On the afternoon of June 18th, Beijing time, the Libra white paper was released on its official website. What is Libra? What can Libra do? What cannot Libra do? What is the future of Libra? This article takes you through all of this.
What is Libra? Being linked to a basket of bank deposits and short-term government bonds, Libra is a stable token of asset anchor mode, which also confirms our views of Stable Token: the legal currency anchor is the main mode of stable token, but the asset support is single. In the future, it may evolve into a multi-asset mortgage and a credit-like token and even the internal anchor mode.
What can Libra do? In addition to the conventional monetary functions such as value scale, trading medium, value storage and payment method, Libra is also capable of credit creation. Moreover, as far as Facebook is concerned, Libra will serve as an economic incentive for its huge ecology, which will help increase the viscosity of the ecology and further expansion.
What cannot Libra do? Not being a sovereign currency, it cannot become a tool of monetary policy; it cannot obtain the income of the coinage tax; it cannot become a super-sovereign currency; it cannot defeat the hegemony of US dollar; it cannot lead the non-nationalization process of currency; it cannot disconnect with the sovereign currency.
Prospect: The future of Libra. Monetary funds have huge space of profits; a more robust Facebook ecosystem; Libra trading pair will replace USDT trading pair to become the mainstream; great significance to raise public awareness of bitcoin; great impact on countries with lower government credit.
What is Libra?
Being linked to a basket of bank deposits and short-term government bonds, Libra is a stable token of asset anchor mode, which also confirms our views of Stable Token: the legal currency anchor is the main mode of stable token, but the asset support is single. In the future, it may evolve into a multi-asset mortgage and a credit-like token and even the internal anchor mode.
Ⅰ. Means of Libra Credit Enhancement: Magnate holding, multiple assets anchoring
The legal currency anchor is the main mode of the stable tokens currently and anchoring the US dollar has become a “standard”. Stable token is a type of digital token which anchors its value and price through specific mechanism, including three modes: the legal currency anchor, the asset anchor and the internal anchor. The legal currency anchor is the main mode of the stable tokens currently and it is also the type most investors have contacted and used. Since the first stable market token with the highest market value, USDT, all the subsequent stable tokens with the mode of legal currency anchor are issued based on US dollars. The international currency is still “hard currency” in the field of digital investment.
The development of stable token with legal currency anchor is a process of continuous credit enhancement. At present, the mainstream tokens often choose to anchor the legal currency —- US dollar based on the following reasons: on the one hand, the international currency such as the US dollar has long been used as the highly recognized currency anchor of the sovereign state and the settlement unit of international trade; on the other hand, due to the insufficient credit rating of the issuer of stable token, the international currency anchor can improve the credit enhancement. However, the anchoring of stable token to a single asset will be susceptible to various factors, so the stability is lower than that of the anchoring to multiple international currencies/assets.
Endorsement from Facebook, the world’s largest social networking company, will improve credit enhancement of Libra. As of March 31, 2019, Facebook realized a total revenue of US$15.077 billion in the first quarter and the net income was US$2.429 billion. Facebook has 37,773 full-time employees, a year-on-year increase of 36%. Its daily active users are 1.56 billion, a year-on-year increase of 8%. The monthly active users are 2.38 billion, a year-on-year increase of 8%. Facebook still takes the lead in the comparation of active accounts on the global social networking platforms.
Libra is anchored to a basket of bank deposits and short-term government bonds, which improves credit enhancement of Libra. At present, the main legal currency anchor stable tokens only support single asset with a certain degree of risks. The multi-asset mortgage, debt-like tokens and even internal anchor mode are the reliable evolution direction. USDT was anchored to the US dollar in the early stage. After repeated crisis, the anchored assets were changed to include US dollar cash, third-party loans and accounts receivable. Libra stable token anchors a variety of assets, which helps stabilize the token price, reduce the cost of trade friction, increase the rate of return and promote its global expansion.
