Editor's Note: This article comes fromGu Yanxi, published with permission.
Editor's Note: This article comes from
Gu Yanxi
, published with permission.
Author: Gu Yanxi, a practitioner in the financial markets of China and the United States for many years, a researcher and practitioner of blockchain and encrypted digital assets, has served as the deputy director of information technology of Huatai United Securities and the COO of several financial service companies, and has served the United States Options Clearing Corporation, which provides clearing services for all options trades in the United States.
Understand the current currency issuance and clearing mechanism
Currency can be divided into two types, one is commodity currency and the other is credit currency. Commodity currency is currency issued based on commodities, such as currency that was once issued based on gold. Credit currency is the currency issued by the central bank based on its own credit, which is now commonly known as legal currency.
The circulation method of currency is physical currency and electronic bookkeeping. Physical currency is the coins and banknotes produced by various central banks. Electronic bookkeeping is the holding and circulation of money based entirely on electronic technical records.
In such a market structure, banks conduct lending business by attracting users' deposits, and lending business is the bank's main profit model. Free payment is one of the various services that banks provide to users in order to obtain their deposits. In our daily economic life, when banknotes and bank debit cards are used for payment, it seems that the payment is free on the surface, but in fact this free service is obtained by depositing in the bank.
Credit card payment is a method of payment based on credit. When the user pays with a credit card, his card-issuing bank pays the money to the other party. The user returns the money to his credit card issuing bank within a certain period of time thereafter. Credit card companies typically charge a service fee of 2% to 3% to recipients of credit card payments. The role of the credit card company is actually to provide a clearing network for credit card payments, and it cooperates with each credit card issuing bank and receiving bank to complete this process. Such credit card companies include Visa and Mastercard.
In addition to the payment methods provided by banks, there are some other service providers in the market. One of the main categories is the integration of payment clients, such as PayPal, Stripe and Square in the United States. The products of these companies collect payment from customers at the payment client, and then transmit the payment data to the banks of both parties through the bank's clearing network and credit card clearing network.
first level title
What is Libra's currency mechanism?
Currency attributes: Libra is a digital stable currency based on legal currency and short-term government bond mortgages, so its essence is still a credit currency. Libra's monetary policy is best stated in the following section of the white paper: "Our goal is for Libra to coexist with existing currencies. Since Libra will be a global currency, the Association has decided not to develop its own monetary policy, but to Follow the policies of the central bank represented by the basket.”
Circulation: The issuance and destruction of Libra depends entirely on market demand.
Seigniorage: For participants who mortgage their assets for minting, their seigniorage should come from various business income based on Libra.
Underlying clearing network: The underlying clearing network of the Libra stablecoin is an open permissioned chain.
Governance mechanism: The Libra Association, a non-profit organization registered in Switzerland, manages all aspects of the Libra stablecoin. There are about 100 members in the association.
first level title
What are the strengths and opportunities of Libra
To achieve a more reasonable minting mechanism
Bitcoin's minting mechanism is a very fair and reasonable mechanism. Anyone and any organization can obtain newly produced Bitcoins by providing Bitcoin bookkeeping services. This is actually a process in which everyone participates in minting coins. In the current financial society, the right to mint coins is owned by the government, and only the government has the right to mint legal currency according to its credit. Therefore, the government has obtained a large amount of wealth in the society and the right to use this wealth in the process of minting coins. Ordinary individuals and other organizations cannot participate in minting, and therefore cannot receive seigniorage. Libra provides an opportunity for everyone to participate in minting and earn seigniorage accordingly.
In the design of Libra, each node needs to mortgage its own funds of 10 million US dollars to participate in minting. It is estimated that the first circulation of Libra will be Libra worth about 1 billion US dollars. Afterwards, participating nodes or authorized dealers can adopt the DeFi coinage model to allow more institutions and individuals to pledge their owned and accepted assets to participate in this coinage process. As a result, the threshold for coinage is greatly reduced, which provides opportunities for everyone to participate in coinage and obtain corresponding seigniorage taxes.
