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In this article, I will discuss and analyze Libra, the digital currency recently announced by digital economy giant Facebook. According to Facebook's plan, the giant decided to expand its business beyond the global digital advertising business and plans to monetize all of its instant messaging services (with 1.5 billion users, including WhatsApp and Messenger).

Currently, Facebook's global digital advertising business accounts for nearly 98% of its total revenue. Because of this Libra innovation, we can predict that Libra will become the largest e-commerce and payment tool in the world, competing with traditional banks. But this project also created several problems, in particular the most questionable ones:

Why should we trust the new financial system formed by Facebook? The answer is not like the song "The Answer Blows in the Wind", but to be found in "Libra Blockchain and Cryptography".

Simply put, Facebook will make money through a new and disruptive business model based on distributed ledger technology (DLT) and cryptography. Following the announcement of this initiative, we can now say that any discussion of the intrinsic value of cryptocurrencies is out of date, with blockchain and encryption expected to become the standard for the new internet adopted by many giant companies, including Facebook.

• According to the plan of the Libra project:

• Build a new decentralized blockchain;

• Create a stable cryptocurrency;

• Build a smart contract platform;

Provide new opportunities for innovation in financial services.

In addition to Libra, a new cryptocurrency that will be available starting in 2020, Facebook also plans to launch Calibra, an encrypted wallet that runs through Messenger and WhatsApp. The wallet tool will support peer-to-peer transfers and retail payments of Libra coins, thereby enabling the creation of a new cryptocurrency (the Libra coin) on a secure, scalable and reliable Libra blockchain.

The Libra coin will be backed by a "basket of bank deposits and short-term government bonds" managed by the Libra Association, a consortium of 28 large corporations and institutions including Facebook, Visa, MasterCard and Uber, and "hopes that by 2020 In the first half of the year, the number of founders of the Libra Association can reach about 100."

The Libra coin is built on the basis of the "Libra Blockchain". According to the Libra white paper, its purpose is to provide an open source software to a global audience, so that anyone can build on it, and billions of people can rely on it to meet their needs. their financial needs.

The white paper explains that the main goal of the Libra project is to create an open financial services ecosystem built by developers and organizations to help businesses and people hold and transfer Libra coins on a daily basis.

The Libra blockchain will be a decentralized network with a group of validators processing transactions and maintaining the state of the blockchain. These validators are also members of the Libra Association, which will be responsible for providing a governance framework for the Libra Blockchain and the reserves that underpin Libra coins. Initially, the association (and validators) will consist of a number of different founding members spread across different regions.

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The Ultimate Battle: Central Banks vs. Cryptocurrencies

Reactions from the cryptocurrency community and the financial world to Facebook's announcement about the Libra project have been mixed. Most of the comments are negative, but these comments may ignore Libra's ability to effectively accelerate the process of decentralization of finance, which is exactly what we need. In my opinion, the real question is whether the Libra blockchain will be scalable, not whether Libra can become a sovereign currency.

Libra would represent a fundamental milestone in a debate about the intrinsic value of blockchain technology and cryptocurrencies sparked by government authorities, prominent figures and prominent economists, although many are already touting Libra as a Blockchain has nothing to do with it.

Economist Nouriel Roubini (Doctor Doom), for example, has often criticized blockchain, calling it "the most overhyped and impractical technology in human history," and arguing that "cryptocurrency is the culprit of all scams and bubbles. "

Paul Krugman, the 2008 Nobel laureate in economics, also expressed his skepticism about cryptocurrencies and blockchain. Paul said that although it is a cutting-edge technology, it "sets the monetary system back 300 years," while he It also stated that, unlike fiat currencies, cryptocurrencies have no underlying value. In Paul's view, the benefits of cryptocurrencies are "just a bubble", and said that even gold and silver, in addition to having a "store of value", have more applications in the real world than cryptocurrencies because they Can be used to craft jewelry and other real items.

But in my opinion, these criticisms are not correct, because they do not see the potential and opportunities brought by blockchain technology and cryptocurrencies to promote the decentralization of money and finance.