Ⅱ. Libra: Stable token 2.0
The legal currency anchor is suitable for the current development stage of the blockchain system. The emergence of Libra means the official birth of asset anchor. With the expansion of blockchain ecological scale, the legal currency anchor and asset anchor may be replaced by internal anchors. During current stage, the economic volume of blockchain ecology is still relatively small and the total value of digital token is only US$19.1 billion, which is greatly different from the traditional Internet. At present, the value system of blockchain industry still relies on the traditional economy. Different tokens are usually priced according to legal currency with strong dependence on traditional economic system. As a kind of legal currency equivalent, the stable token can support chain transaction and meet the demand of the blockchain for stable token currently. Although the anchor assets of traditional stable token USDT have been extended beyond the legal currency, the appearance of Libra stable token is still the symbol of the official birth of asset anchor. As the blockchain economy develops to a higher stage and scale in the future, it needs to generate its own value system to adapt to the different forms of the real economy. The legal currency anchor and asset anchor are most likely to be replaced by internal anchors.
Libra is an internal anchor endorsed by national credit. Libra stable token is warranted by real asset reserve, so any holders can exchange Libra for local currency at current exchange rate with the redemption guarantee. The purpose of such behavior is to foster consumer trust in the new currency so that the currency can realize widespread coverage in the early days. Thus, it can be seen that the consumers’ trust in Libra blockchain technology comes from its ability to “support the exchange of legal currency”. In other words, the legal currency of sovereign state provides endorsement for Libra. The legal currency is the internal anchor of each sovereign state. Therefore, Libra is an internal anchor based on the factors such as the scale of users and changes of international exchange rates. It also confirms to the attitude of the Libra association which claims “we welcome public surveys and accountability. We are committed to have dialogue with regulators and policy makers. Just like the policy makers, we are as interested in the continuous currency stability in all countries.”
What can Libra do?
In addition to some conventional monetary functions such as value scale, trading medium, value storage and payment methods, Libra is also capable of credit creation. Moreover, as far as Facebook is concerned, Libra will serve as an economic incentive carrier for its huge ecology, which will help increase the ecological viscosity and further expansion.
Ⅰ. Value Scale
The value scale is the most basic and important function of money, that is, the currency acts as a scale of measuring the value of all other commodities. The amount of commodity value depends on the length of socially necessary labor time it contains. Here, socially necessary labor time is the internal scale of commodity value. However, under the conditions of commodity economy, the amount of commodity value can only be measured indirectly by the means of the currency represented by value, instead of directly measured by labor time. It’s obvious that the function played by the money as value scale is the external value scale of commodity value. In the ecosystem built by Facebook and its partners, Libra performs the value scale function by defining the price of the goods and services contained in the ecosystem. For example, author’s creation of paid articles can be priced with Libra.
Ⅱ. Trading medium
Currency acts as a medium in commodity trading. As a trading medium, currency makes direct bartering an indirect exchange. The indirect exchange is called commodity circulation. When the currency fulfills the function of the trading medium, it has several characteristics: it must be the real currency instead of the conceptual currency, that is, the payment on delivery; the currency as the means of circulation can be replaced with the currency symbol, therefore, banknotes and credit currency came into being. Libra stable token anchors a variety of “low fluctuation” assets to maintain its value stable, so as to be adopted as trading medium by Facebook and other partners.
Ⅲ. Value storage
Value storage means that currency can be preserved as an independent form of values and general representative of social wealth. As a means of storage, currency can spontaneously regulate the amount of currency in circulation. When less amount of currency are needed in circulation, the excess currency will exit the circulation; otherwise, the stored currency will enter the circulation. According to Libra generation mechanism, when a user deposits a certain amount of legal currency, a corresponding amount of Libra will be generated to enter the market for circulation or storage. Conversely, the user uses Libra to exchange legal currency and the corresponding amount of Libra will also be destroyed. That is, Libra liquidity in the market can be adjusted by the storage/exchange of legal currency.