Chance to develop into a commodity currency
Libra's current issuance is based on legal currency and short-term government bonds, so it is still a legal currency in essence. The value of Libra itself is therefore inevitably affected by the potential disadvantages of fiduciary currencies. Since the quality of legal tender depends on the policy of the issuing government, policy uncertainty will definitely affect the value of Libra. For example, the U.S. government's large expenditures for the Vietnam War led to a sharp depreciation of the dollar. However, after Libra was born, it has its own unique identity. It can adjust the acceptable mortgage assets in the future, and it may gradually develop into a complete commodity currency, whose value will be determined by the pricing of the global market.
Build a global financial market infrastructureThe underlying blockchain technology that supports bitcoin circulation has since proven to be more valuable than bitcoin. The underlying blockchain network that supports Libra circulation may also be more valuable than Libra stablecoins in the future.One of the biggest highlights of the Libra project is its underlying blockchain technology network. The Libra project white paper also very clearly defines this network as financial infrastructure. Such a network is actually what the financial industry usually calls a Financial Market Infrastructure (FMI). Such an underlying network will not only support the simplest financial product, that is, currency, but also support the circulation of various complex financial products. Given that Facebook has a social network of more than 2.7 billion users and the participation of various members of the Libra Association, if there are several financial applications based on stablecoins that are popular in the market, a large number of users can be attracted to use this network. And given that the network is open, it has the potential to be a strong competitor to Ethereum.
All the current public chains hope to become the public chain widely adopted in the world and become the second of Ethereum. But among the various reasons that hinder the general adoption of a public chain, the lack of killer applications is one of the main reasons (see my article:
So many public chains, so few applications
). Now the Libra project provides an underlying chain, stable coins running on it, and various applications on top of it; more importantly, this project also directly has 2.7 billion potential users, so such an underlying chain is The probability of widespread adoption in the market is very high.
Internationalized social networks match the attributes of digital assets
Encrypted digital assets are internationalized from the very beginning, and their production and circulation are not restricted by national borders. Facebook's social network is also global, and its network members are located in various countries around the world, which fits well with the international characteristics of digital assets. In Facebook's social network, users are accustomed to peer-to-peer information exchange, and it is much easier to further carry out peer-to-peer value exchange on this basis. Therefore, this is very beneficial for Facebook to promote its stable currency products. This migration mechanism is very similar to WeChat users starting to use WeChat payment.The network that supports the circulation of Libra supports the circulation and transactions of stablecoins and various financial products. The first financial product on this network is obviously the Libra stablecoin. Then, users in the Facebook social network can transfer funds directly 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 using WeChat Pay. The essence of WeChat Pay is still information exchange based on a centralized system. The process of Facebook users adopting stablecoins is the process of turning to direct value transactions between accounts.）。
With the increasing number of stablecoin users, the integration of the Internet-based information network and the blockchain-based value network has actually been realized (see my article:
Migration from centralized information network to distributed value network
Migration from centralized information network to distributed value network
The development of the current blockchain network has a lot of room for improvement in terms of usability, one of which is the need to help ordinary users intuitively see and use the asset information of the blockchain. The process of Facebook users adopting Libra is a process of gradually integrating the information-based Internet network with the blockchain network for value exchange. Therefore, the popularization and promotion of blockchain usage will also have a qualitative improvement.Provide the entrance to the future digital financial worldThe future digital financial world must be a world based on digital assets. In this future unified digital financial network ecology, the generation, circulation, storage, transaction and use of digital assets are all on one chain. Users only need one client to manage and use their own digital assets and digital currencies, conduct retail payments and securities transactions, and conveniently convert between digital assets and digital currencies. If Libra can be widely used, Facebook's current various client terminals, whether it is Facebook, WhatsApp or Instagram, will become such an entrance.
In my previous article, I believed that Facebook should continue to strengthen its advantages in user clients in terms of its stable currency strategy, instead of independently developing stable currency products (see my article:
Analysis of Facebook's Stablecoin Strategy
). Today, the Libra stablecoin is managed by the Libra Association. Calibra, which Facebook founded for this purpose, is just one of the association's members. In this way, Facebook is not the exclusive operator of Libra stable currency, so it will not become the target of other stable currency product providers. Therefore, Facebook can further expand its advantages in user clients based on Libra, and it will be more difficult for other social networks to shake Facebook's market position.
the correct form of organization
The organizational form of Libra is one of the biggest highlights of this project.
