Editor's Note: This article comes fromDigital Asset Research Institute CIDA (ID: gh_cbfb4ac358dc), published with permission.
Editor's Note: This article comes from
Digital Asset Research Institute CIDA (ID: gh_cbfb4ac358dc)
, published with permission.
There has been a lot of big news about Libra in recent days. Seven members of the Libra Association, represented by traditional payment companies, quit the association before the official establishment of the Libra Association. According to multiple media reports, the G7 working group submitted a preliminary assessment report on the global stablecoin project to the International Monetary Fund (International Monetary Fund: IMF) and the World Bank (World Bank: WB) before the annual meeting, saying that Libra will affect the global financial system. posed serious challenges. Senior officials from Germany and France in EU countries have also repeatedly released harsh words to ban Libra from operating in Europe, and "European countries should issue their own central bank digital currencies." Confusing things further, Benoit Coeure, a member of the executive board of the European Central Bank (ECB) and head of the G7 Stablecoin Working Group, said in an interview with Bloomberg on October 17, 2019, “ Global financial regulators have no plans to ban Facebook Libra or other stablecoins, but digital currencies backed by official currencies must meet the highest regulatory standards.” On October 16, 2019, Federal Reserve Governor Lael Brainard made a rare long speech on "The Evolution of Digital Currencies, Stablecoins, and Payment Systems", mentioning that Libra will encounter the strictest supervision.
The author reviews the article "Evaluating Libra from the History, Status and Future of the Monetary and Financial System" published on Babbitt on June 28, 2019 (hereinafter referred to as the "evaluation" article, which may be the most read original Libra-themed comment in China) The content of the article about Libra and banking and global regulation.
"The attitude of the mainstream monetary regulatory authorities is very clear, and the regulators of the US and British banks have expressed their clear support. The institution representing the G20 to observe the global financial system and make policy recommendations is the FSB sponsored by BIS. The current chairman of FSB is the vice chairman of the Federal Reserve At the same time, the Governor of the Bank of England is the former chairman of the FSB. The FSB's recent report on encrypted digital currency stated that "because of its small market value (encrypted digital currency), it currently has no impact on the stability of the global financial system." FSB claimed, "The introduction of Facebook's stable cryptocurrency Libra requires a new regulatory framework." Therefore, it can be cautiously optimistic that even if the FSB releases an assessment report on Libra, it will be positive. The attitude of BIS/ECB will also be.
The Libra project is indeed a genius design. It builds a grand and stable cryptocurrency financial system on the fragile cornerstone of the traditional monetary and financial system. It not only fully protects the interests of traditional commercial banks but also meets the central bank's regulatory demands for stable cryptocurrency. It has also successfully inspired widespread enthusiasm and resonance in the new world of blockchain and cryptocurrency. In the Libra currency system, token holders exclusively enjoy all or the main currency income of the entire Libra economy, accounting for about 3% of the total Libra economy, and all reserves come from users. The architects of the Libra project are familiar with the establishment of the governance structure, satisfying the formal decentralization and ensuring absolute control over the project. There are many flaws in Libra's financial stability, and its openness and democracy are not satisfactory. China's response should be to learn and surpass. "
Clarify the nature of Libra - the relationship with the traditional currency system, whose cake Libra moves, and who really controls its future destiny
First of all, to clarify a basic fact, Libra fundamentally protects the interests of the traditional legal currency system, because it uses legal currency (and/or national debt denominated in legal currency) as a reserve pool, and is a "pseudo currency" based on the traditional legal currency system. innovation". Most people over-interpret Libra's subversion of the traditional system, so they misread the relationship between Libra and the Federal Reserve, or misread the relationship between Silicon Valley geeks and Wall Street capital. This article emphasizes once again that Libra fundamentally represents the interests of the traditional fiat currency system. At the beginning of the release of the Libra white paper, everyone may be surprised that there is no traditional bank as a founding member. A natural guess is that Libra challenges the interests of traditional commercial banks. In the "Evaluation" article, the author analyzed that Libra fully protects the interests of traditional commercial banks, and from the perspective of cost-benefit, traditional commercial banks are most suitable to play the role of Libra ecological authorized distributors. Even if other types of enterprises participate, they cannot effectively compete with banks. . If Libra announces to use Bitcoin or other native digital assets as a reserve, it will be a real subversion, but it will be firmly pressed to the ground by the Federal Reserve on the first day.
Strictly speaking, Libra is just a redistribution of coinage rights among the top rich people. The rich people always have old money and upstarts, but there is never a shortage of bankers. If Libra truly represents the ideals of Satoshi Nakamoto, it is impossible for it to trigger heated discussions on global regulation and form a new regulatory consensus.
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Libra's challenges to the monetary and financial system
How the traditional monetary system views the challenge of stablecoins to them is the decisive factor in Libra's fate, not others, such as Facebook's misdeeds in abusing user privacy data.
