Summary
Summary"Facebook officially released the Libra project white paper on June 18, 2019, along with technical documents, governance documents, Reserve documents, etc. At present, there are many analyzes on Libra in the market. The extreme view regards the emergence of Libra as a "super-sovereign national currency" and a "currency war weapon" between different sovereign countries in the future digital society."; At the same time, there are many opinions that Libra will not be able to pass the first supervision threshold, and even if it passes, it will not be a "revolution".
. According to TokenInsight's research, for Facebook, there are four reasons for issuing the Libra project:
1. A "self-salvation" about the crisis of self-confidence;
2. As an essential behavior of capital market companies seeking profits;
3. Quickly seize the "first-mover advantage" in the future digital tokenized society;
4. Zuckerberg's own vision for the future.
But in terms of its significance, it is absolutely not only that, the launch of the Libra project is only the first step in the modern financial society to open digital tokenization. Using blockchain technology to develop fast, safe, convenient and low-cost financial services is an inevitable trend. In addition, the trend of tokenization is also very obvious. Facebook is just the first batch of companies among the current giants to try. After that, more and more companies will inevitably issue certificates that match their own business models and business characteristics. This also makes it necessary to introduce laws and regulations on these tokens as soon as possible. More importantly, due to the characteristics of the blockchain, the legal regulatory framework can no longer be limited to a single country or region. A more comprehensive regulatory framework with better coverage is still necessary at present.
As a product of inclusive finance, Libra itself can provide convenient and simple financial services for people who cannot access banking services from bottom to top. However, Libra's passive and dual structure management is very likely to cause Libra's "two" prices. In addition, how to solve the financial data generated by users after using Libra is also a problem that Facebook needs to face. Compared with the promise of "can do it but won't do it", the "inability" to obtain user privacy seems to really help Facebook solve the crisis of trust.
The rights and interests represented behind the LIT pass can govern the alliance at a lower cost. As for Libra, the dual-token design of Libra and LIT makes the Libra ecosystem more complete and easy to govern. In fact, the process of Libra ecology from centralization to decentralization is the process of "power alternation" between LIT and Libra. The design of LIT's "different rights for the same share" disperses the rights of early investment institutions while guaranteeing their rights and interests.
1. Introduction to Libra
Libra is very similar to the stable currency USDT and USDC in the current digital token market, which is a "special stable currency". Unlike these stablecoins, Libra employs a basket of low-risk, highly liquid assets as collateral for value. In fact, Libra is more similar to the "Special Drawing Rights SDR" of the IMF. The value of SDR is also supported by a basket of currencies: US dollar, renminbi, euro, British pound, and Japanese yen.
Since Libra is issued based on blockchain technology, it also has the functions of cross-region settlement, low handling fee, convenience, and real-time settlement. Libra's main mission is to provide convenient payment methods for users around the world, especially for the 1.7 billion unbanked people. Cross-border payment is one of its important goals.
Chart 1-1 Comparison of Libra with Bitcoin and USDT
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Source: TokenInsight "Privacy and Trust Dilemma Brought by Anonymity
In terms of anonymity, Libra adopts the same method as Bitcoin, which is pseudo-anonymous. This means that the transaction records recorded on the Libra chain only have a string of addresses of the user, and do not have the real identity of the user. And Libra also guarantees in its blockchain that it will not link transaction records on the chain with the real identity of users. But there is a slight paradox in that users need to pass KYC when using Calibra (the Libra wallet launched by Facebook). This is bound to be the same for other compliant wallets in the future. In other words, although Libra does not record the user's real identity on the chain, it still (may) collect the user's real identity information, and at the same time be able to link the user's real identity with the transaction on the chain. This is also one of the points that many users question Libra. Facebook has the social and preference information of all its users, and through Libra, it can also obtain financial information of users. Once connected, it is equivalent to allowing users to "run naked" in front of Facebook. Although Facebook promised not to do so, in fact, before the incident of leaking users' personal information, Facebook also promised to do so.