Facebook did not adopt an exclusive management method for this stable currency product, but registered an association specifically for this purpose, and adopted an alliance organization method to promote stable currency. And this organization is not-for-profit and only provides basic services for members' businesses.
Members of the alliance so far planned to participate include companies in different public domains, such as credit card companies Visa and Mastercard, consumer application companies Uber and Lyft, payment application companies PayPal and Stripe, Argentine e-commerce companies, investment companies and non-profit companies. Sex companies and more. The participation of related different types of companies will be very helpful for the promotion of stablecoins.
What is particularly important is that the design of the Libra Association is obviously to ensure the fairness of the association's decision-making. Therefore, among the initial members, some direct competitors in the industry have participated in this association, such as Visa and Mastercard, Uber and Lyft. The association thus established from the outset that the association was inclusive in terms of admission to its members.
The organizational form of the alliance is a mainstream organizational form. This form is actually ubiquitous in the current business society, from credit unions to even the organizational form of the Federal Reserve Bank of the United States. For example, the organization of Options Clearing Corporation, which I worked for before, is like this. It is a non-profit corporation jointly established by the original five options exchanges in the United States. It serves options exchanges and clearing members. The profits on the account are returned to shareholders and settlement members every year.
But these current organizational forms only exist in one small region or one industry in one regulatory jurisdiction. The emergence of blockchain technology has given new vitality to this organizational form. The blockchain supports the automatic operation of smart contracts on it. In this organization in the form of a consortium, business rules can be pre-determined, and then run automatically on the chain through smart contracts. Since there is no human intervention, such rule enforcement is fair to any participant.
The most representative application of this is the distribution of revenue among multiple service parties. Since the smart contract automatically executes the distribution rules, more service parties can participate in providing this service with confidence. The scalability of the business is therefore very strong. Alliance members are no longer restricted by regions and regulatory jurisdictions. Individuals in any place can join as long as they meet the rules of the alliance. The service network of Libra can therefore attract service organizations from all over the world to participate in providing related services based on Libra, so this ecology can develop rapidly and stably.
Feasible Promotion Strategies
The promotion of an innovative financial product must have a suitable application scenario. Existing financial means cannot provide a good solution in this application scenario, and this innovative financial product has the opportunity to emerge and develop. The most representative example in this regard is the emergence of Alipay. As an online payment and clearing method, Alipay filled a blank field that financial payment could not serve at that time, and this blank field was a field that was developing rapidly at that time, so Alipay gradually developed.
Promotion area
In terms of geographic reach, Libra's biggest opportunities are in regions where traditional financial strength is weakest. For example, a regime with weak currency management capabilities leads to a large amount of currency issuance, such as Germany after World War I and Venezuela not long ago. In order to protect their assets, local people will have a very high demand for stable currencies on a global scale. Of course, if there is Libra circulating in the market from the beginning in these areas, the ability of local regimes to issue currency will be greatly limited.
Another situation is in the newly established small countries. 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 size and economic capacity, the credit currency it issues is difficult to be accepted by the market. The quality of Libra is much higher than the credit currencies of these emerging small regimes. In such a geographic area, the market will certainly pay a premium for Libra.
The worst area for promotion of Libra applications is the daily payment activities of people in an economy like the United States. It is very difficult to replace the habit of using credit cards in this region with Libra.
In terms of business, the largest application scenario of digital stablecoins is still the transaction of digital assets. The application scenario of the original stablecoin Tether is digital asset trading. In the past one or two years, the compliant stablecoins that have appeared in the U.S. market are mainly applied to digital asset transactions. When digital asset transactions are on the rise, the market's demand for stablecoins is stronger, which is also reflected in the market's willingness to pay a higher premium for stablecoins. But in the field of digital asset transactions, Facebook does not have this advantage. Therefore, it chose the next important application field of digital stable currency, that is, transfer and remittance transactions between different legal currencies.
technical factors
At present, the transfer transactions between different fiat currencies in the financial market are completed through a centralized clearing system, the most famous of which is SWIFT. The current process is costly and inefficient. This is a problem that already exists in the market and needs to be solved urgently. The emergence of blockchain and encrypted digital currency technology provides a good means to solve such a problem. There is a consensus on this in the market. The USC and JPM launched by financial institutions are first used to solve the remittance of different legal currencies between institutions. WorldWire, jointly launched by IBM and Stellar, also supports remittances between different fiat currencies between banks. It is therefore very natural that Facebook chose this field as the first entry point for its stable currency.