Who is influencing and determining the top-level system of global currency and finance? The answer is the bank interest groups with the Federal Reserve, ECB, Bank of international Settlements (Bank of international Settlements: BIS), IMF and WB as the core (I avoid using the description of "bank cartel" to avoid people using "conspiracy theory" without thinking Cover), bankers, central bank officials and scholars representing "transnational capital groups that do not represent any country or nation", as global elites, jointly influenced and formulated the top-level system of the global monetary and financial system. China does not belong to this group now, but China's rapid economic growth has benefited to a certain extent from globalized economic and financial policies. The Federal Reserve has played the role of the de facto global central bank, and the central banks of sovereign countries such as the Bank of England mostly follow the former. The Financial Stability Board (Financial Stability Board: FSB) is an international institution that was spun off from some functions of the BIS after the global financial crisis in 2008 to provide policy advice on the global financial system for the G20 governments (finance ministers and central bank governors), although it is nominally independent Based on but essentially chaired and sponsored by BIS, the current chairman of the FSB is the Fed's vice chair for supervision. When discussing the ECB, we should distinguish the relationship between the ECB and the EU countries, the European Parliament, etc. The EU is a very special existence. The UK will soon no longer be a part of the EU. The EU military is given to NATO, the monetary policy is given to the ECB, and the diplomacy is given to Europe. Parliament, the finances are given to each member state. The ECB is independent of the European Parliament and the European Commission, and does not accept instructions from them and member states. Its core of power is a group of global elite bankers and scholars who support European integration. Therefore, it is relatively open to Libra, which represents the trend of global integration, while the European Parliament is There are many divisions and many parties. Like the senior officials of EU member states, they will resist the erosion of Libra's (currency) sovereignty, which represents globalization, from the perspective of individual countries or nationalism.
The open letter states that stablecoin projects with potential global reach and scale must meet the highest regulatory standards and be subject to prudential oversight and regulation. Assessing and addressing possible regulatory gaps should be prioritized. The G7 Stablecoin Working Group has completed its initial assessment and handed over work on global stablecoin regulatory issues to the FSB. The FSB has established a working group to formulate regulatory policy. The FSB will submit a consultation report to G20 governments in April 2020 and a final report in July 2020. (Readers can subscribe to the official account of "Digital Assets Research Institute" to obtain the Chinese translation of the full text of the open letter and the author's comments)
The mission of the FSB is to submit any policy recommendations on the stability of the global financial system for the G20 governments in a forward-looking manner. The general working method is that the FSB conducts research, analysis, research and formulates regulatory policy recommendations on issues in the global financial system and submits them to G20 countries are responsible for the specific implementation and supervision of implementation. After the financial crisis, the FSB is responsible for the reform policy recommendations and implementation supervision of the global banking and financial system, such as the Basel III agreement, shadow banking supervision, financial derivatives and OTC supervision, etc., and the current global stable currency project supervision issues is a new task for the FSB. The FSB's takeover of this matter means that the global regulation has reached a consensus, and the formulation of global stablecoin regulation has been incorporated into the formal work process. The official report of the FSB is a proposal for the detailed rules of the global stablecoin regulation policy. On October 18, 2019, the FSB issued a press release stating that it "started the supervision of stablecoins".
What does this mean? Don’t look at Libra being heavily regulated now, which means working with policy makers from the very beginning to solve regulatory gaps. How about Libra’s compliance status by July 2020? Libra may be the only stablecoin project "certified" by the global regulatory consensus, and compliance may become Libra's biggest competitive advantage. Now it is to watch "thieves" being beaten, and in the future it is to watch "thieves" eat meat.
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The Rise of Global Stablecoins Meets the Demands of Global Elites
The emergence of global stablecoins represented by Libra and others is in line with the demands of the elite group of global integration. As the author discussed in the article "Currency Competition and System Reshaping Under the Digital Currency Tide", new currencies will reshape the global currency pattern, creating new connections and new boundaries. Digitization could change the foundations of the international monetary system. Libra is a synthetic international currency based on multiple fiat currencies.
As Mark Carney, Governor of the Bank of England, pointed out in his speech in August 2019, the US dollar-based international monetary and financial system is unsustainable. Similar to Libra's basket currency scheme, it is a network of multi-national central bank digital currencies and provided by the public sector. The "synthetic hegemonic currency" of China may be the best alternative. In recent decades, growing international linkages have created a scarcity of dollar-safe assets and large cross-border spillovers from U.S. monetary policy through the global financial cycle. A synthetic international currency linked to several different units of account could partially compensate for the shortage of safe assets, since the value of debt denominated in multiple official currencies would fluctuate along with the value of the synthetic currency (which would likely be less volatile). The global relevance of trade flows is also reduced if international trade is invoiced in units of account in synthetic currencies. Currently, 40% of international (goods and services) trade is denominated in dollars, so US shocks and monetary policies have had a considerable impact on stimulating or hindering international trade. In a world of synthetic currencies, such a shock to the dollar would have a much smaller impact on trade efficiency. Of course, synthetic currencies have spillovers from shocks to their backing currencies, but to the extent that countries face idiosyncratic shocks, diversification may dampen these spillovers.
