Li lihui: digital currency could reshape the global monetary system

Li lihui: digital currency could reshape the global monetary system

Li lihui (expert member, institute of financial technology, renmin university of China, group leader, Internet finance association of China blockchain working group, former President of bank of China)

Source: institute of financial technology & NBSP; & have spent

Late on May 5, renmin university of China financial institute of science and technology experts committee member, China association of Internet financial chain blocks, team leader, a former bank of China President li lihui said in people's live, the titled "digital currency: may reconstruct the global monetary system" of sharing, detailed explained the legal digital currency, virtual currency and trustworthy institutions development history and status quo of digital currency. Li lihui said that in terms of international transactions, China's central bank has not made specific arrangements for digital currency at present, while in the future, securities may become digital assets. & have spent & have spent

Everyone knows that when bitcoin, based on blockchain technology, was launched in 2009, it was almost silent. Libra, a digital currency dominated by the global social networking giant facebook, aims to become a global monetary and financial infrastructure that is free from the control of Wall Street and central Banks and can benefit billions of people. The people's bank of China's digital currency, said to be piloted on a small scale, is also getting a lot of attention.

"The economy changes its structure as technology evolves," says Brian Arthur, a professor at Stanford university. "it changes its institutional arrangements." So what we're going to talk about today is whether digital money is going to reshape the global monetary system?In my opinion, the form of money that adopts digital technology can be called digital currency, which can be divided into legal digital currency, virtual currency and trusted institution digital currency.

Legal digital currency

Fiat currencies are particularly concerned with how to pass on and replace traditional fiat currencies. As far as I am concerned, a digital currency with legal status, national sovereign endorsement and issuing liability constitutes a legal digital currency, or a central bank digital currency.

In 2015 and 2016, central Banks of many countries announced the launch of the research and development of legal digital currency. As far as I know, due to the digital technologies that digital currency may apply, including consensus mechanism, distributed ledger and other blockchain technologies, as well as encryption algorithm, peer-to-peer network and other basic component technologies, these technologies have not been able to obtain the high concurrency demand of the retail level in the super market at present. Therefore, as for the basic price structure of legal digital currency, various countries are still debating and weighing, and have not yet made a final decision. Here we have to discuss the question, how do we evaluate the legal tender? The industry is relatively unanimous on this point.

Many experts believe that fiat digital currency has some potential benefits, such as:

One is to save the cost of cash flow. Especially in remote and vast areas, as well as in cross-border retail payment scenarios, fiat digital currency can effectively reduce the cost of cash flow. At the same time, it can help prevent counterfeit money, because legal tender is very difficult to counterfeit.

Second, it can strengthen the public nature of the payment systemWe will promote financial inclusion and legal tender so as to provide the public with safe and liquid payment instruments. And it can no longer need commercial bank accounts, or even commercial Banks as intermediaries.

Third, it can provide end-to-end and reliable payment tools for digital asset transactions.In the future market for digital assets, we will be able to transfer value automatically in accordance with agreed commercial terms and applicable laws by using smart contracts and key technologies.

Fourth, the transmission mechanism of monetary policy can be strengthenedEspecially at this stage of a long economic recession, fiat money is very convenient to implement special interest rate policies such as negative interest rates.

What we have just mentioned is the potential benefits of legal tender. Experts and scholars are also evaluating the potential risks and problems of legal tender. There are several risks and problems:

First, it may weaken the initial credit capacity and profitability of commercial BanksPublic deposits may flow from commercial Banks to the central bank, forcing them to raise interest rates in order to obtain funds and retain customers, raising their costs.

Second, it may be easier to promote systemic financial riskAs long as deposits in fiat money meet the conditions, it can be easily withdrawn, causing a payment crisis at a particular bank and setting off a chain reaction that could trigger systemic financial risks.

Thirdly, under the framework of fiat digital currency, the central bank has more direct power to regulate and control the money market.In the case of fiat digital currency, the central bank's balance sheet is likely to expand substantially. However, when the economic crisis and financial crisis occur, the central bank must provide more liquidity support to commercial Banks.