In the field of cross-border remittances, Facebook does have its incomparable advantages. The Facebook social network has 2.7 billion users worldwide, and the country with the largest number of users is India, with 260 million Indian users. Such an advantage cannot be possessed by any other company. The retail cross-border remittance market is a $600 billion+ annual market. This market is in great demand and is expected to continue to grow. Also, according to the World Bank, India topped the world in remittances received from overseas at $80 billion in 2018, and such remittances are expected to continue to grow. So it is logical that Facebook chose India's retail cross-border remittance business as the first application scenario for its stable currency.
technical factors
Facebook chose the cross-border remittance business as the first business application, which is also more suitable for the underlying support of the required blockchain technology.
The cross-border remittance business does not have high requirements on the performance of the underlying clearing system, and the current level of blockchain technology can fully meet such business requirements. Compared with the current cross-border remittance at least one day, the real-time settlement supported by blockchain technology has greatly improved in terms of time. Compared with the cross-border remittance business, the retail payment business in the same market has much higher performance requirements for the underlying clearing network. The current level of blockchain technology is completely unable to meet such business requirements.
Serving currently underserved groups
The Libra white paper believes that Libra will serve more users around the world, which is very reasonable and predictable.
Avoid excessive lending by commercial banks
On the Libra network, one of the benefits of using Libra stablecoins for credit business is to avoid the ability of commercial banks to create credit currencies. Because Libra must have an equivalent value of legal currency mortgaged in the bank, there will be no additional issuance of Libra. When a credit institution on the chain adopts Libra for lending, it must first have a corresponding number of stable coins. In the real banking market, commercial banks actually create more money through lending. The ability of commercial banks to create credit loans is subject to different restrictions in different periods, and 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 circulation network, the credit institutions in the network do not have the ability to create credit money. Thus eliminating a major cause of the financial crisis.
first level title
What is Libra's business model?
As a basic service in the financial market, the Libra stablecoin and its underlying clearing network can only earn the most basic service fees. It is absurd to hope that the stablecoin product itself will obtain high profits, let alone expect the Libra Association to issue new stablecoins out of thin air every year for distribution among nodes. Likewise, the Libra Association cannot be expected to issue new currencies through leverage like banks. Libra's reasonable profit income should come from the share of revenue generated by various business applications on this basis, 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 was the largest country in the world for cross-border remittance business. During the year, it received $80 billion in remittances from overseas. The cost of 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 globally, it is reasonable to think that many Indian users inside and outside India who have the need to use cross-border remittances are using Facebook. This provides a very good foundation for the application of Libra in this cross-border remittance.
When stablecoins are circulated between accounts, the underlying network that supports their circulation can choose to charge or not. The charging method also includes charging the transaction parties or charging the payee. In the existing digital asset circulation method, the network circulation fee is basically free. For example, the purpose of Ethereum's gas fee is to prevent attacks, not to earn network service fees. The same is true for the design of transaction fees on the Stellar network, which directly supports cross-border remittance operations. If Libra chooses to charge fees, this will reduce its competitiveness relative to other stablecoins.
It is estimated that Libra will not charge when it is in circulation. Nodes that provide this service only charge when users convert stablecoins to fiat currencies. This revenue will definitely be distributed between the nodes that provide this service and the network, and the nodes that directly provide the service will get most of the business revenue, and the network will get a small part of it. The part of the income allocated to the network is definitely divided equally among the various nodes. Based on this calculation, the ROI of each node in this business should be limited.
Of course, other stablecoin-based businesses would generate reasonable income. For example, when the market demand for stable value is strong, the market will pay a higher premium for stable coins. Given the current volatility in global financial markets, the odds of such a premium appearing are very high.
What are the risks of the Libra project?
Risk 1: high-risk project management
If the Libra project fails, project management must be a major reason for its failure.
There are usually two ways to manage project progress: one is incremental and the other is big bang. An incremental approach to project management works step by step, starting small and local. After the various components are gradually completed and the phased goals are gradually achieved, the ultimate goal of the project will naturally be achieved. The way of the big bang is to set the ultimate goal as the first goal to be achieved at the beginning, and all kinds of work in the project are carried out for this purpose. The ultimate goal of the project is achieved through a one-off approach. For example, the so-called Battle of the National Fortune and Consummation of Great Achievements all refer to this method. Comparing the two methods, it is obvious that the risk of the first method is much smaller, while the risk of the second method is huge. The Libra project actually uses the second approach.