Support for Libra is also in the dollar's own interest. The speech of Federal Reserve Board member Lael Brainard reflects that the Federal Reserve has a clear understanding of the network externalities of large-scale network platforms and the substitution role of global stablecoins for traditional legal currencies, which may bring about the effect of digital dollarization and replace the currencies of financially weak countries. Even the sovereign currencies of other advanced economies have strong penetration. Moreover, it is in the Fed’s core interest to bring Libra to the fore in the face of widespread global criticism of a dollar-based monetary system. But on the most critical issue - the deliberate evasion or ambiguity of Libra's denomination unit, it leaves room for the imagination of various stakeholders (main central banks of other countries). However, as analyzed in this article, there is a high probability that Libra will use the U.S. dollar as the denomination unit, which is the fundamental way to maintain the authority of the U.S. dollar currency. Therefore, Libra is more like a global stablecoin attempt supported by the Federal Reserve and cutting into the cross-border payment field with blockchain and digital currency technology innovation. It is a "Trojan horse" placed by the Federal Reserve into the future global monetary system.
So the most real idea of Global governments and regulators on Libra may be this.
In the United States, only the Federal Reserve, which represents the interests of Wall Street, controls the fate of Libra. The author believes that before the release of its white paper, Facebook has fully communicated with the Federal Reserve and obtained approval. The Fed has actually never expressed a clear disapproval. The fundamental reason why the Federal Reserve "secretly" supports Libra is that it represents the interests of the dollar and is an extension of the dollar's hegemony in the digital world. It is necessary to reasonably understand the meaning of "full communication". This does not mean that Facebook has communicated with the Federal Reserve on compliance and regulatory details, but has formed a consensus on the strategic goals of global stablecoins. It's like promoting some big initiatives with the top leaders of the government. The decision-making layer only needs to make decisions on goals and guidelines, rather than formulating implementation details.
The Bank of England's statement on Libra can basically be understood as the Fed's "repeater", which has always emphasized "meeting the highest regulatory standards."
Germany and France, the leaders of the EU, are really opposed to Libra. The fundamental reason is that Libra represents the interests of the US dollar and erodes the monetary sovereignty of the euro zone. Senior officials of Germany and France, the leading countries of the European Union, spoke harshly of Libra early on, "prohibiting its operation in the European Union" and "European countries should vigorously develop their own central bank digital currencies." However, the attitude of the ECB, which represents the monetary authorities of the European Union, is very ambiguous. When the Libra white paper was just released, the ECB spoke relatively cautiously. There was also an ECB executive member who said that "currency is a public product and cannot be handed over to Facebook, which has a bad record in abusing user privacy data." ", but ECB executive member Benoit Coeure is also the head of the G7 Stablecoin Working Group, and he affirmed that "Libra or a proposal similar to a global stablecoin" can "become a contender for the Iron Throne of the US dollar", said in an interview on October 17 “Global financial regulators have no plans to ban Facebook Libra or other stablecoins, but these digital tokens backed by official currencies must meet the highest regulatory standards”.
In terms of the current ratio of the Libra basket of currencies, the U.S. dollar and the euro are 50% and 18% respectively. Considering the percentage of global settlement currencies, the U.S. dollar and the euro are about 40% and 30% respectively. The U.S. dollar has been significantly strengthened, and the euro has been weaken. But it appears that the ECB has accepted this arrangement. At present, we think that the proportion of Libra's basket of currencies has reached a consensus among the Federal Reserve, BIS and ECB.
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Libra represents an extension of dollar hegemony in the digital world
Zhu Min, president of the National Institute of Financial Research, wrote that "Libra has actually strengthened the already hegemonic position of the US dollar." Libra's reserve basket includes five fiat currencies. How does it reflect the authority of the US dollar currency?
First of all, we determine the meaning of "anchor" in "Libra is anchored to a basket of fiat currencies", because many people have misunderstood or misused the term "anchor". In the current context, sometimes "anchor" means that Libra's reserve assets are "anchored" to a group of legal currency or national debt, where "anchor" means the support of reserves; sometimes it is said "anchor" " means the unit of account of the currency. When discussing Libra, people usually say that it is "anchored" to a basket of fiat currencies. Many people take it for granted that it is also "anchored" to Libra's unique pricing unit. In fact, the Libra white paper only explicitly talks about the first type of "anchor". , that is, to support its issuance with a basket of legal currency or national debt, and did not specify the unit of denomination.
