Zhu Jiaming: Libra may be a test and attempt to solve the "inequality of financial resources"

Source: Digital Assets Institute (WeChat Public) Original title: "Zhu Jiaming | Libra Digital Currency and Global Financial Resources Equality"

This article is a speech by the author on July 2, 2019, at the China Blockchain Application Research Center and the National Federation of Industry and Commerce Blockchain Professional Committee, “The Impact of Libra Currency and China's Countermeasures” (Shanghai Field) . This article was officially published after the revision of the recordings by the author.


Speech text:

Financial resources are the most important resources to support the growth and operation of the modern economy. However, on a global scale, inequalities in financial resources are becoming more serious. Not only hindered the balanced development of the world economy, but also aggravated the difference between rich and poor. We need to think and observe Libra's philosophy, design and experimentation in this historical context.

There is such a possibility: Libra is an idea and attempt to solve the serious inequalities in global financial resources .

1. How to define "financial resource inequality"

So, what is “financial resource inequality”? It mainly refers to the generation and distribution of various financial resources, especially monetary resources, financial institutions including banks and funds, and the distribution and social distribution of capital markets and money markets. Specifically in:

(1) The US dollar is the main body of the world's monetary resources. The US GDP is about 20 trillion US dollars, accounting for about 25% of the global total. However, the US dollar accounts for more than 60% of the world's "reserve currency." China is the world's second largest economy, and China's share of the world's reserve currency is extremely low. As of the fourth quarter of 2018, the proportion of RMB assets in the foreign exchange reserves held by the central banks of various economies reached an all-time high, but it was 1.89. %. The United Nations has 194 member states, of which more than 150 countries have zero or little impact on financial resources.

(2) Financial institutions, capital and money markets are mainly distributed in developed market countries, and emerging market countries have improved. However, there are too many developing countries with few modern financial institutions, and billions of people without bank accounts and access to modern financial services.

(3) Between developed and developing countries, within each type of country, the gap between per capita monetary and financial resources is very large and is expanding.

(4) The Fed, as well as the traditional financial capital of Wall Street representatives, based on strong wealth, has long dominated the main trend of monetary and financial capital.

(5) The growing financial strength of the world's multinational corporations and the close cooperation of commercial banks continue to be the biggest beneficiaries after the financial crisis.

(6) The IMF and the Bank for International Settlements effectively influence the rules and order of the financial system with the Basel Accord and various world financial cooperation organizations, such as the SWIFT and Ripple agreements.

(7) The imbalance between the sharing of financial technology and innovation results.

From the perspective of the world, there is an obvious tendency to continue to deteriorate.

2. Reasons for “inequality in financial resources”

Mainly caused by historical and institutional reasons .

(1) The Brinton Forest Conference. In July 1944, 730 representatives of 44 World War II allies held a meeting at the Mount Washington Hotel in Bretton Woods, New Hampshire, USA. The core outcome of this meeting was to identify a system in which only the dollar and gold were pegged, while other world currencies were pegged to the dollar. Because the dollar's gold content is determined, the exchange rate of other currencies pegged to the US dollar is naturally fixed. Under such a system, the dollar has in fact become a "world currency."

(2) Nixon announced the window to close the dollar and gold. On August 15, 1971, the then US President Nixon officially announced the closure of the US dollar window. Because the direct link between the US dollar and gold has been cut off, there is no stable dollar gold content, which means that the final influence residue of the post-war "gold standard" has been eliminated. From then on, the world entered the era of the floating exchange rate. Despite this, the US dollar still maintains the status of the world's major, even absolute "reserve currency."

(3) Square agreement. In September 1985, the "Plaza Agreement" signed by the United States, Japan, Britain, France and West Germany opened the first place for the world's major central banks to directly intervene in the foreign exchange market and exchange rate, artificially realizing the world's major currencies, especially the yen. For the appreciation of the dollar. Since then, the government can operate the exchange rate, and the exchange rate policy has become an integral part of monetary policy. The world exchange rate is a dollar-centered exchange rate system.

(4) The euro is issued. According to the Maastricht Treaty, 11 European countries recognize the use of the euro as the official currency, and on January 1, 2002, the euro was officially circulated. The essence of the euro is the "monetary union" of sovereign states and the test of "super-sovereign currency."