The Libra project is a project of enormous scope and complexity. Facebook's social network spans the globe, with 2.7 billion users. The nature of a stablecoin project is much more complex than that of a social networking site. It involves aspects such as technology, currency generation mechanism, financial market structure, business model, organizational model, promotion model, communication and coordination with local supervision, etc. 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 too large, which is one of the biggest risks of project management.
Judging from the existing reports, Facebook has very high expectations for the success of this project. It is in talks with various agencies, including commercial companies and regulators, to do so. Facebook actually uses a big bang approach to project management in terms of project management. This approach to project management has its advantages, but it is also very risky. Because a large project requires the close cooperation of all parties, any small detail may cause the overall delay or failure of the project. Therefore, the incremental approach is a more secure approach to project management. The development of Facebook itself is actually a gradual project management model. It started with one university campus in the United States, then expanded to other campuses, and finally expanded to a global scale. If the Facebook social network had been rolled out globally from the start, it would have failed.
Risk 2: Resistance from existing interests in various countries
Facebook chose India's cross-border remittance business as the entry point for Libra. Although the choice in terms of region, business and technology is reasonable, Facebook's biggest resistance in this regard may come from existing forces in Indian society.
The Indian social system is a fully democratic system. Its characteristic is that any decision needs to be fully discussed and reached a consensus before it can be implemented. The introduction of a new type of digital currency in Indian society is obviously a very important thing. Libra and its underlying clearing network will directly affect India's financial market foundation. Many existing interests 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 application promotion strategy.
Information in Facebook's social network flows freely. But in a country, if a new currency appears, it is a matter of a completely different nature. The free exchange of value has far greater impact on a society than the free flow of information. Governments will certainly have to assess its implications for their own monetary and financial policies. Therefore, the Libra Association needs to communicate with the financial supervision of each country. The free circulation of Libra around the world is not something that will happen naturally.
For the U.S. dollar, which currently dominates global trade, since Libra is against a basket of fiat currencies instead of only against the U.S. dollar, its promotion and use will inevitably affect the market position of the U.S. dollar. In addition, since 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, in view of Facebook's previous problems with user privacy, it is expected that the Libra project will have a long period of communication and coordination with the US government in the future.
Risk Three: Competition Risk
The Libra project will certainly compete with existing stablecoins in the market. USDC, TUSD, GUSD, and GUSD are all stablecoins of the same type. They are all stablecoins based on US dollar collateral, pegged to the US dollar, and using the ERC20 standard. Given the nature of these stablecoins and the organizations behind them, these stablecoins will not form strong competition for Libra.
One contender is World Wire, an alliance between banks spearheaded 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 stablecoins on its network, and in fact, banks and third-party companies are issuing stablecoins based on Stellar technology. However, the influence of these issuers in the global market is far less than that of Facebook, and the main positioning of World Wire is to support the transfer business between financial institutions. It is an underlying clearing and settlement network, not a stable currency. Therefore, the positioning of IBM's World Wire and Libra is completely different.However, World Wire would be a serious competitor to Libra from the banking world. First of all, banks of various countries participating in World Wire can issue stable coins based on their own national legal currency on the basis of this network. Second, the circulation cost of stablecoins on Stellar-based World Wire is very low. Therefore, World Wire will be a competitor of Libra in terms of the support of participating national banks, the diversity of stablecoins, and the cost of circulation.Another category of potential competitors for Libra should be stablecoins issued by banking institutions. In this field, the most famous should be JPM issued by JP Morgan and USC jointly supported by financial institutions such as UBS. Although these two stablecoins are currently positioned for clearing and settlement between banking institutions, these two stablecoins can be further developed into the field of retail payments, which will form direct competition with Libra. Among the two stablecoins 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 development trend of blockchain technology. However, JPM's supporters are mainly JP Morgan, which is still a traditional organizational model. It is difficult for this model of independent operation to outperform the model of joint operation.