Ⅳ. Payment means
The means of payment comes out as a result of the sale of goods on credit. In credit sales, currency is used to pay off debts. Later, it was used to pay rent, interest, wages or taxes. With the development of the commodity economy, the function as the means of payment has gradually expanded beyond the circulation of commodities. As the world’s largest social media platform, Facebook currently has at least 2.3 billion active users, which provides favorable conditions for Libra’s practical applications. Massive users and a wide range of application scenarios provide a broad imagination for the use of stable tokens for payments, and the direct example is the mutual account transfers among Facebook users.
Ⅴ. Credit creation
Libra became the creator of credit. In traditional finance, the currency issuers, commercial banks, and enterprises/residents have jointly built credit through changes in the “balance sheet”. In Libra’s operation mechanism, users can deposit legal currency to make Libra issue proper amount of stable token. Other users can use existing Libra to exchange for a certain amount of legal currency assets, some of which may continue to flow back to the Libra system, thus the simple process of credit creation has been completed.
Ⅵ. Embedded into Facebook ecosystem
Token owns two significant characteristics:
- The first one is “currency embedding.” The blockchain-based projects are generally trying to create a peer-to-peer financial structure to reorganize society into a series of decentralized networks with mutual interaction among the people, so the token has been introduced into most of these projects.
- The second one is the externality of the user scale. As the size of users on the platform grows, it will be easier for everyone to find a trading partner, the long-term contract will be more hopeful to be reached and the products and services will also be sold faster. Therefore, when more people use the token, the utility of token itself will also be improved. In line with the concept of the Matthew Effect and the Flow First in the Internet economy, the externality of the user scale is also crucial.
After Libra has been introduced into Facebook ecosystem, people can also enjoy the benefits from the token. Firstly, Libra helps to reduce the extra cost of currency inconsistency in global transactions. Secondly, the introduction of the account unit will ease the risks resulting from asset-liability mismatching due to different accounting units; Thirdly, Libra can be used as an incentive to promote the stability and functionality of Facebook’s ecology; finally, when it comes to Facebook, Libra will serve as an economic incentive for its vast ecology to improve the viscosity of the ecology and further expansion.
What cannot Libra do?
Not being a sovereign currency, it cannot become a tool of monetary policy; it cannot obtain the income of the coinage tax; it cannot become a super-sovereign currency; it cannot defeat the hegemony of US dollar; it cannot lead the non-nationalization process of currency; it cannot disconnect with the sovereign currency.
Ⅰ. Not a sovereign currency, cannot become a monetary policy tool
At present, there is no recognized definition of currency sovereignty. With reference to the sovereignty definition such as diplomacy and territory, the currency sovereignty can be understood as the autonomy of a country to determine currency regulation as well as financial reform and development. The ownership of currency distribution rights has been debated for a long time. The main points of view include the mainstream theory of legal currency and the theory of non-state currency represented by the Austrian experts. For the faithful believers of Hayek, the currency distribution rights should be attributed to private individuals and currency should be automatically generated in a competitive market. The state monopoly of currency issuance will inevitably lead to inflation and economic volatility, which in turn will damage the public interest. Although the concept of such a theory has been widely recognized, the automatic market adjustment in the real world can bring out the market clearing, however, the society cannot bear the pain of the long-term adjustment process, as Keynes has said, “In the long run, we are all dead. “.
Obviously, Libra is not a sovereign currency. Sovereign currency is issued based on the credit of sovereign countries. Facebook undoubtedly does not own such a kind of credit. The assets behind Libra are low-volatility sovereign currency assets, so it is based on the credit of other sovereign currencies as well as the corporate credit of Facebook. With the blockchain technology, it has become a stable token anchoring sovereign currency assets.
Libra cannot become a macro monetary policy tool. Bernanke has once quoted Friedman’s “helicopter money” strategy. In contrast, since Libra is also based on the assets of legal currency, it’s not backed by strong sovereign credit and legal liquidation capability, so it cannot become a monetary policy tool like other sovereign currencies such as the US dollar, and the Libra Association cannot become a “central bank” in the global digital economy, either.
Ⅱ. Cannot obtain the income of the coinage tax
The coinage tax, also known as the currency tax, refers to the specific income generated from the issuance of the currency and obtained by the organization or government that issue the currency whose monetary value minus the issuance cost to exchange the benefits of actual economic resources. The income resulting from “general currency face value surpassing the production cost” monopolized and obtained by the currency issuer is defined as the coinage tax.
