Libra is coming, what kind of disturbance will the stablecoin market cause?
Editor's Note: This article comes fromBabbitt, author Cai Weide, Jiang Xiaofang, reprinted by Odaily with authorization.
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preface
On June 18, 2019, Facebook (Facebook) released a white paper on stable currency, which aroused heated discussions around the world, including the world's central banks, financial institutions, and practitioners. But we have already predicted these in the original article. The article in early June 2019 said that there will be a big shock this time with "the tiger is coming". This big shock finally came after the release of the Facebook white paper!
As early as 2016, when the Bank of England proposed the concept of digital legal currency (CBDC), it predicted that it would change the existing banking system and financial system [9]. The big reform of legal currency encountered (once in 320 years, because the world's first central bank, the Bank of England, was established in 1694). In May 2019, the International Monetary Fund (IMF) proposed that the stable currency supported by the government or the central bank is a digital legal currency, indicating that the stable currency supported by the US government issued by IBM in July 2018 is a digital legal currency (digital dollar), officially opened A new chapter in human financial history. This also shows that stablecoins are assistants of national legal currency, not enemies (unlike digital tokens are opponents of legal currency), and the country should actively develop stablecoins.
After the shock caused by Facebook, banks at home and abroad came to discuss the impact of this matter, and some were already very anxious. Because many people think that digital tokens are not in the mainstream, and the orthodox financial market does not need to consider it. They forget that when the foreign regular army uses the same technology to develop digital legal currency, it is the time for the financial market to wash up. Now is the right time!
But we don't need to be anxious, because knowing the problem is the beginning of solving the problem, and we also have the solution. First of all, it is to develop technologies that can actually be implemented, rather than developing so-called "white paper technology" (only white papers, no actual content that can be implemented), and a major change in the way of thinking is required, because this change starts from technology. Coupled with financial layout. In fact, Facebook claims to be able to serve 1 billion customers. The reason why it is so confident is because of its leading technology. Its technology is not comparable to "white paper technology". According to the analysis of Taishan Sandbox Big Data Edition of Tianmin (Qingdao) International Sandbox Research Institute, Facebook’s stable currency code has no intersection with any previous blockchain system, indicating that Facebook’s technology is original and does not use the code of the centralized hyperledger.
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1. The definition, background and development of stable currency
Stablecoins are also cryptocurrencies, but their purpose is to control price fluctuations to the greatest extent. At present, a variety of stable coins have emerged, and stability is achieved through various mechanisms (such as by anchoring legal tender or commodities or using complex algorithms). Therefore, stablecoins are fundamentally different from other cryptocurrencies such as Bitcoin. The prices of other cryptocurrencies basically depend on the value of their own blockchain technology and the confidence and valuation of market investors. The instability and violent fluctuations of cryptocurrencies are one of the most important reasons why many institutions and individuals cannot accept them, and this is why stablecoins appear. The price of digital tokens has been fluctuating, but the price of stablecoins should be stable. According to the current financial market targets, stablecoins are equivalent to cash, while digital tokens correspond to stocks, as shown in the table below. Stablecoins can be regarded as a "parking lot" for digital tokens, as an intermediary for buying and selling digital tokens, so that investors' funds can always be placed in cryptocurrency without returning to legal currency. In theory, these stablecoins need to be supported by legal tender or equivalents (such as gold) before they can be issued. In this way, the stablecoin project party is like the current commercial bank.
The profit model of stablecoins is based on transactions (see Section 4 for other ways of making profits), rather than by rising currency values, so the more transactions there are, the more profitable the project will be.
But in fact, the prices of many so-called stablecoins that appeared in the early days were not stable, and the prices fluctuated violently within a day, so they were questioned as "fake stablecoins". There are also stablecoin project parties who arbitrage by buying and selling stablecoins themselves, harming the interests of investors.
There is still a huge difference between stablecoins and bank cash. Because stablecoins are encrypted currencies, cross-border payments can be made without going through SWIFT. Compared with the traditional banking system, the speed is faster and the procedures are simpler. The cross-border payment capability of stablecoins has greatly surpassed that of traditional banks. It can be traded at any time without queuing up in banks. This function has gradually been recognized by people. Traditional bank cross-border payments have been severely challenged. Start issuing legal and compliant stablecoins.