On the other hand, although compliant wallets require users to pass KYC, some wallet providers must launch services that do not require KYC in order to increase the number of users. And because of the rigid demand at this point, this kind of service will inevitably be banned repeatedly. In addition, even for wallets that do not require KYC certification, users' own private keys are another pain point that needs to be solved. This is also the problem faced by many decentralized wallet providers. For the security of the account, the private key of the user account must be a string of meaningless characters that are long and hard to remember. In the digital token market, this situation often occurs even for users who are more or less familiar with this mechanism. For Facebook, most ordinary users do not have the awareness of keeping their private keys. As a result, Facebook has entered a dilemma:
1. Help users keep their private keys - user personal information (email, real identity, etc.) is required - users do not trust;
2. The user keeps the private key by himself - the cost of educating the user is too high - the user's assets are permanently lost.
2. Facebook’s motivations, problems, and the future of tokenization
"The profit-seeking nature of Facebook seeks new profit growth points
An important reason for Facebook to launch Libra is that Facebook can do so. In Facebook's social product system, there are more than 2 billion monthly active users and more than 1.5 billion daily active users. Making payment from the starting point of social interaction, WeChat has proved the feasibility of this path. Faced with such a big piece of cake, it is difficult for Facebook not to be tempted.
Chart 2-1 Number of Facebook users
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Source: Statista
Chart 2-2 Digital Advertising Market Share Distribution
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Source: eMarketer
Chart 2-3 Changes in the stock prices of Facebook and Western Union after the release of the Libra white paper
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Source: Yahoo Finance
On the day the Libra white paper was released, Facebook’s stock price opened up more than 3%; while Western Union, an international remittance giant, fell 2.8%. The market seems to be very optimistic about the Libra project. According to McKinsey's report, the total revenue of the global payment industry in 2017 has reached 1.9 trillion US dollars. Among them, cross-border remittance accounts for 2%-8% (regional gap). Even though Libra only charges a small fee when users transfer or withdraw cash (Libra is converted into legal currency), it is still a huge income in the face of such a large volume.
Facebook itself is a product of capital. No matter how it promises to provide services to users, it always represents the interests of shareholders. The profit-driven nature of the company is at the heart of nearly every decision Facebook makes.
"The crisis of trust forced Facebook to grasp the "life-saving straw" of Blockchain, but it is not optimistic
In the past year, Facebook has been questioned by too many people in terms of user data privacy and security. Ignore, steal, sell user privacy, and even manipulate the US election. Facebook's share price also fell from a high of 217 US dollars to a minimum of 124 US dollars, close to "half cut". The blockchain can protect user privacy from a technical perspective. Although all the data on the chain is public, no one can accurately determine the real user identity offline only based on the information on the data on the chain. Compared with "can't do it", "can't do it" seems to be able to fundamentally solve Facebook's trust crisis.
But "unfortunately", the Calibra wallet requires users to perform KYC authentication. In addition, if users use Libra to transfer money in Facebook products, it must be done on their Facebook account. This also means that Facebook actually has the matching relationship between the user's real information and the use of Libra. Even though Facebook has guaranteed and set up a subsidiary to participate in the operation independently, it will not touch users' financial information. But compared to the guarantee of "can do it but won't do it", it seems that only "technically it can't be done at all" can truly gain the trust of users.
So from this point of view, because the trust problem has not been fundamentally resolved, Facebook's "history" makes users not easily trust its guarantee. Rebuilding trust is a long way for Facebook.
"Regulatory risks are still high, and there is a possibility of being banned by different countries
There is no doubt that Facebook must have carried out a lot of demonstrations within the company before launching the Libra project, and the professional opinions of people in the financial and legal circles must have done enough consulting work. In addition, Facebook also contacted the regulatory authorities in advance to make sufficient preparations for Libra to operate under a legal and compliant framework. This is one of the reasons why most people think Libra can pass.