(5) The worldwide financial crisis triggered by the “subprime mortgage crisis” in 2008. The impact of this crisis is extremely profound, strengthening the government's control and influence on financial resources, or strengthening the government's monopoly on financial resources. The most representative is the implementation of the “Quantity Quantitative Easing (QE)” policy in the United States, the Eurozone, and Japan. Ten years later, the policy’s profound changes in the world’s macro economy have not yet fully emerged.

3. What are the consequences of “inequality in financial resources”?

The main consequences of inequality in financial resources:

(1) Aggravating the gap between developed and developing countries, rich and poor countries, including emerging market economies, is an important cause of imbalances in the world economy.

(2) Increasing the difference in the distribution of per capita financial resources in the world, showing the situation in which the per capita GDP of developing countries has risen while the per capita financial resources have declined.

(3) The imbalance of financial resources distribution within all countries, financial resources accumulate at an unprecedented rate to a handful of financial institutions and people in the world. The middle class is the most direct harm to the inequality of financial resources.

Therefore, the imbalance of the distribution and distribution of global financial resources ultimately exacerbates social divisions and constitutes the underlying cause of world turmoil.


4. Try to solve the "inequality of financial resources"

In the past few decades, in the face of global financial resource inequalities and consequences, people have been constantly proposing solutions and starting various trials and experiments. There are two major categories of “top-down” and “bottom-up”:

Regarding the “top-down” programme and experimentation, the most successful euro issuance and the establishment of the euro zone. For more than a decade, the issuance and circulation of the euro, especially the governance of the debt crisis within the euro zone, and the eastward expansion of the euro zone have proved that the design of the euro is reasonable and the foundation of the euro is solid.

The existence and development of the euro is conducive to changing the monopoly position of the dollar, conducive to the balance of the world monetary system, and inhibiting the imbalance of global financial resources. Regrettably, in the foreseeable future, it is impossible to establish a "Asian dollar" about the concept of transplanting the euro in Asia.

In the “top-down” program, there was also the “super-sovereign currency” proposed by Wang Qishan and Zhou Xiaochuan, the heads of China’s monetary and financial institutions after the 2008 world financial crisis. However, this plan of China was not widely accepted. Implementation. Only the structure of the IMF's "Special Drawing Rights" has changed, and China's "Special Drawing Rights" has been limited. In addition, since 2015, EU countries, the United Kingdom, Singapore, Hong Kong and Taiwan governments have begun to promote “Open Banking”, aiming to return consumers’ sovereignty over bank account information and have the right to decide to let other banks or third parties The institution obtains account information and enables consumers to obtain more diverse financial services.

The “bottom-up” approach and practice is quite rich:

(1) Development finance and "financial deepening" concept

In 1973, it was very coincidental that American economics professor Ronald I. M. Blonde said: "Monetary and Capital in Economic Development," and American Economics Professor Edward S. Shaw published "Financial Deepening in Economic Development." Their core idea is that the important obstacle to the economy of developing countries is “financial restraint” – so they advocate “deepening” finance and promoting financial liberalization.

(2) Community Currencies

There are more than 3,000 kinds of community currencies in the world, mainly in developed countries, which are created by the local communities themselves. This is a reaction to people's serious imbalances in financial resources.

(3) "Poor Bank"

In 1983, Muhammad Yunus (1940-) founded the Bangladeshi Rural Bank (Grameen Bank) in Bangladesh, which has always provided micro loans to the poor and contributed significantly to the economic development of the poor. Bell Peace Prize. However, Junas’s “Country Banking” program is not available in the world.

(4) "Tea Party Movement" and "Occupy Wall Street Campaign"

The "Tea Party Movement" is an American social movement that took place in 2009. The main players are right-wingers who advocate conservative economic policies. The "Tea Party Movement" does not belong to the long-term social movement. However, all its backbones and leaders have become Republicans and support Trump. In a certain sense, Trump is supported by the Tea Party.

The Occupy Wall Street Campaign took place in 2012 and originated in New York, USA, and then spread to major US cities and even some countries and cities in the world. The most basic appeal of the movement is to change Wall Street's financial capital to control the world, suggesting that the richest 1% of the population accounts for 99% of the wealth, while 99% of the population only has 1% of the wealth, so each participation " Members of the Occupy Wall Street Movement belong to 99% of the social group.