USDT is the first stablecoin:
The USDT issued by Tether is the earliest "stable currency" in this market. It has been traded on the exchange in February 2015, and has almost no competitors for more than two years. However, due to the smooth channel of fiat currency and user habits, the transaction volume of USDT has been mediocre, and its daily transaction volume has never even exceeded 4 million US dollars 17 years ago. The September 4th incident in September 2017 brought an opportunity for the rise of USDT. Due to the ban on the fiat currency channel, the USDT trading area was successively launched on major mainstream exchanges along with the BTC and ETH trading areas. With the surge in the cryptocurrency market at the end of the year, the daily trading volume of USDT reached a maximum of 6.3 billion US dollars. By the end of October 2018, the average daily trading volume was still around 2 billion US dollars.
However, according to multiple reports from foreign media, USDT does not disclose the ledger, and the funds behind it are likely to be fake (because the project party did not provide evidence to confirm the existence of these funds), at least there is not enough legal currency support, and the price is unstable. Prosecutors are investigating its project party. Due to the unstable price of USDT, it is a fake stable currency. According to foreign media reports, from 2017 to 2018, digital tokens soared, which was caused by USDT’s deliberate issuance of fake stablecoins. This is equivalent to USDT creating currency "out of nothing" without the support of legal currency, and there is no government supervision, so that the digital tokens skyrocket unreasonably. Foreign regulators have determined that this is a serious fraud.
GUSD/PAX is the first compliant stable currency:
In September 2018, the New York Department of Financial Services (NYDFS) approved the first batch of compliant stablecoins GUSD and PAX. Because the sharp price fluctuations of digital currency prevent it from being used as a medium of exchange and a tool of value (two of the three major currency functions), storage and hedging functions cannot be well realized (so digital currency is defined in many countries as assets rather than currencies). The rise of ST (digital stocks) and the bear market of Bitcoin and Ethereum have made the market gradually realize that the stable currency with real currency function is an important infrastructure of the market, which has set off a wave of stable currency fever.
Since 2018, major institutions, including financial institutions and technology companies, have joined the tide of issuing stablecoins.
First country-backed stablecoin:
In July 2018, IBM and Stronghold, a San Francisco-based start-up, jointly issued a stable currency that is insured by the U.S. Federal Deposit Insurance Corporation (FDIC) and pegged 1:1 to the U.S. dollar. This is a stable currency supported by the U.S. government, which means that the financial revolution of blockchain is officially coming. In fact, IBM directly stated in August 2018 that they issued a "digital fiat currency" (CBDC) or a "digital dollar".
This matter is of great significance because this is a legally compliant stablecoin issued by a non-central bank and non-banking institution, and it is guaranteed by the US government FDIC.
Stablecoins issued by banks:
On February 15, 2019, JPMorgan Chase Bank also issued a stable currency, becoming the world's first commercial bank to issue a stable currency. And both IBM and JPMorgan Chase do cross-border payments.
The most imaginative stablecoins:
On June 18, 2019, Facebook issued the stable currency "Libra" (Libra). Libra anchors a "basket of currencies" composed of multinational legal currencies. Its mission is to establish a simple, borderless currency and provide billions of people The financial infrastructure of the service, trying to establish a digital payment system around the world. Because of its global platform network, the application of stablecoins can be extended to nearly 2.4 billion terminal active users and their ecological scenarios distributed around the world, which is the most imaginative.
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2. Classification of Stablecoins
Stablecoins can be classified according to collateral, intermediary, compliance, stability mechanism, profit method, etc.:
(2) Mortgage of digital assets on the chain: multi-centralization, issuance of mortgage assets on the chain. The advantage is that there is no centralized institution. However, due to the highly volatile prices of digital asset collateral, stablecoins backed by them may need to be over-collateralized. The representatives are DAI and BTS.
(3) Unsecured issuance: The value of stablecoins is maintained through a system, such as adjusting the supply of stablecoins based on algorithms, which is more in line with the original principles of Bitcoin and does not rely on central authorities or trusted issuing institutions. But it is still immature, and it is still in the stage of algorithm exploration, because sometimes intuitive and simple algorithms may hide fatal design flaws. Representatives: BASIS, CARBON.
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3. The role of stablecoins
The importance of stablecoins as blockchain infrastructure is becoming more and more prominent.
(1) In the field of finance and trading:
Store of Value: Acting as a safe-haven asset is the original vision of the birth of stablecoins to avoid the risk of market decline. In the case of a sharp downturn in the market, exchanging funds for stable coins can avoid the risk of market decline.