From a trend point of view, projects like Libra will definitely reappear. Even if Libra does not pass now, other projects will definitely run legally and compliantly in the future. However, it is worth noting that for digital currencies, due to the different levels of financial infrastructure, regulatory agencies in different countries often adopt different attitudes. Generally speaking, countries with more developed economies have a stronger ability to control financial risks, so they are more tolerant of financial innovation; but emerging economies are relatively weaker in controlling financial risks, and generally adopt tougher measures.
As one of the regions with the largest number of users of Facebook products, India has an unfriendly attitude towards digital currency. In addition, according to Coindesk's report, Facebook did not seek advice from the Indian central bank in advance on the Libra project, nor did it make any application. In India, Facebook has 400 million WhatsApp users. At the same time, India is also one of the countries with a huge volume of cross-border payments. Brazil, another country with a huge number of Facebook users, also has a less friendly attitude towards digital currencies.
In addition, the French Minister of Finance also made it clear that "Libra cannot be allowed to happen, and it is impossible to make Libra a 'sovereign currency'", and also called on the G7 central banks to jointly re-examine Facebook's Libra project. Members of the U.S. Congress have also called for the Libra project to be halted. Compared with these opinions, the opinions of the SEC in the United Kingdom and the United States are relatively friendly, and the governor of the Bank of England stated that it is possible to open an overnight deposit account with the central bank for technological innovation companies. This means that the status of the enterprise has been raised to the same level as the bank, and the enterprise has officially touched the balance sheet of the central bank. The chairman of the SEC said that he had contacted with the Libra project in advance, and believed that Libra could bring certain positive effects, but at the same time, he also needed to pay attention to potential risks.
Digital currency regulation is a difficult problem in itself. The application of Libra around the world is actually forcing regulatory agencies in various regions to express their views, and if it is allowed, under what legal framework it will be implemented; field, what can and cannot be done. From this perspective, Facebook's Libra project is actually promoting the progress of the entire digital currency industry, and this step is crucial.
It is more likely that some countries (capital controls, unfriendly to digital currency) will restrict the use of Libra locally; while other countries will allow its use. But in the long run, when the trend is set, countries with negative attitudes will also be forced to gradually relax and adopt Libra ( or other similar items). But this time period may be longer.
In the final analysis, this is actually a game of interests between giant companies represented by Facebook and government agencies. What regulators really care about is whether there is any unauthorized arbitrage in such projects. In countries with developed financial facilities, the arbitrage space neglected by such regulators is small, and it is easier to make up for it even if it occurs; but in countries with weak financial infrastructure development, the arbitrage space is huge. If it is not controlled, enterprises and corporate consortiums driven by profit maximization may tear up this loophole and cause more serious consequences.
"Instead of caring about who is in the Libra Association, it is better to see who is not in the Libra Association
In a society like the United States, a large number of laws and regulations, especially in the financial field, can be understood in the context of games played by different interest groups. There are only eternal interests between countries, and the same is true for internal interest groups.
There are three main purposes for Facebook to unite many companies. One is to gain the trust of more users and allow more companies to endorse Libra; the other is to unite more large companies to form an alliance to obtain more Bargaining Power; the third is to cover as many countries and regions as possible within the geographical scope , in terms of products and services, as much as possible to cover all aspects of user needs. In this way, when sanctions against individual companies may occur in the future, the alliance may provide stronger counterattacks or ways to deal with them.
Facebook announced its first batch of 28 founding members, and most of the attention was on which companies were in the alliance. However, the comparison found that there are many important companies that are not in the alliance. Not being in the alliance does not mean that Facebook has not communicated with it. On the contrary, when creating the alliance, Facebook must communicate with as many influential companies as possible and try to persuade them to join the alliance. Therefore, companies that are not in the alliance are most likely because they did not accept it.