Another potential competitor for Libra should be Jack Dorsey. Jack Dorsey is also the CEO of Twitter and Square. Twitter, a social network that rivals Facebook, has 320 million monthly active users, and about 80 percent of Twitter's registered users are outside the United States. Another very important factor is that Twitter is the favorite social network for cryptocurrency enthusiasts, and it has an absolute advantage over Facebook in this regard. Square is a very popular retail payments marketplace in the US, with 45 million downloads as of early 2019. Moreover, Jack Dorsey has always been a fan of Bitcoin. Square’s terminals have already started to support Bitcoin sales and payments, so Jack Dorsey should have a better chance than Facebook to promote a digital stable currency on a global scale (see My articles:
The most stable currency should be Jack, not Mark
). Among the reported Libra alliance members, relevant financial institutions include Visa, Mastercard, PayPal, and Stripe, but Twitter and Square are notably absent. For Libra, there is a potentially very powerful competitor.
Risk 4: Lack of a unique application scenario
Libra's application lacks a market where demand is strong but 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 so is the adoption of stablecoins and blockchains to solve this problem. Previously, IBM and Stellar cooperated with several banks to establish World Wire to solve the problem of cross-border remittance.
Now Facebook is using the same solution to participate in this business. Facebook's solution does not have a strong first-mover advantage in terms of time, let alone a company operating alone. In addition, both USC and JPM will further promote these stablecoins to cross-border transfers between retail customers. In view of the intense state of the market, it is difficult for Libra to have enough time to establish its own advantages in the field of cross-border transfers. Bitcoin, by contrast, has years of development on its own. Only in this way can it help it achieve an absolute leading position in the encrypted digital currency market.
Think more, understand Libra better
Libra vs. Bitcoin
The original intention of Bitcoin was to be an electronic cash, and later it actually developed into a digital asset. However, the concept and mechanism of Bitcoin have inspired all subsequent digital currency projects, and more innovations have been continuously derived from the mechanism of Bitcoin, which of course includes the current Libra stable currency project.
In terms of currency value attributes, Bitcoin is not associated with any other assets, and its value is entirely the result of market consensus. Bitcoin is actually a virtual commodity, not a currency. Libra is generated based on fiat currency collateral. It is actually a derivative of existing fiat currency, so the essence of Libra is still a fiat currency issued based on credit.
In terms of value stability, since the value of Bitcoin is formed through continuous transactions in the market, its volatility is inevitable, and Bitcoin is therefore not suitable as a value exchange medium. The price of Libra is benchmarked against a basket of fiat currencies, 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, not controlled by any person or institution, and operates automatically. Libra's governance mechanism is jointly governed by an association of 100 members. Although such a democratic decision-making mechanism is far from Bitcoin's, it is still more reasonable than some existing legal currency governance mechanisms.
As a digital asset, one of Libra's biggest advantages over Bitcoin is that it can convert existing fiat currencies into digital forms in a more reasonable way for use in the market. As a virtual asset, Bitcoin is not linked to existing fiat currencies and assets, so it cannot digitize currencies and assets in the real world, and therefore cannot be connected with real economic life. But Libra can successfully complete this grafting. This will greatly promote the process of currency digitization.
Don't Overestimate Facebook's User Advantage
The Facebook social network has 2.7 billion users in almost all countries around the world, which provides a very strong user base for Libra products. However, it cannot be inferred that Libra products will succeed naturally. Facebook's previous attempts at financial services such as Facebook Pay and Facebook Credit have shown that this is not the case. The content and aspects involved in stable currency products are more complicated than the previous two financial products. So Facebook's advantage in terms of users cannot be expected too much.
The pursuit of profit or the pursuit of network user growth?
One of the first choices that needs to be made in the Libra business is to pursue profit or to pursue the increase of network users. These two goals are mutually exclusive and only one of them can be selected. According to the business model of the Internet, the growth of Internet users is the first choice, but the expectation of Wall Street is obviously profit. The success of Amazon has proved the great 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 stablecoin business will provide greater value compared to competitors, so as to attract more users to start using Libra's underlying clearing network, so that it can provide more in the future. value-added financial services.
Libra can't replace credit card payments
Earlier news reports said that one goal of the Libra stablecoin is to replace the 2% to 3% service fee that credit card companies charge merchants during the credit card payment process. If this is the case, I don't think this logic makes sense.