Meanwhile, bankers have voiced criticism and skepticism, highlighting the risks of cryptocurrencies as tools of crime. Recently, the governor of the Bank of France, Francois Villeroy de Galhau, announced that he is forming a G7 national working group to study how central banks can ensure that cryptocurrencies like Facebook's Libra will be regulated by a series of regulations such as anti-money laundering laws and consumer protection rules. To be honest, I would have expected a different announcement looking at how digital currencies can improve the existing monetary system.

Mark Carney, governor of the Bank of England, once said: "Libra must be safe enough from the beginning, otherwise it will not start, and major central banks around the world will need to regulate it."

From the current point of view, the mainstream view is that Libra positions itself as a new global sovereign currency, like a digital dollar, to replace the old financial institutions. But this is not possible, because cryptocurrencies and fiat currencies with practical functions can coexist, and this is also necessary for the entire system powered by this technology.

You can regulate cryptocurrency, but you can't stop it because it's an endogenous process of economic development. Unfortunately, I also get the sense that bankers and governments are trying to organize an ultimate battle against Facebook and cryptocurrencies. They cannot accept the idea of ​​a decentralized financial system, but if they want to prevent this decentralization, they will be the losers in the black hole, losing the opportunity to develop their old business models.

While Facebook may pose a real threat as it may become the most powerful centralized institution on the planet, Facebook is also trying to use blockchain and digital currency to solve real needs that other companies or financial institutions do not want to solve.

Instead of creating an all-out war, they should study how to properly regulate cryptocurrencies and quickly enter this new digital currency era, rather than fear or run away. Central banks must understand how decentralized money and credit creation can lead to different monetary policies that have a real impact on the needs of economic development for the benefit of all mankind. If they choose to try to understand how to get to the next stage of economic development brought about by cryptocurrencies, then this black hole may well become a flickering light to guide their way forward.

I'm amazed at the comments made by bankers and politicians who don't know about Libra. I think if they understand the history, they will have a clearer understanding of innovation. In fact, I can foresee that if Facebook has the idea of ​​making Libra a sovereign currency, it will be a very bad idea, because in this case, Libra's structure will be inherently weak, and cause Libra s failure. In fact, the real dilemma is how to achieve coexistence between fiat currencies and cryptocurrencies with actual functions (such as Libra).

• Surprisingly, although the cryptocurrency community has mixed reactions to Libra, almost all point out that the main difference between Libra and Bitcoin is "trust", because Bitcoin buyers do not need to entrust their assets or information To any third party, Libra users must trust the Libra Association. It seems that most people in the cryptocurrency community are against Libra, and they mainly attack it from the following three aspects:

• Blockchain infrastructure;

• trust;

Security and Privacy.

Ethereum co-founder Joseph Lubin expressed many concerns about Libra. He pointed out that Facebook will not eliminate people's subjective trust, but rather ask us to trust Libra, and try to convince us that Libra coins will have their "intrinsic value" because Libra coins will be backed by "a basket of bank deposits and short-term government bonds." , and its value does not fluctuate as much as other cryptocurrencies. Furthermore, while Libra aims to be an open-source decentralized system, its code base will only be partially accessible at first, so creating an efficient and secure ecosystem and expanding it will not be easy.

While I have some concerns, I'm not as negative as most community members. In fact, I think Facebook is following the path of other large corporations toward a decentralized finance model. This represents the beginning of coexistence between fiat currencies and cryptocurrencies with real functionality.

From a strategic point of view, I think some of the most important players in the Internet field can strategically turn to blockchain, change their business models and become core players in this technological revolution, and eventually participate with other different industries Together, they can obtain new commercial and economic value from the decentralization of the blockchain and financial system. The easiest way to do this should be to form a private, permissioned blockchain network between them, like Libra.

Will Libra bring the next Bretton Woods system?

As mentioned above, Libra is designed as a stable digital cryptocurrency that will be fully backed by a physical asset reserve (Libra reserve) and supported by a network of competitive exchanges that buy and sell Libra. This practice is similar to how other currencies have been introduced in the past to ensure that a country's fiat currency can be traded against other physical assets such as gold or other fiat currencies. However, Libra will not be backed by gold, but by a basket of low-volatility assets such as strong fiat currencies, bank deposits and short-term government bonds from stable and reputable central banks.