Apple, Google, Microsoft, Amazon, and all the banks are not in the Libra alliance. Apple has its own Apple Pay, although under the temptation of a cashback of up to 10%, it has not seized much of the market; Google has as many users as Facebook, and it also surpasses Facebook in the industry share of digital advertising; Microsoft has already In cooperation with JPMorgan, it is responsible for running and maintaining its blockchain platform Quorum; Amazon's layout in the blockchain field also started early. In addition, JPMorgan also released its own stable currency JPM Coin for internal circulation of the system a few months ago. The exploration of many giant companies in the blockchain and the exploration of tokenization have undoubtedly verified the signal of the trend of digital tokenization.
There are many precedents for enterprises to issue internal credits, but the circulation of credits is weak, and the application scenarios are relatively single and controlled by enterprises at will. Users see it more as a "discount" rather than a medium of circulation. However, the certificate issued by the blockchain is far superior to the form of points in terms of liquidity, settlement, and decentralization. At present, there are two forms of certificate issuance by enterprises. One is issued by a single enterprise and circulated within the user network. The advantage of this form is that it is relatively less difficult and only needs to be decided by an individual company. However, the shortcomings are also very obvious. The number of users of a single enterprise is insufficient, and the application scenarios of the certificate are single, which leads to insufficient liquidity of the certificate. The second form is that enterprises unite to form an alliance and issue tokens within the alliance. This kind of pass depends on the strength of the alliance. If the enterprise service users in the alliance cover a large number of countries, the circulation of the pass will have no country restrictions within the geographical scope. This kind of certificate has the meaning of "beyond the national sovereign currency", and then it may be subject to greater supervision and more difficult to implement.
With this, two problems arise:
1. Will these tokens circulate with each other?
2. What is the comparison between tokens issued by different companies or alliances?
It is inevitable that the certificates issued by different enterprises or alliances can be exchanged and circulated. In fact, the Center jointly established by the American blockchain company Circle and Coinbase is working on doing such a thing. From the perspective of business logic, users will use different goods and services provided by different companies, and users have the need to convert tokens issued by different companies. Technically, the provision of liquidity for different tokens relies on cross-chain technology. In addition, the exchange will also be one of the places that provide token exchange; of course, the wallet will be similar. A better way for the user experience is to not require too cumbersome design on the front end of the user's use. In summary, providing liquidity for tokens issued by these companies in the future will be a potential business opportunity.
Secondly, compared with the existing tokens in the market, the certificates issued by enterprises or alliances can provide real commodity services or some degree of value support. The purpose of tokens issued by enterprises or alliances is generally to use tokens as a medium to purchase their products on the basis of their existing businesses, so as to provide users with a more convenient, safe and efficient experience. In addition, the distributed nature of electronic tokens allows enterprises to expand their service scope at low cost, greatly reducing their business expansion costs. In the early banking industry of the United States, there was a scene of different banks issuing their own credit currency as described by Hayek in "Denationalization of Currency". It's just that I didn't expect that not only banks, but also commercial companies would start such an attempt decades later. However, it is worth noting that the certificate issued by the company will not rely on its own credit to issue certificates. For the time being, the "coinage right" can only be controlled by the central bank relying on national credit. The essence of these certificate competitions is the value that enterprises or alliances can provide users with goods and services. In addition to being a medium of circulation, the nature of the certificate can also be used as a proof of rights and interests. The programmability of blockchain tokens can be endowed with equity, bonds, or other properties in between.
3.1 Libra Reserve
3. Libra Reserve and Currency Issues
As a "stable currency", Libra's value support relies on a basket of low-risk assets behind it. Libra established the Libra Association to manage Reserve assets. The core goal of the association is to ensure the preservation and stability of Libra so that it can be used as a trading medium.