First, credit card payment is mainly a payment method that people have become accustomed to. This method of payment is actually beneficial to the consumer, not to the recipient. However, the payment method of stable currency is a payment mode in which both payment and payment are paid, which is completely different from credit-based payment. In the current economic life, the people who pay with credit cards are completely different from those who pay with cash and debit cards (that is, the payment mode of stablecoins). It is difficult for users who currently use credit cards to make payments to change their existing payment habits because of stablecoins.
Second, if Libra positions itself as competing with credit cards, then such a strategic decision is wrong. Where credit cards are widely used is also 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 user groups, the user groups in this region have become accustomed to using existing financial services. When a new financial service method appears, it is difficult for these user groups to change the existing way to adopt the new financial service method if there is no great benefit. This is why QR code payment first emerged in China, and only now has it gradually penetrated 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 model, that is, cash and bank debit card payment models, but will not have any impact on their own credit-based payment methods. direct competitive impact. In addition, the application of blockchain technology and digital assets is an obvious trend, and its fundamental changes to the financial market are also very obvious. As a financial market infrastructure service provider, credit card companies should grasp the changes that Libra can bring and be at the forefront of this change.
The missing digital stock exchange
A digital stock exchange is an important missing piece in Libra's product strategy. Such an exchange is not the current encrypted digital currency exchange like Coinbase and Kraken, but is similar to the current various security token exchanges in the United States, that is, it can digitize various assets and rights in reality , and then an encrypted digital asset exchange for secondary market transactions. These current products are commonly referred to as security tokens, but I think these products are more likely to be called digital securities in the future, that is, "digital security". At present, in the US securities market, two companies are already applying to the SEC to establish such a digital stock exchange.
In the future financial world, various assets and rights in reality will be digitized, and then traded and circulated in the secondary market in the form of digital securities. Since the structure of the future securities market will be global and the liquidity will increase significantly, some smaller securities trading varieties will also be circulated in the secondary market in the form of centralized matching transactions. The types of assets are not only company equity and fund shares, but also alternative assets such as real estate. In addition, because the future secondary market is a global 7×24 hour transaction, the value of various assets is to carry out fair market pricing at any time on a global scale. Such a variety of assets and fair pricing in the market provide a solid foundation for issuing commodity currencies based on these assets. This can also provide a solid foundation for Libra to transition to commodity currency.In addition, in the future financial world, users' retail payment scenarios will be inseparable from securities trading scenarios. Users can use a client terminal to conduct retail payments and securities transactions, and to realize the exchange between digital stable coins and digital assets of variable value 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 piece in Libra's strategy (see my article:
Facebook should be an ST exchange, not a stable currency). Of course, it is also possible that Libra is waiting for the further development of the digital stock exchange, and has left an appropriate place for such an exchange in the future in the current design.Interestingly, Bakkt's strategy is exactly at the other extreme. Bakkt's vision is to establish a network for the generation, storage and circulation of digital assets, and Bakkt also foresees the integration of digital asset transactions and payments in the future (see my article:
Is Bakkt's reverse pursuit of Starbucks worth it?
Is Bakkt's reverse pursuit of Starbucks worth it?
). But Bakkt's strategy ignores the serial role of stablecoins in this ecology. Therefore, Bakkt definitely needs to improve in this area.
What kind of members does the alliance need?
The current members of the Facebook League could be called "All American but no banks," or "All American without banks." Members of the current coalition are big names, each offering $10 million and nominal support. So in order to promote this stable currency, what kind of members does this alliance need in the future?
At present, the most important application scenarios of stable currency are digital asset transactions and cross-border remittance and payment. If Libra cannot currently be widely used in digital asset trading business due to regulatory reasons, then the second option should be cross-border remittance and payment. This field is currently weak in the application of various fiat currencies, but has a very strong market demand. Therefore, the most helpful institutions for the application promotion of Libra should be companies that conduct various cross-border transactions and payment services, such as tourism and cross-border e-commerce. In this regard, Uber and Lyft are very good choices. A user uses the same taxi client and a digital currency to pay in different countries, which is much more convenient than the existing taxi payment process.
The lack of participation of other countries in the current coalition membership is an area for improvement in the current coalition membership. However, I believe that the Libra Association must have a clear understanding of this, and the recruitment and participation of members from other countries is already in the promotion plan.