According to the relevant information disclosed by the central bank officials, some interpretations are made on China's legal digital currency DC/EP.

The first is to adopt the two-layer operation and release system, inheriting the indirect release model

With the application of digital technologies such as blockchain, fiat currencies can be issued directly by the central bank and the public. In the direct issue model, the central bank can have the absolute power and ability to regulate the money market and can directly absorb public deposits, which will limit the initial credit capacity of commercial Banks. If we choose the indirect issuing mode of legal tender "central bank, commercial bank and public", we will inherit the current money market operation mechanism and monetary policy transmission mechanism.

The benefits of inheriting the current model are economy and robustness. First, there is no need to rebuild the financial infrastructure in another place to save investment. Second, there is no need to reconstruct the pattern of currency issuance and management, which is conducive to controlling risks. Third, it is not necessary to look ahead and behind to connect the different characteristics of the currency issue mode, conducive to the stability of the market.

Second, adopt the parallel technology route and stick to the central bank central management mode

Some people believe that the existing blockchain technology cannot meet the high concurrency demand of retail in the super market, so it is advisable to keep the technology neutral and not rely on a single technology. The "horse racing" mechanism can be used to compete for technical routes, and different institutions can be designated to take different technical routes for parallel research and development, so as to realize the systematic optimization of legal digital currency through technological competition and market selection.

The central bank should stick to the centralized management mode to ensure the reliability of the monetary policy transmission mechanism, ensure the efficiency of monetary regulation and prevent financial institutions from overissuing money. The central bank has been cautious about smart contracts, but is likely to support the application of smart contract technology that facilitates the realization of monetary functions.

Third, "account loose coupling" is adopted to replace the currency M0

WeChat payment, alipay and other electronic payment tools adopt the "account tight coupling" method, which requires the bank account to be bound and value transferred through the bank account. Under the real-name account management system, the requirement of anonymous payment cannot be realized. The legal digital goods can be transferred from the bank account to the end of the value by the way of "account loose coupling" + electronic wallet, so as to reduce the financial intermediation in the transaction process, and realize controllable anonymous payment within the scope permitted by the central bank.

At present, the design of China's legal digital currency may be limited to replacing M0, that is, cash in circulation, rather than the narrow money M1 and broad money M2, depending on the actual market demand and the degree of digitalization of China's M0, M1 and M2.

In China, WeChat payment and alipay use digital technology to build a payment and life service platform linked by trust link, breaking through the traditional payment mode and realizing a billion level of linear link. WeChat payment and alipay occupy the retail payment market, and the number of transactions of cash and ATM keeps decreasing. The bank card becomes the account card of WeChat payment and alipay, retreating to the big payment market.

China's design of legal digital currency can theoretically be separated from the network, away from the bank implementation of value transfer. But whether it can eventually replace traditional forms of money and the emerging electronic payment instruments as the main forms of money and the main payment instruments will depend on four key factors: greater efficiency, lower costs, economies of scale with commercial value, and socially acceptable reliability and security.

Virtual currency

How to define coin or token in the public blockchain community? Some emphasize the characteristics of digital technology and call coin an "encrypted digital currency". Some emphasize the financial attribute and call the token "pass-through".

In my opinion, if we agree that the essence of money is "a contract about the right of exchange", we should emphasize the economic support and financial property of the "right of exchange".

Coin or token not only becomes a value marker and a payment tool in the virtual community, but also can be traded with legal tender currency to form a transaction price, thus possessing the property of a financial tool. Therefore, it may be more appropriate to define coin or token as "virtual currency". At the same time, it should be clear that if virtual currency does not have qualified issuing entity, no physical asset support or sufficient credit endorsement, it will also be different from legal digital currency and trusted institution digital currency.

In the last two years, the virtual currency has gone up and down sharply, with its price plummeting and soaring. Some dig, some speculate; Some get rich, some go bankrupt; Few are allowed to become securities, most are suspected of illegal fundraising.