Sources of funds
Funding for Libra Reserve mainly comes from two sources:
1. The legal currency funds invested by investors through the purchase of Libra Investment Token (LIT);
2. Fiat currency funds invested in Libra purchased by users (through institutions)."It is worth noting that users holding Libra will not receive any interest. The Libra Association will use the received funds for asset allocation, mainly in low-risk, low-volatility and high-liquidity assets. The selection of assets that meet these characteristics is actually limited, mainly the currencies of countries with high sovereign credit ratings and some short-term bonds. Compared with banks earning a high interest rate differential, the Libra Association earns a zero-interest "loan
Give users the interest difference between Libra and Reserve management.
In addition to the above-mentioned interest income, another income of the Libra Association is the handling fee in the process of user transfer or Libra and fiat currency exchange. Compared with traditional international remittances, Libra's payment methods must have extremely low interest rates. But under the premise of a huge number of users and transaction volume, this is also a very considerable income. After all the income of the Libra Association covers costs (including operating costs and the cost of motivating users and merchants to use Libra), dividends will be distributed to initial investors based on the amount of LIT held.
Libra's "Two Prices"
The way the Libra Association manages Libra is similar to a dual structure from central banks to commercial banks. Users cannot directly exchange Libra or redeem fiat currency from the Libra Association, but must go through a Libra-certified institution. The Libra Association manages funds in a completely passive manner. In other words, Libra will not actively adjust the amount of Libra in the market (the so-called "monetary policy"), but will be based on feedback from users through certification agencies. But this way there will be room for a spread.
The price of Libra is weighted by the basket of assets behind it. When the underlying assets do not change, the "price" of Libra will not change. And in a short period of time, in the eyes of the Libra Association, the price of Libra is also fixed. But the actual market "price" of Libra will fluctuate according to the market price. That is to say, when the market demand for Libra changes (for example, a certain region suddenly prohibits or allows the use of Libra, and a certain company or institution accepts or rejects Libra as a means of payment), there will be two "Libra" in a short period of time. Price": Libra's "official price" and "market price". And because Libra adopts passive management, it can only be adjusted through the user's needs and transmitted to the certification authority. This allows the certification body to have profit margins in this process, that is, when the "market price" is high, exchange Libra with the Libra Association at a low price and then sell it to users at a high price; otherwise, it will do the opposite.
Currency attribute
From the perspective of a basket of currencies, Libra is very similar to the IMF's SDR. But Libra's main purpose is to serve as a means of payment and settlement for users' daily use. Compared with national sovereign currencies, the scope of application of Libra is not limited by geographical location, and has a certain "super-sovereign national currency" nature. But at present, the so-called "Facebook Empire" is a bit of nonsense, and Libra is unlikely to obtain or dare to grant itself the "minting rights". Regulators in any country or region are unlikely to allow such a thing to happen. Since there are not many assets that satisfy the Libra Association's value support behind Libra, most of the assets in the Libra Reserve will be US dollars or US dollar bonds. The U.S. dollar is actually the world currency at present, and the emergence of Libra will not pose any challenge to the status of the U.S. dollar. Because at present, Libra is only an additional demand for the U.S. dollar, and in principle has no impact on the monetary policy of the U.S. dollar or other legal currencies behind it.
More likely, Libra's value will ultimately be measured in dollars. As a means of payment, Libra's original intention is to become a unit of account for other goods and services or even legal tender. But as the result of the SDR, it tries to be the denomination unit of the dollar and other currencies, but actually uses the dollar to measure its value. That is to say, users will not use Libra to measure U.S. dollars, but still use U.S. dollars (or other fiat currencies) to measure how much Libra is worth.
In fact, what is more worthy of attention is whether the Bank of England’s statement will really open the overnight withdrawal right to such innovative fintech companies. How much approval can Libra get from the central bank, open an account in the central bank and enter the balance sheet of the central bank, so as to obtain the same status as a bank. Once that happens, Libra's future looks very different.