Medium of Exchange: Stablecoins can be used as an entry and exit channel for Bitcoin and legal tender, especially in a strong regulatory environment.
Measure of value: It serves as a pricing function for other assets that cannot be realized in the case of high volatility of cryptocurrencies. Stablecoins that rivet fiat currencies can price physical and virtual assets.
Short-term lending needs (Pegged Lending): Stablecoins can solve short-term liquidity problems. Users can exchange their tokens for stablecoins and exchange them for the required legal currency at any time.
Inclusive finance: Stablecoins can introduce relatively stable value stores, such as U.S. dollars or gold, to those users who only have access to local currencies that are easily depreciated or who do not have bank accounts. It is especially valuable for people in countries with hyperinflation, unstable currency systems, and areas with underserved financial services.
(2) Commercial circulation field:
Global cross-border payment: Using the advantages of blockchain technology, bypassing SWIFT for global cross-border payment, reducing costs, improving efficiency, reducing risks, and transcending time and space constraints.
(3) National policy areas:
Alternative ways to increase the issuance of legal currency: Increase the issuance of legal currency through stable currency, and the legal currency will depreciate, thereby reducing repayments and devaluing foreign exchange reserves of other countries, and transferring debts to the world.
Supporting national economic activities: Stablecoins can have interest policies. For example, the Bank of England proposed that the interest rate of its digital legal currency be negative to support national economic activities. Recently, some stablecoins have also proposed positive interest rates.
In terms of value definition, stablecoins are more suitable to be called "anchoring coins".
In terms of the function of communicating value logic on and off the chain, stablecoins should be called "bridge coins".
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4. Profit model of stable currency
Many people doubt whether stablecoins can be profitable, because the price of stablecoins remains unchanged and cannot be profitable through price fluctuations. But stablecoins are not stocks, they are considered currencies in the UK, and stablecoins are regulated by the "currency law". Currency is profitable through circulation and transactions, so the more participants, the more profitable it will be. The profit model of stable currency currently has the following three directions:
1. Charge transaction fees, although this is usually very low, but because of the large volume, there is still a lot of profit;
3. Make investments, including loans, real estate, etc.
When the stable currency conducts the first and second types of transactions, the stable currency project party becomes a "transaction bank", but when the stable currency conducts the third type of transaction, the stable currency becomes a traditional bank. All of these create competition for commercial banks. If most of the country's transactions are replaced by stablecoins, the economic structure changes.
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5. Impact of Stablecoins
On September 30, 2017, the International Monetary Fund (IMF) gave a shocking speech at the Bank of England. In that speech, the IMF changed its views on blockchain and digital legal currency, and believed that blockchain technology And digital legal currency is the future. In May 2019, the IMF issued a report, arguing that these stablecoins are now digital fiat currency (CBDC), which is equivalent to agreeing with IBM’s claim in August 2018, and also means that these stablecoins have the attributes of fiat currency.
The IMF also cited the advantages of digital fiat currencies. The Bank of England has also mentioned these advantages, and the Bank of England also believes that digital legal currency is a new tool for national monetary policy and a sharp weapon for supervision. At the same time, the use of digital legal currency can increase the country’s GDP and stimulate economic development.
Therefore, the emergence of stablecoins is not just a new financial product, but will also bring about structural changes in the market. They are not digital tokens that are not popular with the government, but legal and compliant digital fiat currencies that are supported and encouraged by foreign governments!
It can be said that stable currency is an important innovation in the history of world currency. The stable currency that appeared at the beginning was fake, without government support and supervision, such as USDT. July 2018 was a watershed moment. When the first state-backed stablecoin appeared, the real stablecoin was born. It is actually a digital legal currency. Because according to the IMF, if there is a corresponding legal currency stored in the central bank (or other custodian institutions such as banks), the stable currency is a digital legal currency.
Stable currency is a digital legal currency, so if the stable currency project party is a "new digital bank", the investment of the stable currency project party must be restricted, just like commercial bank loans, a lot of due diligence must be done on the lender to ensure that the stable currency behind Assets are stable. Therefore, as the Bank of England said, the innovation of digital legal currency will make the structure of the central bank and banks need to be reformed. As for how to reform, further exploration is needed. The Bank of England adopts the "big central bank doctrine", directly connects with third-party payments without going through commercial banks, and expects to adopt the "negative interest" policy of digital legal currency to regulate hot money to return to commercial banks and the real economy soon, while commercial banks maintain the traditional Positive interest rate policy for legal currency. The Bank of England released a report in 2016, proposing that only the adoption of the "negative interest rate" policy could increase the British economy by 3%. At that time, many central bank economists expressed surprise, but believed that research in this area should be strengthened.