From 2014 to 2018, the virtual currency market has seen some spin-offs:

One is the IC0In 2014, the global IC0 reached us $26 million; in 2016, it exceeded us $200 million; in the first half of 2017, it soared to more than us $1.2 billion; in fact, China accounted for more than 30%. IC0 is crowdfunding, which may be suspected of illegal fundraising without approval.

Second, the issue of bifurcated currency, the currency used is decentralized architecture and finite block specifications, with the passage of time, dig the example resource they take up more and more, so the congestion in the network is more and more serious, the transaction cost is higher and higher, for the sake of different interests, but also for different technical way to solve, so the currency community appeared to split. Therefore, some bifurcated COINS have appeared since 2017, including bitcoin cash, bitcoin gold, bitcoin diamonds and so on.

Third, the stability currency, just mentioned that the price of virtual currency is always ups and downs, so this time the so-called stable currency broke through the ground. The stable currency with a large market share is the USDT, whose company claims to follow a 1:1 reserve peg to the dollar, which is fully backed by physical assets in dollars. However, from what I have learned, their accounts are not so transparent and lack authoritative supervision. In particular, world-renowned accounting firms are reluctant to audit for them. So I think there's some credit risk here.

The industry has a lot of criticism of virtual currency, summed up in a word is "virtual", there are a lot of virtual, but there is no real thing. I don't fully agree with this view. In my opinion, the growth of virtual currency, represented by bitcoin, has economic reasons, including:

One is the survival of virtual currency.The "decentralized" architecture of the public chain essentially belongs to the self-organization that implements self-rules, the governance mechanism of the common network consensus and the incentive mechanism for the issuance of virtual currency, which is the equivalent and payment tool recognized by the participants.

Second, the market demand of virtual currency.Virtual currency trading can be anonymous, cross-border and difficult to regulate. It can be used in both public chain communities and in grey and black transactions. It can become a tool for the illegal flow of funds and speculative trading. The global "dark web" market has always had illegal trade in guns and pornography. The scale is difficult to measure, and it needs payment tools that can be trusted "underground" and difficult to control "above ground".

Third, the speculative market of virtual currency.For example, large bitcoin accounts are in the hands of a few people. By one estimate, 40 percent of bitcoin is held in about 1,000 accounts. These "key minority" are at the top of the food chain and are likely to manipulate the market and control prices, leaving retail investors with huge losses.

The technical flaw of virtual currency comes from "decentralized" public blockchain architecture. Under this architecture, the whole network verification needs data synchronization of very large specifications, and the operation capacity of each node needs to be up to standard and balanced. As a result, neither bitcoin nor ethereum has yet solved the issue of transaction efficiency and scale.

Fourth, virtual currency has coinage costFor example, bitcoin is generated by mining, which must rely on a specific algorithm to calculate the hash value, which is confirmed by the distributed ledger system. Mining costs include electricity, wages, depreciation, rent and maintenance. By some estimates, it currently costs you between $3,000 and $4,000 to mine a single bitcoin.

The economic disadvantage of virtual currency lies in the lack of sufficient physical asset support and credit endorsement, unstable value and too much speculation. In 2018, bitcoin hit a bottom of $3,158, 84 percent below its peak. The market value of the global virtual currency dropped from $835 billion at the beginning of the year to $110 billion, down nearly 87%. Bitcoin continued to fluctuate in 2019, falling by 22% in the last seven days of September.

Based on the economic factors, virtual currency will survive and develop, very few may expand territory, most can only be a corner. In the future, the underlying technology innovation of the blockchain on which the virtual currency relies will be able to enter into popular transaction and payment scenarios if the bottleneck of large-scale application can be broken and the operation mechanism of the virtual currency can be updated to solve the problem of stable value.

Trusted institution digital currency

I refer to the digital currency issued by institutions with credibility, including financial institutions, as the trusted institution digital currency. A fiat digital currency can be trusted because of its legal status and the endorsement of national sovereignty. To be "trustworthy", the digital currency of any other institution must have the following qualities:

A credit endorsement from a public trust institution; & have spent

Customer scale with commercial value;

Efficient and reliable financial transactions and payments;

Backed by auditable financial assets;

Have the market access of administrative license.