As far as Libra is concerned, due to the 1:1 support of Libra’s reserve assets, it doesn’t own the income resulting from the aforesaid “general currency face value surpassing the production cost”, so coinage tax income cannot be obtained by issuing Libra.
Ⅲ. Cannot become a super-sovereign currency
The claim of super-sovereign currency has been advocated for a long time, but the practice of global super-sovereign currency has always suffered from ups and downs. After the Second World War, the “Keynesian Plan” fell behind in the competition with the “White Plan”. However, the plan to create the super-sovereign currency “Unita” advocated by the “White Plan” has never been implemented. After that, although people had tried regional super-sovereign currencies such as the EURO, there were still many problems in actual operation. The application of SDR (Special Drawing Right) was also limited to the settlement among the members of the International Monetary Fund (IMF) in a small scale with less influences.
Therefore, the realization of super-sovereign currency cannot be achieved overnight. Under the circumstances of uneven economic development levels in the world and the obvious interests conflicts among different economic bodies, the establishment of super-sovereign currency will undoubtedly face many obstacles in politics and the distribution of interests, such as currency stability, currency issuance, etc., so it requires a long period to go through all the technical barriers.
Libra is difficult to develop into a super sovereign currency in a short time. If Libra aims to develop into a super-sovereign currency, it must face all the aforesaid problems. Facebook itself does not own sovereign credit and the Libra mechanism resembles to that of SDR, that is, issuing currency based on mortgage of a variety of low-volatility bank deposits and government bonds.
Ⅳ. Cannot defeat the hegemony of US dollar
We believe that the world needs a global, digitally native currency that brings together the attributes of the
world’s best currencies: stability, low inflation, wide global acceptance, and fungibility.
The Libra currency is designed to help with these global needs, aiming to expand how money works for more people around the world.
—- from the Libra White Paper
All the features of the best currencies have been achieved by US dollar without exception. Its global acceptance and interchangeability are needless to be mentioned. Since the World War II, the international monetary system has always been dominated by the US dollar; in terms of stability, the US dollar is more stable than gold and many sovereign currencies, so we see that Libra has excluded gold from its reserve assets; since the 1990s, the dollar inflation rate has remained below 6% and it’s as low as less than 4% in the past decade.
The features of Libra as best currency are not from Libra itself, but on the policies of central banks that rely on other sovereign currencies.
Rome was not built in a day, and the establishment of dollar hegemony was not a one-off event. The early stages, US dollar was rarely circulated abroad without any social status. Even the import and export trade in the United States, US dollar was also excluded. On the eve of World War I, the United States had already become the world’s largest economy. In 1912, the United States commodity exports had even surpassed that of Great Britain. However, in the ranking of international currencies, the French franc, the German mark, the Swiss franc, the Dutch guilder, the Italian lira, the Belgian franc and the Austrian shilling were all ranked above of the US dollar. Such a situation did not change until the business of US dollar acceptance bill came into being in 1915. At that time, the European trade credit market was disrupted by World War I, banks in the United States started to enter foreign markets and the British pound was also in violent volatility, so the US dollar had become increasingly important in international trade. Since then, the US dollar had experienced depreciation and rebound in the Great Depression, which abruptly interrupted the internationalization process of US dollar until the end of the World War II when US dollar started to maintain its dominant position through a series of international currency negotiations.
To shake the hegemony of US dollar? It’s extremely hard. In the current international monetary system dominated by US dollar, if Libra intends to achieve stability, low inflation, global acceptance and interchangeability, it can be predicted to hold a large amount of dollar assets. The emergence of Libra may partially replace the role of US dollar in financial payments, but “to shake its hegemony” is by no means so simple.
Ⅴ. Cannot lead the non-nationalization process of currency
In the 1940s, many British believed that the whole world would become a big family in the coming future, in which the same language is spoken, the same laws are followed and the same God is worshiped. In the Internet age, everyone also clamors the global village, however, it’s the sovereign state which finally dominates the development of the world.