(5) Time Bank

American Edgar S. Cahn (1935-) founded the Time Bank in the 1990s, hoping to achieve a direct exchange of labor through the time banking model. The premise is that labor is not expensive, and everyone's working hours are equal.

(6) Crowd Funding

Crowdfunding emerged in the 1990s, relative to traditional financing methods, based on the characteristics of the Internet, communication, dissemination of entrepreneurs, artists or other innovative programs, gaining public attention and getting project start-up funds. The essence of crowdfunding is to break the monopoly of capital and investment.

(7) Peer-to-Peer Lending is also a verification test that attempts to change the serious imbalance between supply and demand of financial resources through the microfinance model.

(8) "Password Punk Movement" behind Bitcoin

The general Punk movement originated in the 1970s with a cultural movement that advocated full expression of individual consciousness and proposition. Such thoughts have influenced the cryptography community: some cryptographers, mathematicians, and computer scientists have joined together to end the state’s absolute monopoly on monetary and financial resources, and finally at the end of 2008, when the world’s financial crisis was at its worst. Launched "Bitcoin" – a non-sovereign, decentralized currency.

In the invention of Bitcoin password punk, there are indeed people who are full of anarchism and freedom. They want to build "Utopia" with code. Later, when Bitcoin came out, many people who mastered Bitcoin may not be able to adhere to this concept. This is another problem.

In fact, there are more than these claims, movements and experiments. One thing is certain: the ultimate goal of people is to change the serious inequality of financial resources, and behind the serious inequality is the monopoly of financial resources.


5. Why Libra may be a test and attempt to solve the "inequality of financial resources"

On June 18, 2019, Facebook announced the Libra white paper, which will solve the "inequality of financial resources" to practice "inclusive finance" and "encourage more people to enjoy the right to access financial services and cheap capital" as their goal. To this end, “the global monetary and financial infrastructure should be designed and managed as a public good”. It is obviously too early to judge Libra's implementation and future. However, Libra's basic conception and implementation has undoubtedly created a shock wave that covers the economics, digital economy and digital currency sectors, national monetary authorities and government financial regulators.

Libra is most worthy of attention in how to solve the "inequality of financial resources":

(1) Define Libra as a “non-sovereign currency”. (2) Libra uses the blockchain as a technology and belongs to the “currency internet”. (3) Libra uses the “one basket” of the world's major sovereign currency as the basis for achieving its value stability. (4) Libra itself is a new type of financial “infrastructure” that means going beyond traditional banking services. (5) Libra will be the fastest “currency” in the world. (6) Libra will achieve a comprehensive reduction in the cost of currency transactions. (7) Libra is also a harmonious financial ecosystem where members of the community receive equal rights.

In particular, Libra offers a choice for most of the world's countries and people who have no voice in the monetary and financial sector. Because of Libra, the world began to have "non-sovereign currencies" coexisting with traditional sovereign currencies, specifically "non-sovereign digital currencies." Now, the world monetary system is quietly changing:

In the past, sovereign currency, or Fiat Money’s “unification of the world” was deconstructed, forming a “one-third” situation: sovereign currency, private currency and non-sovereign currency coexist .

Such a situation is no longer an idea, but a fact, a fact that has become a climate in the world. See below:

WeChat picture_20190707192125

Most notably, any currency form is digitized. So far, five digital currency entities have been formed:

(1) Central bank issuance. In recent years, many countries are doing research and experiments in this area. Except for small countries such as Estonia, other countries are basically "thunder and heavy rain." (2) Commercial banks. (3) Commercial banks and real economy enterprises. (4) Social platforms and Internet giants, such as Libra. (5) No main release, the most typical is bitcoin.

See below:

WeChat picture_20190707192128

Because of the deconstruction of the monetary system and the digitalization of the existence of monetary and financial forms, the pattern of wealth creation and distribution needs to change. At the same time, the corresponding legal system, the regulatory model, needs to be adjusted and even rebuilt.

However, it cannot be inferred that Libra is a "stabilized currency." Because the concept of the so-called "stabilized currency" itself has problems, it is almost a replica of the "perpetual motion" thinking in the field of digital currency. Monetary science is not equal to thermodynamics, but monetary science needs to think about the principles and theorems of thermodynamics. The second theorem of thermodynamics is especially instructive for understanding the monetary system. In a complex monetary system, the stability of any kind of currency is relative to other currencies, and achieving its own stability requires energy consumption and increases the "entropy" value, thus leading to new instability.