Financial institutions that have obtained administrative permission to issue digital currencies include Goldman sachs, jpmorgan chase, ubs and other multinational Banks. Libra, the digital currency, aims to become a financial infrastructure that is not controlled by Wall Street and not controlled by central Banks. That leaves Libra under regulatory pressure from the start. Payment giants Visa, Master, Stripe, eBay and Paypal pulled out of the program before the Libra association's first board meeting on Oct. 14. So what disruptive potential does Libra have?

First, the industry giant co-founding, covering a huge customer group.Libra is led by Facebook. Currently, there are 22 co-founders, including online payment, telecom operator, online travel, online taxi hailing, e-commerce platform, streaming media and music platform, online luxury platform, etc., which can still provide Libra with enough credit endorsement and cover more than 2 billion customer groups worldwide.

Second, the application of digital technology to build an independent financial infrastructure.Libra applies the distributed peer-to-peer architecture of the alliance blockchain, applies the privacy computing technology to protect data privacy and data security, and applies the Calibra e-wallet to provide a peer-to-peer, end-to-end transaction and transfer platform that can cover all corners of the world. Banks and third-party payment institutions are no longer needed.

Third, the value of independent digital currency is supported by hard assets. Investments made by members of the Libra association and purchases of Libra's fiat currency by users become reserves that support the value of Libra. Libra USES reserves to invest in low-risk, low-return investments tied to low-volatility real assets to maintain value stability. Libra will be an independent digital currency anchored to legal tender.

When I did some research on their white paper 1.0 last year, I felt that Libra must address some major issues if it is to truly reach the threshold of market access for western countries. These include:

First, it is necessary to verify the efficiency and reliability of the technology platform. & have spent

Second, the feasibility and transparency of business operation mode;

Third, the path and credibility of financial compliance control.

Libra is registered in Switzerland, and I think the key lies in the United States. In recent years, the United States has made some strides in digital finance. For example, the United States has successively issued digital currency licenses and e-wallet licenses in recent years. Legally, there does not seem to be enough reasons simply to refuse Libra's application. But how can Libra break through the hurdles faced by financial regulators, central Banks and politicians?

What we've seen over the last 10 months is that facebook has done both and seems to be making some progress. What, I ask you, is beyond the rule of law to impress America's politicians and its government? I think that should be the economic and financial strategy of the country. In a six-hour hearing before the house financial services committee on October 23, 2019, facebook CEO mark zuckerberg highlighted four points, including:

One is that Libra is not the creation of a new sovereign currency. It is a global payments system, and the dollar accounts for the largest share of reserves. & have spent

Second, it will expand America's financial leadership and democratic values around the world.

Third, if America does not innovate, global financial leadership will not be assured.

Fourth, in terms of technological innovation, China's partial payment infrastructure is ahead of the United States, and the United States must build a more modern payment infrastructure.

These words are very provocative. In October, I suggested that the United States has been issuing digital currency licenses and e-wallet licenses in recent years. Legally, there does not seem to be enough reasons simply to refuse Libra's application. If the United States tries to capture the global hegemony of digital currency, it is possible to grant administrative approval to Libra with restrictive conditions, such as requiring Libra to increase the proportion of the dollar in the basket of anchored legal currencies to conform to the international currency status of the dollar, and requiring Libra to follow the legal norms on anti-money laundering, anti-terrorist financing, and anti-tax evasion.

Facebook released its Libra2.0 white paper on April 6, 2020, a big step forward in its efforts to meet political demands and adapt to the rules of financial regulation.

First, strengthen the dollar's monetary supremacy.Libra will add a new class of digital currencies, namely the anchor order of a legal digital currency, such as the dollar, the euro, the pound, etc., while also launching a global digital currency, Libra. I think Libra will in fact become a tool for the us to continue to promote dollar monetary hegemony in the digital economy.

Second, strengthen financial compliance standards.Libra claims that there will be no more decentralized technology architectures in the future. Libra promises to formulate a comprehensive framework for financial compliance and risk management across the Internet, establish anti-money laundering and counter-terrorism measures, abide by strict standards for sanctions and prevention of illegal activities, and combat all types of financial crimes. & have spent & have spent & have spent

We can see that ifLibra is only a slightly shocking draft in 2019, so it should now be a blueprint for construction and construction.