First of all, as Dr. Ouyang Mo pointed out, “In September 2018, New York State has approved two stablecoins denominated in US dollars: PAX and Gemini”, so “Facebook can use the precedent (of the legal system) to be approved.”
Second, if the mandatory conversion of Libra and the U.S. dollar is required, this will allow the U.S. dollar monetary policy to be effectively transmitted to the Libra ecology, but in fact Libra will form an exchange with the basket currency instead of just the U.S. dollar, taking into account changes in the currency weight and exchange rate in the basket , the mandatory exchange between Libra and the US dollar has considerable volatility/uncertainty. The Libra Association is registered in Switzerland instead of the United States, and this exchange commitment is not necessarily legally binding, and the mandatory exchangeability of Libra and the US dollar cannot be fully confirmed now.
Third, the unit of account is the most important attribute of a currency (different payment instruments are connected to an independent currency through its unit of account rather than other attributes such as medium of exchange and store of value), as long as it is denominated in US dollars, the Fed guarantees its monetary authority. From this point of view, the author believes that Libra is denominated in US dollars is a consensus that Facebook has formed with the Federal Reserve before releasing the white paper, but it has not been publicly stated before.
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Regulatory Hurdles Libra Faces
As a well-known digital currency pessimist in the Federal Reserve, Fed Governor Lael Brainard rarely delivered a lengthy speech on "Digital Currency, Stablecoins, and the Evolution of Payment Systems" on October 16, 2019. Readers who work in the government may have experience that the bigger the leader, the more influential the people are, the less likely they are to speak out on major issues. Therefore, Director Lael’s speech is of great significance and reflects the Fed’s position on related issues. Interested readers can subscribe to the official account of "Digital Asset Research Institute" to obtain the Chinese translation of the full text of the speech and the author's comments.
The speech is very long, the main part of which is the regulation of stablecoins, so the author summarizes the main points of the speech and expands the topic of regulation here.
The core points of the speech include: The United States/Federal Reserve has a long history and experience in issuing and managing private currencies, including currencies or assets issued by non-bank institutions to assist transactions within a specific network, such as gift cards, points, and virtual game currencies. As the scale and scope of private networks expand, their network externalities allow the development of payment systems based on digital platforms, such as Alipay and WeChat Pay in China. The most unique feature of Libra as a stable currency project is that it has active users of one-third of the world's population, and through its payment system, the Libra network can quickly expand to a global scale. Libra, and any stablecoin project of global scale and scope, will have to resolve a host of legal and regulatory challenges to go live. The central banks of many countries are promoting central bank digital currencies. The Fed will not join in the fun, but let's see how others are doing. The Federal Reserve supports innovation in the payment field and is happy to see innovations that have a long-term impact on the payment system in the next few years, including the option of a stable currency.
Director Lael particularly emphasized legal and regulatory issues in four areas."First of all, "know-your-customer: KYC" rules and regulatory compliance need to be achieved to prevent stablecoins from being used for illegal activities and illegal finance. Libra's business model is naturally cross-border, and every participant in the Libra system is regarded as a financial institution that needs to comply with the anti-money laundering laws of each jurisdiction. Libra's global operations may require a consistent global anti-money laundering framework to reduce the risk of illicit transactions."Second, issuers of stablecoins designed to facilitate consumer payments must clearly demonstrate how consumer protection is ensured. Consumers must be trained how their rights differ from bank accounts. In the United States, legal and regulatory protections have been put in place for bank accounts so that consumers can reasonably expect their deposits to be insured; fraudulent transactions are the responsibility of the bank; clear, standardized disclosures about account fees and interest payments, etc. It’s unclear whether Libra has similar protections, how consumers have claims, and how much price risk consumers face, since they don’t appear to have rights to the stablecoin’s underlying assets. Consumers need to be aware that stablecoins are likely to have very different legal terms than sovereign-issued fiat currencies. Need to clarify who is responsible for the security of personally identifiable information and transaction data, and how personal data is stored, accessed and used. The high number of cyber-attacks in the past few years highlights the importance of these issues."Third, it is necessary to define the financial activities carried out by various participants in the Libra ecosystem so that judicial authorities can assess whether the existing regulatory and enforcement mechanisms are sound. As the legal registration place of the Libra Association, Switzerland is particularly concerned about these topics. Swiss authorities have created three new categories to help regulate by function:"pay token"are cryptocurrencies, used for payment or transfer of value; “utility tokens
are cryptographic assets similar to stocks, bonds, and derivatives.
Summarize
Fourth, a global stablecoin network may bring financial stability risks, such as liquidity, credit, market and operational risks, etc., whether individually or in combination, may trigger a loss of confidence and trigger a "run". A global stablecoin network presents a number of legally separate but interdependent complex issues, lacking transparency in the management of reserves and the responsibilities of market participants in the network.
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