Although the globalization has greatly promoted the development of non-state bodies including multinational corporations, from David Mitrany to contemporary idealists, all of them even believed that nations and countries would be replaced or dying. However, multinational companies have never replaced sovereign states and some large multinational corporations have, in fact, even become tools for authority and foreign policy of some big powers. In the early 1960s, the average life expectancy of companies listed in the S&P 500 Index was about over 60 years. Since then, large companies have shorter period of “survival” in the Index. In the long run, multinational companies have extremely “shorter life” than sovereign states.
The alliance of multinational corporations cannot dominate the non-nationalization process of the currency. Multinational corporations as non-state bodies and its alliance are expected to dominate the non-nationalization process of the currency. If so, then the United States can be regarded as a combination of all the S&P 500 Index companies, which naturally have the survival of fittest. It’s hard for any multinational companies to own such a strong sovereign state credit.
Ⅵ. Cannot disconnect with the sovereign currency
The Libra Association plays the role of the “last buyer” in the Libra ecosystem. However, behind the “last buyer” there is the “final buyer” with sovereign currency assets, the sovereign state.
Why cannot Libra disconnect with sovereign currency? Libra has no legal liquidation capability and support of long-term independent credit. Once Libra is disconnected with sovereign currency, its values will become meaningless.
Prospect: The future of Libra
Monetary funds have huge space of profits; a more robust Facebook ecosystem; Libra trading pair will replace USDT trading pair to become the mainstream; great significance to raise public awareness of bitcoin; great impact on countries with lower government credit.
Ⅰ. Huge profits from monetary funds
Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions. Because the assets in the reserve are low risk and low yield, returns for early investors will only materialize if the network is successful and the reserve grows substantially in size.
On the capital preservation point, the association will only invest in debt from stable governments with low default probability that are unlikely to experience high inflation. In addition, the reserve has been diversified by selecting multiple governments, rather than just one, to further reduce the potential impact of such events. In terms of liquidity, the association plans to rely on short-dated securities issued by these governments, that are all traded in liquid markets that regularly accommodate daily trading volume in the tens or even hundreds of billions. This allows the size of the reserve to be easily adjusted as the number of Libra in circulation expands or contracts.
This means that Facebook has set up a monetary fund, but unlike the traditional one, its share is Libra token. Meanwhile, since the users will not get return from the mortgaged reserve assets, the fund will own huge profit space.
According to the report of net asset value announced by Tianhong Asset Management in Chian, Tianhong Yuebao reached the scale of 1.13 trillion yuan at the end of 2018. In the first quarter of 2019, Facebook’s monthly active users was about 2.38 billion. Accurdong to conservative assumption, if Libra’s reserve assets reached the scale of 10,000 billion, the annual income will be as high as 15 billion US dollars as per the 1.5% of yield rate.
Ⅱ. More robust Facebook ecosystem
Facebook owns enough users. The introduction of Libra and the token economy system will bring more possibilities for the Facebook ecosystem, including users, application scenarios and partners, etc. and Facebook’s entire ecosystem will become more robust.
Ⅲ. Libra trading pair will replace USDT trading pair to become the mainstream
Although suffering from ups and downs as well as being questioned, USDT is still firmly dominate the market value of the stable token industry. With the appearance of stable token, Libra, the sovereign currency asset mortgage with stronger credit than the USDT, the Libra trading pair may replace the USDT trading pair to become the mainstream.
Ⅳ. Great significance to raise public awareness on bitcoin
Currently, the public still has very limited recognition on the bitcoin and blockchain. Facebook’s huge number of users can significantly raise the public awareness on bitcoin and blockchain.
Ⅴ. Great impact on countries with lower government credit
We have witnessed the fact that the people chose bitcoin as a means of payment and value storage when serious inflation occurred in sovereign currencies. Nowadays, some sovereign countries still have very low credits. Since the emergence of stable token, Libra may bring a big impact on these countries after the public there have started to know about Libra.
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