Not surprisingly, there are no banking institutions among the members of the alliance. After all, currency and various financial businesses based on currency 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, this will definitely arouse the vigilance of banking institutions. What's more, there are already digital currency generation and circulation schemes based on blockchain technology in the financial field. Banking institutions in various countries will definitely need to further evaluate before making a choice. More importantly, the banking system does not exist quite independently like any other industry. It is strictly regulated and protected by regulatory policies. Banks would be very cautious about participating in such an organization changing the fundamentals of financial markets without the permission of the bank's local regulator.
Comparison with WeChat Pay
The success of WeChat Pay is obvious to all. I believe this is also a reason to motivate Facebook to be a stable currency. 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 Inc. to provide financial services. Compared with WeChat Pay, Libra is fundamentally different.In terms of user attributes, the WeChat user population is a global Chinese-speaking population, and the main user population is in China. Facebook's customer base is a global customer base that speaks various languages. The number of users has reached 2.7 billion, distributed in many countries around the world, and a considerable number of them live in areas where communication and finance are not well developed. Therefore, Facebook can take advantage of its social network to directly provide various financial services based on stablecoins to a wider range of users in these regions.In terms of financial services, WeChat Pay is essentially a payment client built on top of the existing banking system. It provides a more convenient payment method for retail users, which is similar to PayPal, Stripe and Square in the United States. The payment medium of WeChat Pay is RMB, and the balance in the WeChat Pay account actually corresponds to the user's RMB deposit in the bank account. The underlying clearing network of WeChat Pay is the clearing network between banks. When WeChat Pay is used for payment in currencies other than RMB, the underlying clearing network needs to be connected with the underlying clearing network where the merchant is located through system connection.
Libra is a digital form, and its value is against a basket of fiat currencies. The Libra stable currency exists independently and is recorded in the account on the underlying clearing chain, and has no relationship with the user's deposit in the bank. The circulation of Libra is based on the blockchain-based clearing network and does not use the clearing network between banks. Therefore, the circulation of Libra is not restricted by the network between banks (see my article:
How do Squares bypass fiat liquidation?
). Since this underlying clearing network is global, users holding Libra can conduct direct transactions with each other anywhere in the world. In addition, since Libra's underlying clearing network is based on distributed accounting technology, this clearing method is superior to the existing centralized clearing network, which also includes the clearing network of WeChat Pay.
As mentioned above, the biggest highlight of the Libra stablecoin project is its underlying clearing network, because this clearing network not only supports the circulation of stablecoins, but also supports the circulation and transactions of more complex financial products. Therefore, this underlying clearing network may develop into a global underlying financial market infrastructure (Financial Market Infrastructure, FMI). Such an advantage is unmatched by WeChat Pay.
How to create a stable currency that competes with Libra?
Libra, whether it is successful or not, will be a milestone event in the history of digital currency development. Based on the current understanding of Libra, it has a certain chance of success, but it is in a very early stage after all, and there are still some high-risk factors in the project. In addition, some of its current advantages are also its biggest disadvantages. These risk factors are likely to lead to overall delays in product launch, or even fail to achieve its expected results.
Libra is still far from its goal of unifying the world. In the course of its development in the next few years, there is still a great opportunity for competing stablecoins to emerge and become a major value exchange medium in the market, and such a stablecoin is likely to have the following characteristics:
In the near future, it will be issued based on the mortgage of legal currency, and in the future it will be issued based on the mortgage of digital assets.The underlying blockchain supporting the circulation of this stable currency must be open source.）
There will be a global digital asset exchange. This exchange provides a fair global trading and pricing mechanism for digital assets and digital currencies. This digital asset exchange must be a global brokerage alliance (see my related articles:
An exchange a hundred times the size of Nasdaq, the next blockchain-based cross-border financial alliance
An exchange a hundred times the size of Nasdaq, the next blockchain-based cross-border financial alliance
The mortgaged fiat currency and digital assets still need to be hosted in trusted custodians around the world, both on-chain and off-chain.
The underlying blockchain supports multiple asset custodians. Users choose to host their own digital assets in these asset custody institutions.
In view of the unevenness of global economic development, the smallest unit of this digital stable currency should be suitable for supporting economic activities in financially underdeveloped regions.
