After Facebook released the Libra white paper in June 2019, the digital stable currency has attracted widespread attention from the international community. Digital stable currency is a type of encrypted (digital) currency, which is developed on the basis of ordinary encrypted currency. Digital stablecoins solve the problems of large fluctuations in the value of unanchored cryptocurrencies such as Bitcoin and lack of regulatory bodies, and have the potential to be widely used. Digital stable currency, like ordinary cryptocurrency, belongs to the category of private digital currency. Since the influence in the economic system is smaller than that of the central bank’s digital currency, and the initiative of private institutions is fully utilized, there is a competition and cooperation between digital stable coins and central bank’s digital currency. Against the background that the central bank’s digital currency cannot be achieved overnight, digital stablecoins, especially global stablecoins that are built on a large number of cross-border customers and have the potential for rapid global application, such as Libra and JPMorgan coins, are expected to lead the global cross-border payment system change. Facing the development opportunities of digital stablecoins, my country should also put the development and operation of digital stablecoins by private institutions on the agenda.
You can overcome the shortcomings of ordinary encryption currency
digital currency refers to the relative stability of a particular asset or a basket of assets to maintain a stable value of digital currency. According to its stability mechanism, it can usually be divided into three categories: using legal currency or physical commodities as collateral, using digital assets as collateral, and supported by algorithms. At present, the most recognized and operable digital stable currency with legal currency as the collateral is a relatively stable digital currency that is anchored to a legal currency or a basket of legal currency to maintain its value. The latest data shows that there are 226 digital stablecoin projects worldwide, of which 66 are active projects, accounting for about 29%. Among these projects, the market capitalizations of the top two TEDA coins and USDC (USDcoin, a fully collateralized U.S. dollar stablecoin) are USD 13.4 billion and USD 1.5 billion (data on August 31, 2020), respectively. They are all digital stablecoins with legal currency as collateral, and the anchors are all US dollars. Among the 134 projects in the development stage, Libra coins, Morgan coins and other projects have attracted much attention.
Digital stablecoins are currently mainly used by crypto asset traders to deal with market fluctuations. Unanchored cryptocurrency is represented by Bitcoin. Its characteristic is that each node in the network can participate in currency issuance and transaction accounting, and payment and settlement can be made directly between nodes. However, this type of cryptocurrency is not a liability of any entity, nor does it take any existing assets as a value anchor, so the price fluctuates very sharply and it is difficult to assume the basic functions of currency. Moreover, there is a lack of centralized issuing and settlement agencies in the entire ecosystem, and it is difficult for the regulatory authorities to find specific targets for implementing regulatory measures. As a result, this type of cryptocurrency is used in a large number of illegal activities such as money laundering, terrorist financing, tax evasion and tax evasion, which adversely affects the financial security of various countries. In addition, most unanchored cryptocurrency fully decentralized trading systems are difficult to meet the needs of high-frequency trading. For example, the transaction processing capacity of Bitcoin is only 7 transactions per second, and Ethereum is only 10-20 transactions per second, which is far from Alipay’s processing capacity of 260,000 transactions per second.
Digital stable coins provide an effective solution to the above problems. First of all, digital stablecoins can assume the basic functions of currency. This type of digital currency has a clear value anchor, so the value is stable and can be used as a measure of value. Digital stablecoins are issued by specific institutions and belong to the liabilities of the issuing institutions. There are also special institutions responsible for exchange and operation, making digital stablecoins more acceptable to the market and playing the role of a trading medium. Furthermore, there are various centralized institutions in the digital stable currency system, so it is easy to be included in the existing regulatory framework. For example, the supervisory authority can review whether the issuing institution has sufficient reserves, require the exchange institution to obtain the true customer information and complete the process of knowing the customer when the customer registers, and require the system operator to provide detailed transaction data to track suspicious funds when necessary. Finally, digital stablecoins can adapt more flexibly to the needs of high-frequency trading. By designing a moderately centralized transaction settlement mechanism, digital stablecoins can find a balance between distributed networks and high-frequency transactions.
In addition, digital stablecoins also have the potential to provide a key infrastructure layer for the digital asset ecosystem, especially expected to play an important role in cross-border capital flow activities. Currently active digital stablecoins in the market are more used as trading intermediaries for encrypted assets, but their role in actual payment activities is very limited. A report pointed out that TEDA has established trading pairs with 396 cryptocurrencies, but only has trading pairs with 4 legal currencies; USDC trades with 109 cryptocurrencies, but has only established trading links with 2 legal currencies. However, digital stablecoins launched on platforms of large multinational companies are expected to change the above-mentioned situation. Digital stablecoins represented by Libra and Morgan coins are likely to reshape the global digital asset ecosystem. After the release of the Libra white paper, the Group of Seven (G7), the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) quickly established a special stablecoin working group. They set up a special stablecoin working group to be launched and established by multinational technology companies or financial institutions. Based on the existing large-scale and/or cross-border customers, the digital stable currency that has the potential for rapid global application is called global stable currency. It is believed that global stable currency will have a global impact on monetary policy, financial stability, and international The monetary system and fair competition have an impact.