Cash in circulation (M0) = the sum of the cash on hand of each unit outside the banking system and the cash on hand of residents
Broad money (M2) = M1 + resident savings deposits + corporate time deposits + corporate other deposits + securities company customer deposits
Money in the narrow sense (M1) = M0 + current deposits in banks of enterprises, institutions, groups, troops, schools and other units
Broad money (M2) = M1 + resident savings deposits + corporate time deposits + corporate other deposits + securities company customer deposits
According to the above discussion, real stablecoins should belong to the category of M0.
Here, we ask a few questions:
(1) What is the subject of the stablecoin account?
If changes in bank accounts are not considered, after Broadbent (2016) proposed the concept of Central Bank Digital Currency (CBDC), Fan Yifei (2016) pointed out that CBDC mainly belongs to the category of cash (M0). According to the IMF report, stablecoins also belong to the category of cash (M0). However, if the impact on bank accounts is taken into account, the current definition of multi-level currencies (M0, M1, M2, etc.) is based on the different attributes of bank accounts. Once there is no bank account, the distinction between these currencies will disappear. The quantity theory of money and the theory of quantity-based monetary regulation based on the total amount of money will all fail, which will lead to the failure of the original theory of monetary policy transmission and other theories, resulting in a chain effect.
(2) Do stablecoins pay interest?
Most of the current stablecoins do not pay interest, but some stablecoins that are in preparation for issuance plan to pay interest. Because the stablecoin project party is actually a digital bank, for digital banks, it can invest or loan, and the profit can also pay interest. In 2016, the Bank of England proposed a negative interest policy for the central bank’s digital legal currency.
Different stablecoins provide different services. So there will be various stablecoins in the future, such as real estate-based stablecoins and financial-based stablecoins, and the degree of stability will vary with different interest rates. There will also be competition between stablecoins. Stablecoins with high interest rates may not necessarily be competitive. Stablecoins give priority to stability (maintaining value), and after stability, high interest rates are given priority. The central bank's digital currency can have negative or zero interest because it is the most stable.
(3) How are stablecoin project parties supervised?
It is recommended that the China Banking Regulatory Commission supervise the stablecoin project party, because the stablecoin project party is actually a digital bank and should be supervised with similar banking regulatory rules.
But due to the speed at which stablecoins operate, regulatory technology must be highly automated and intelligent. Now traditional regulatory technology will not be able to support it, and the latest regulatory technology must be adopted, including big data, artificial intelligence, blockchain technology, etc., that is, technology is used to monitor technology. In the new era, the previous supervision methods that only relied on laws and manuals will become obsolete.
(4) What impact will stablecoins have on commercial banks?
Since the stablecoin project party is actually a commercial bank, this will have a major impact on local or overseas commercial banks. For example, Facebook, although it does not have a banking license, has more than 2 billion users worldwide (more than 3 billion users if related companies are included), covering more than 130 countries and regions. Once its digital currency is issued, it is equivalent to the establishment of A multinational digital bank (without a banking license), and because of its large user base, will be more influential than many traditional large banks in the world.
The reason why banks are important lies in their strong assets, numerous customers, many investment projects and stable income. But these Facebooks can also do it, and they will do it better, so that traditional banks cannot compete with the new digital banks. The president of China Construction Bank once said that this is a big threat to traditional banks. In early June, another bank in China also stated that the emergence of Facebook's stable currency would affect the bank, because it is no longer possible to compete with Facebook's stable currency in overseas business.
Facebook has created a payment system outside of the central banking system. At the same time, the stable currency Libra issued by it is only a channel or carrying media, and Facebook can build a huge business empire integrating payment, banking and commerce by uniting 100 co-founding companies. Can share leftovers outside the network. This is also the reason why Facebook can become the world's largest bank (but without a banking license) if it successfully issues its currency. This huge cross-border competitor will make all the traditional big banks who understand it tremble, because Facebook will Transferring large amounts of funds from the bank deposit system to the Libra network may also be used for large capital flows that banks cannot detect. This means that banks are responsible for some operations such as payment and transaction fees. Income from loans, etc. will be significantly reduced, and the bank's lunch will be reduced. At present, the banking industry strictly controls all matters related to capital market transactions to prevent outsiders from joining. This barrier will be wiped out before Facebook's cross-border robbery.
