants rather than government agencies also helps reduce political risks and international political disputes with foreign stablecoin issuers.

Second, before the regulators formulate the relevant regulatory documents or regulatory policies, they can first guide and promote the above-mentioned business giants to create their own stable currency governance rules, such as asset reserve custody rules; regular independent third-party audit rules; risk disclosure rules; Security standards for the stablecoin blockchain, etc. These internal governance rules have been repeatedly tested and tried and tested by the market, which has gradually made the rules for the issuance of stablecoins in Chinese commercial institutions mature. As the author's previous research has stated, China's lawmaking has long had the obvious characteristics of artificial creation, and social self-sustaining rules (such as custom) are often excluded from the law. ^↵

This should be given full attention in current regulations and legislation.

Third, after the Chinese Internet giants explored the mature experience and business model of stablecoin issuance, it was borrowed by the People ’s Bank of China, united with some major Chinese commercial banks and several Internet technology companies, led by the People ’s Bank of China, and finally established a legal digital currency issuance system.

[1] Source: https://coinmarketcap.com/en/Site data, access time: November 22, 2019.

[2] Image source: Tether. Fiat currencies on the Bitcoin blockchain [R / OL]. (2016-06) [2019-10-09]. Https://tether.to/wp-content/uploads/2016/06 /TetherWhitePaper.pdf, accessed November 20, 2019.

[3] Image source: https://coinmarketcap.com/currencies/tether/ Website statistics, access time: November 22, 2019.

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