It can maintain a competitive and cooperative relationship with the central bank’s digital currency
Although there is potential competition between the digital stable currency as a private digital currency and the central bank digital currency, the two have a broad space for cooperation in the competition. The biggest difference between digital stablecoins and central bank digital currencies is the issuer. The central bank’s digital currency is issued by the central bank and guaranteed by sovereign credit and has unlimited legal compensation; digital stable currency is issued by private institutions, relying on private credit, and is mainly used on payment platforms developed by private institutions. Therefore, from the perspective of currency holders, central bank digital currencies have lower risks and more advantages than digital stable currencies. However, as a national behavior, the introduction of central bank digital currency will have a systemic impact on the national financial system, including the risk of financial disintermediation and the reduction of credit allocation efficiency, which may damage the stable operation of the overall economy. Therefore, from the perspective of national financial stability, the central bank’s digital currency must be launched cautiously and gradually. In contrast, digital stablecoins have less impact and are relatively flexible. In the short term, the central bank’s digital currency still faces many unresolved problems, and it may be difficult to launch it quickly. At this stage, if the digital stable currency is used to test the water first to examine the market acceptance, system operation problems and system operational risks, it will help the central bank’s digital currency design plan.
In the medium to long term, the central bank’s digital currency can still maintain a competitive cooperative relationship with digital stablecoins after the launch. The main functions of the central bank are to formulate and implement monetary policy, carry out financial macro-control, and assume the responsibility of the lender of last resort, while private institutions are better at handling retail user interaction, instant payment confirmation, and system technical maintenance. The comparative advantages of central banks and private institutions are different, creating conditions for cooperation between the two in the field of digital currency. On the one hand, the central bank and private institutions can jointly develop a synthetic central bank digital currency (sCBDC). sCBDC is issued by a private institution and is a liability of a private institution, but it is fully supported by the central bank; the private institution directly handles retail payment transactions, while the central bank is responsible for the wholesale settlement between financial institutions. It can be seen that sCBDC is actually a digital stable currency guaranteed by the central bank, retaining the dual system structure of “commercial bank-central bank” to the greatest extent, and organically combining the advantages of the central bank and private institutions. The IMF has mentioned sCBDC many times in reports, pointing out that this public-private cooperation model allows the central bank to focus more on its core functions, which is better than the central bank digital currency (CBDC), which is completely controlled by the central bank. On the other hand, after the central bank’s digital currency is launched, it can also use the established digital stable currency system for promotion. The Libra Association pointed out in the second edition of its white paper that after central banks develop CBDC, they can directly integrate with the Libra network and replace the original digital stable currency in the network with CBDC.
Has broad prospects in cross-border payments in
the currency Libra Libra white paper issued coins reason for being concerned about the world in general, lies in its great future in the field of cross-border payments. Since it solves the problem of the lack of currency anchors for cryptocurrencies such as Bitcoin, and provides the feasibility for the implementation of regulatory measures, digital stablecoins have the potential to be quickly promoted globally. In the context that the central bank’s digital currency cannot be achieved overnight, digital stablecoins are expected to become the preferred choice for improving cross-border payment efficiency and reducing cross-border payment costs. Currently, cross-border payments generally adopt the agency bank model, involving many intermediaries and long chains, and differences in regulatory standards across jurisdictions have also increased various explicit and implicit costs. Moreover, recipients and payers of cross-border payments also face problems such as lack of visibility into payment status, delays in payment processing, and inability to obtain 24/7 services. More importantly, the United States has weaponized cross-border payment networks in recent years, threatening to cut off the connection of other countries with the SWIFT system or exclude other countries from the New York Clearing House Interbank Payment System (CHIPS). In addition, this poses a danger to the financial security of other countries. The digital stable currency represented by Libra provides new solutions for cross-border payment activities, and specifically solves the above-mentioned problems of traditional cross-border payment systems.
Based on distributed ledger technology, Libra connects various institutions and users on the market in a payment network, which can effectively reduce intermediary participation, promote inclusive finance, complete peer-to-peer payment and synchronous settlement. In the Libra Governance Association, payment companies, technology platforms, technology companies, non-profit organizations and even multilateral organizations from different countries participate in the governance of the consortium blockchain (referring to the blockchain that is jointly managed by multiple institutions). The model can not only enhance the security and transparency of the cross-border payment process, but also help enhance the fairness of the cross-border payment system. In particular, using digital stablecoins as a carrier can create conditions for the international use of super-sovereign currencies represented by Special Drawing Rights (SDR). Digital stablecoins linked to a basket of currencies can help solve the Triffin problem faced by sovereign currencies as an international currency, and can also eliminate the current over-concentration of power in the international monetary system.
Of course, to build a cross-border payment system based on digital stablecoins, it must be recognized by the monetary authorities of all countries in the world and included in the international financial regulatory system. The Libra Association has made a lot of efforts and compromises in the past year, actively communicating with various stakeholders, and improving the plan to better integrate into supervision. After the release of the Libra white paper in June 2019, the Libra Association released the second edition of the white paper in April this year. The second edition of the white paper has been adjusted compared to the previous plan, including: abandoning the link to a basket of currencies, adding a single currency stable currency, each stable currency is linked to a single legal currency; emphasizing that Libra currency is a supplement to the legal currency of various countries Rather than substitute, further strengthen reserve protection measures and develop a comprehensive compliance framework. It can be seen that the global stablecoin represented by Libra is becoming more practical and feasible, which means that its smooth launch is no longer far away. The currency competition in the digital age is about to kick off. In the face of the development opportunities of digital stablecoins, it is time for my country to consider whether to allow private institutions to develop and operate digital stablecoins.