Finally, the end of Simmel's "Monetary Philosophy" is over:

"The flow of modern culture rushes in two opposite directions: on the one hand, by tying together the most unreachable things under the same conditions, it tends to level and average, resulting in a more inclusive social class. On the other hand, it tends to emphasize the most individual things, tending to the independence of human beings and the autonomy of their development. The monetary economy supports two different directions at the same time, which on the one hand makes a very general, everywhere. Equally effective media, media and means of understanding are possible, and on the other hand, they can leave the greatest room for individuality, making individualization and freedom possible."[1]

I hope that in the future of monetary and financial fields, the absolute monopoly state should gradually change, giving more choices to human beings, ensuring that people have more and greater autonomy and changing the serious inequality of financial resources. Therefore, we need to pay attention to new ideas, innovations and experiments in the field of financial and monetary. Because of this, we still need to continue to pay attention to the future direction of Libra.

Note: [1] Simmel, Money in Modern Culture, 1896


On-site Q&A:

Q: In my philosophy, Libra is a combination of technology elites and capital elites to declare war on Wall Street capital predators. So how do we Chinese entrepreneurs participate? What should we do if we are excluded? How can our policy system bridge us?

Zhu Jiaming : What about Chinese entrepreneurs? The most important thing is to build a more comprehensive international perspective and understand the relationship between national interests and global interests. In addition, while maintaining their own business interests, establish a sense of social responsibility, and even human responsibility.

In this respect, Libra poses considerable challenges to Chinese entrepreneurs in terms of the social values ​​embodied in its white paper. If you read Libra seriously, it is full of social and human feelings, and some languages ​​are more communist than communism. In particular, Libra did an in-depth interpretation of “Inclusive Finance” and proposed a solution to achieve “inclusive finance”. As for whether Libra can do it, that is another question. Now, for more and more traditional enterprises, the first question is whether social responsibility is a prerequisite for participating in future competition. Q: If Libra is really released, does it have interest problems?

Zhu Jiaming : This is a very challenging question. Looking now, all non-sovereign encrypted digital currencies, represented by bitcoin, have not yet raised the question of whether there is interest and what is the basis for interest.

Unlike Bitcoin, Libra actually exists in the center, and there is a relationship between its value and a package of legal currency. So Libra's value is likely to be volatile. Further, in the future, Libra, in addition to payment, is likely to involve so-called "deposit" and "loan" scenarios, and if so, Libra cannot avoid the so-called "interest" problem. For the poor, "interest", even a little bit, is very important. Alipay has provided experience in this area. After Alipay came out, for many ordinary people, it is also a concern to get a few dollars of interest every day.

The question is, what kind of principle does Libra use to determine and adjust his interest? There are at least a few possible ideas. However, the form of existence is likely to be fixed interest, floating interest, or a combination of interest and Libra and bonds. The deeper problem is that Libra has a large number of countries, and how to adapt to the inflation rate of different countries, the interest structure will be a very complicated issue.

One thing is certain, Libra will affect the world's money supply system, transcend national borders and be highly mobile. In particular, Libra will be the fastest-growing financial medium in human history. If you consider the 5G factor, people should have more imagination. Q: Does Libra represent a "stabilized currency"?

Zhu Jiaming : I have already indicated my attitude before: after the end of the gold standard system, as long as we talk about currency, as long as we cannot establish a single monetary system, as long as there is a wealth model and value evolution, it is impossible to create a "stable currency."

The currency field has similarities and commonalities with the physical world. As long as there is a temperature difference, any energy conversion process consumes an energy source. Achieving stable costs requires huge social and economic costs, and also leads to an increase in the “entropy” value of the “thermodynamic” meaning of the monetary and financial sector. Therefore, stabilizing the currency is a good wish, in reality, like the pursuit of "perpetual motion."

Please pay special attention to the historical event that Nixon announced the closure of the US dollar and the gold window on August 15, 1971. After that, the world entered the era of floating exchange rate, and no country could control the fluctuation of the market value relationship between different sovereign currencies.

Now we can see that the value of Libra will be linked to a basket of major French currency. This is likely to be a “double-edged sword” that provides a real value base on the one hand and, on the other hand, cannot be interrupted because of the influence of the intrinsic value of the legal currency, including a basket of French currency.

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