(5) What impact will stablecoins have on commercial banks during an economic crisis?
According to the IMF, the stable currency is a digital legal currency, so behind it is the national credit, and behind the commercial bank deposits is the bank credit, which relies on the deposit insurance system to ensure limited security. Banks in a narrow sense”—due to the digital nature of digital legal currency, bank deposits may be transferred to digital legal currency quickly and on a large scale in the event of a financial crisis. BoE Deputy Governor Broadbent first expressed concern about this in 2016. In particular, once interest is paid on stablecoins, stablecoins will form an alternative and competitive relationship with commercial bank deposits.
(6) What challenges does stable currency pose to businesses and central banks?
Stablecoins create new commercial competitiveness, which comes from liquidity, transaction speed and supervision. Take Libra as an example, even if people outside the US are not allowed to use Libra to buy local goods, because people outside the US can still use Libra to buy US goods, as long as they have a Facebook account, the speed of their purchases will depend on network protocols and regulations Compliance speed. Therefore, this creates a very significant advantage for US-based stores and suppliers, and therefore as long as a large number of US-based stores accept Libra, merchants outside the US only accept Libra to increase their competitiveness (and they can use Libra in exchanges. U.S. dollars or local fiat currency). But once foreign suppliers accept Libra, the country's legal currency will be suppressed, and the country's central bank will be affected. The back of every Libra transaction is equal to the use of US dollars. In other words, Libra has won an important step for the U.S. dollar in the world currency competition, so Libra is a tool for the U.S. dollar, and it is done by commercial competition, not by military or politics.
The logic is as follows:
1. A large number of American stores accept Libra as currency;
2. Non-US stores can only accept Libra, otherwise they cannot trade with customers who hold Libra;
3. When foreign stores accept Libra as payment currency, the local legal currency will be suppressed;
4. If a large number of local stores accept Libra, the national currency will be greatly impacted;
5. The national monetary policy will be difficult to implement, because most economic activities are affected by Libra, and Libra is affected by the subsequent legal currency and is not affected by the local monetary policy.
The stable currency described above will affect the market, and at the same time it will affect the national legal currency.
The digital currency will suppress the fiat currency is the warning issued by the IMF on September 30, 2017. At that time, the IMF also proposed that the digital currency will substantially subvert the world currency and financial markets. Even non-legal digital tokens (such as Bitcoin) will affect the legal currency of weak countries, so the IMF encourages central banks around the world to issue their own digital legal currency. In 2019, Zhou Xiaochuan, the former governor of China’s central bank, also said, “Judging from the trend of recent years, many institutions are trying to establish such a more globalized currency, and then there will be problems of strong currencies eroding weak ones. This is a challenge to our renminbi and foreign exchange management." If even non-legal Bitcoin can affect the legal currency of weak countries, a legal and compliant stable currency like Libra will definitely impact many of the world's legal currencies, especially those that are almost impossible. Or fiat currencies in developing countries with no access to banking services at all (which is also what Facebook explicitly targets). In fact, 40% of the world's population does not have an active bank account, despite their easy access to a mobile phone. Backed by fiat currencies like the World Bank/IMF SDR currency, consumers in those developing countries are expected to use the Libra stablecoin heavily.
(7) What impact will stablecoins have?
Libra did not discuss win-win development with countries around the world, but adopted a 2C model to directly allow consumers from various countries to trade with stablecoins. As mentioned earlier, consumers in many countries, especially developing countries, are expected to use Libra stablecoins in large quantities. When this spread across the world, the world economic system changed.
I remember that when the author described the content of the IMF’s speech in September 2017 several times, some pre-readers said that the speech exaggerated the impact of digital currency. It may be because the IMF was confused for a while and suggested deleting it. However, judging from the recent frequent meetings and discussions triggered by Libra and the anxiety of some institutions, the IMF’s speech at that time was not exaggerated, but hit the nail on the head, predicting today’s situation. After all, the IMF is not the project party that issued the currency, and there is no need to use an exaggerated "white paper" to attract investment and speculate in the currency. The IMF has seen the huge impact that digital technology may bring to the world when it is used in the formal market.
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BoE Declares War on Third-Party Payments and Digital Tokens — In the Way of a British Gentleman