In my opinion, Libra will help push central banks to start exploring digital currencies with similar characteristics. One possible scenario is that Facebook’s cryptocurrency will become a powerful positive force in developing countries, forcing local governments to maintain the value of their fiat currency’s purchasing power. In fact, the core idea of ​​the Libra Reserve is that since the volatility of these "basket assets" will not change in the short term, the supply and price of Libra will also be relatively stable.

Just imagine, if the Calibra wallet actually appeared, users of platforms embedded with the wallet (including Messenger and WhatsApp) would be able to use Libra coins to trade with merchants for any goods or services. How will this affect us? I think there is a reason why cryptocurrencies achieve mass adoption, like internet giants like Facebook or Amazon can start using their cryptocurrencies, or drive the adoption of cryptocurrencies.

Looking back at the history of the United States, we can compare Libra's mechanism to the gold standard or the Bretton Woods system. In the Bretton Woods system, the United States played a central role in the global monetary system. Looking back at history, we can indeed learn a lot.

The Bretton Woods system, spurred by World War II in 1944, prompted allies to join the new monetary system, accepting the U.S. dollar (rather than gold) as their reserve currency, while the U.S. government pledged to keep enough gold to back the dollar. It was not until 1971 that the United States had completely lost the ability to exchange the U.S. dollar for gold, and the Nixon administration terminated the free convertibility of the U.S. dollar and gold and established a legal tender system, which declared the end of the Bretton Woods system.

Under the Bretton Woods agreement, countries committed their central banks to maintain fixed exchange rates between their currencies and the U.S. dollar. The goal of this entirely new system was to maintain a stable exchange rate between the national currency and the dollar, the idea being that it would help rebuild the economy after the war and avoid a repeat of the 1930s-style Great Depression Competitive currency devaluation (Note: Competitive currency devaluation refers to governments devaluing their national currencies to promote the export of goods).

This monetary system is characterized by a fixed exchange rate, backed by the dollar (the value of which is backed by the price of gold) and managed by the International Monetary Fund (IMF). The exchange rates of the currencies of various countries remained fixed and remained within a small range.

The agreement stipulates that central banks must join the IMF in defending the dollar's status by fending off speculative attacks. If the price of any country's fiat currency was too high or too low, that country could have negotiated with the International Monetary Fund (IMF) to change the exchange rate. This mechanism ensures that when the domestic currency depreciates against the dollar, banks have to buy more dollars in the foreign exchange market, which reduces the supply of the domestic currency and thus increases the price of the domestic currency. And if the domestic currency appreciates against the U.S. dollar, banks will issue more domestic currency (increasing supply), thereby reducing the price of the domestic currency.

Bretton Woods would make the US the dominant currency of the world economy and the US the only country capable of printing dollars. The dollar becomes a substitute for gold and the value of the dollar increases. The result is that the demand for dollars increases across countries, but the value of the dollar against gold remains the same. This planted the seeds for the collapse of Bretton Woods 30 years later, but Bretton Woods did give countries more flexibility than the gold standard.

Could Libra Repeat Bretton Woods History? Is Libra interested in becoming a sovereign currency? In my opinion, as of now, it doesn't make sense for Libra to be a sovereign currency based on the structure of the Libra Reserve, but I'm surprised that some economists and bankers are still arguing about that possibility.

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Taking history as a mirror, we can know the rise and fall...

If Facebook has the idea of ​​replacing national fiat currencies, even if this is theoretically possible, it is not a good idea, because Libra may become unstable by its very nature. Libra is just a perfect cryptocurrency that helps promote the "decentralization of finance and credit". Libra will be powerful, but not a sovereign currency.

Libra will play a role in pushing governments and central banks to change monetary policy. It will also facilitate online transactions, but other powerful cryptocurrencies will also emerge, including those issued by central banks. Of course, if Libra is too closely linked to the U.S. dollar, the Bretton Woods scenario may also reappear.

However, I believe that this new digital currency will incentivize developing countries to unite in the development and launch of similar cryptocurrency projects, thereby stabilizing the surrounding economic regions, promoting trade, and curbing government budget deficits and debt. This is why I firmly believe that central banks and governments in developing countries will soon turn to exploring similar digital currencies to make themselves and their surrounding economic regions stronger.