Super sovereign digital currency

Libra poses an unprecedented challenge to the existing monetary system: transcending national sovereignty, overstepping central Banks and overstepping commercial Banks. The super-sovereign digital currency has the potential to fundamentally restructure the global monetary system.

One is the potential impact on the status of sovereign currencies.Money's status as a general equivalent essentially depends on public trust, which is only reinforced by "fiat". Shells did not become the original currency because of the "law of the land", but because of the public recognition of equivalence. If backward and weak countries encounter major economic difficulties, sovereign currencies may lose the trust of their citizens and may be replaced by super-sovereign digital currencies.In general, the sovereign currency of a country or a union with a booming economy will not withdraw from the monetary arena and may become the anchor object of a super-sovereign digital currency. However, the status of the currency may change.

Second, it may restore monetary hegemony.The hegemonic status of the super sovereign digital currency will be determined by the scope, user scale and physical assets scale. There may be several equal super sovereign digital currency systems in the world.The global circulation of super-sovereign digital currency may no longer have a clear country label, most important is the public recognition of global commercial credit and digital trust.

Thirdly, it is possible to form a financial system spanning commercial Banks.Libra such Numbers probably evolved into super-sovereign currency monetary, formed to cover all corners of the world's financial infrastructure, which may, from the perspective of the payment and settlement, gradually into the savings, financing, investment, insurance, trade and other fields, infiltration masses of economic life, fully for the finance market.

Fourth, it may affect the process of RMB internationalization.Failure to integrate the renminbi into a global digital currency system could weaken its future sphere of influence.

To sum up, digital currency is likely to restructure the financial model and monetary system. This is both a realistic challenge and an opportunity for the future.What should we do here?There are three points:

First, the development of digital currency largely represents the digitalization of the financial industry. Therefore, our country should be based on the sustainable development of digital finance, speed up the construction of digital finance system, speed up the establishment of digital trust mechanism, and formulate digital financial systems such as the issuance of digital currency, the supervision of digital financial market, the supervision of digital currency by trusted institutions, and the supervision of virtual currency.

Second, digital currency will play a central role in the future global digital economy competition, so it is necessary to study the feasible path and implementation plan for the issuance of a global digital currency led by China.

Third, we should speed up the research and development of national standards for digital finance technology, strengthen the coordination of international supervision and regulation, promote the establishment of a consensus on the supervision of digital finance, and establish a unified standard for the international supervision of digital finance. We should actively participate and strive for our country's voice.

The interactive link

Q: will China's legal tender be linked to gold?

Li lihui: as far as I know, not at present. China's legal digital currency is actually our traditional currency, namely the digitalization of RMB, which is a digitalized form of currency. It is not directly linked to gold.

Q: will fiat money replace or banish paper money?

Li lihui: in the long run, I think it is possible that legal tender will gradually replace, replace or even drive out the traditional legal tender. Just like we use alipay, WeChat payment, our cash has become less and less. However, I don't think that will happen in the short term, say three, five or even 10 years after the introduction of fiat money. It is a gradual process of replacement or expulsion.

Q: is it possible to buy bitcoin or not?

Li lihui: as mentioned just now, in the past few years, bitcoin has gone up and down sharply. Some people speculate, some get rich, and some go bankrupt. So I would like to cautiously remind you that there are risks in investment.

Q: can central Banks use digital currencies for international transactions?

Li lihui: cross-border peer-to-peer, end-to-end, large-scale transactions, that's what a digital currency should be able to do. Of course, the central bank has not made specific arrangements for international and cross-border transactions of China's legal tender.

Q: will future securities be scribbled?

Li lihui: the securities in the future may become digital assets. In the future digital asset market, there will be some securities and other financial instruments adopted in the digital way. Therefore, we should further study the future construction and development of the digital market, which is another big problem.

The original address: https://mp.weixin.qq.com/s/Ak0mkVZIRoIPmVOD6jawyg

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