Financial Inclusion, and the Impact on Other Countries' Currencies
Libra claims to be committed to serving the 1.7 billion unbanked people. These people without bank accounts can use Libra through their smartphones, which is indeed in line with the concept of inclusive finance. But will the financial system and monetary system of the countries where these people live be impacted?
MV=PQ
Consider the simplest amount of money:
Once the people start to choose to use Libra instead of their own currency in large numbers, that is to say, the circulation velocity V of the national currency is changed, the total amount of goods Q remains unchanged, and prices need to be stabilized, that is, when P remains unchanged, the money supply must be changed. Quantity M. Once the quantity of money is changed, it also affects the local monetary policy. It is more difficult for local governments to adjust when things are out of control. Once this situation arises, the most likely solution is for the local government to start capital controls. Libra's financial inclusion vision is also difficult to achieve.
But considering the market economy, if there are other options, the final use of currency as a means of payment in a country is entirely the result of market competition. In some countries with high inflation, Libra may be a good solution to the problem. In addition, in countries that are currently dollarized, the adoption of Libra may be one of the ways to improve payment and settlement efficiency.
4. Libra Investment Token and Association Governance
"The process of the development of the Libra ecology in the direction of decentralization actually relies on the "power alternation" process of the two tokens of LIT and Libra; the two jointly build a complete Libra ecology
Figure 4-1 Governance model of the Libra Association
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Source: Libra Association
Institutions that acquire LIT through investment can serve as Libra network nodes, and later institutions can become network nodes by holding Libra. All network nodes can assign a representative to participate in the Libra committee, and the representatives in the Libra committee elect 5-19 representatives as members of the "board of directors" to be responsible for daily affairs.
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Source: TokenInsight
Source: TokenInsight
Libra's positioning of the two types of tokens, and the design of using changes in the number of tokens to achieve changes in the entire ecological governance structure have its unique innovations. LIT is positioned at the early stage of qualified investment institutions and early decentralized governance; while Libra is positioned at the later stage of network decentralization and wider community governance.
The early Libra ecology was in the form of an alliance chain, and the governance method was relatively centralized. However, compared with other projects, Libra's node reputation is relatively higher, and it is easier to gain trust. The later conversion to the decentralized process actually revolves around the status changes of the two tokens, LIT and Libra. In the fifth year of Libra's operation, the committee will give 20% of the voting rights to nodes holding Libra, not just investors holding LIT. All important decisions about the Libra ecology need to be voted on in the committee.
Libra's design for the committee is similar to "different rights for the same share", but at the same time, it guarantees that the dividend income is proportional to the "share". While not dampening the enthusiasm of early institutional investors, we will strive to ensure that the decentralization of the ecology can be realized.
5. Impact of industry development
The emergence of Libra has actually created many investment opportunities and new business opportunities.
First of all, many institutions are currently trying to apply to become one of the founding members of Libra, but this has relatively high requirements. To put it simply, companies need to pay 10 million US dollars to purchase LIT; in addition, the financial requirements for companies and the requirements for service users are also relatively high. The second is to become a Libra certification institution in various regions. As a "middleman", it is responsible for the communication medium between the Libra Association and users. The main job is to adjust the circulation of Libra according to changes in market demand. The third larger need is for the Libra Wallet.
Facebook's launch of the Libra project proves that digital tokenization is the future trend. Regardless of short-term or long-term perspective, it is a positive factor for the digital token market. Especially for some mainstream tokens. Libra is likely to open a convenient channel for legal currency and digital tokens all over the world, and increase the liquidity of tokens such as Bitcoin, making Bitcoin easier for everyone to obtain. In terms of positioning, there is no conflict between Bitcoin as an alternative investment target and Libra as a medium of exchange.
Bitcoin and other tokens have officially opened the era of digital tokenization. A series of stablecoins such as USDT have built an exchange bridge between digital tokens and fiat currencies. Libra has gone one step further on the basis of stablecoins and expanded this scope. unrestricted by geographic location.
