Wang Yongli: Why Libra cannot succeed

Supersovereign money, a core issue deliberately avoided by testimony, looks at the nature of money and the logic of development, and it is certain that Libra, which envisions a super-sovereign currency, will not succeed. On October 23rd Mark Zuckerberg, Chief Executive Officer of Face-book, testified to the House of Representatives Financial Services Committee that he had released a white paper on its plans to launch in 2020 the borderless currency Libra, which is prorated to the dollar, euro, yen, pound sterling and Singapore dollar. In his testimony, he emphasized in particular that:

王永利:为什么Libra很难成功

“More than 1 billion people in the world today don’t have access to bank accounts, but if the right systems are in place, they can access these banking services on their mobile phones. These include 14 million Americans” libra will be a global payment system, backed entirely by cash and other highly liquid assets; “It’s not an attempt to create a sovereign currency”; “Libra doesn’t want to compete with any sovereign currency, and it doesn’t want to go into monetary policy”; I believe that Libra’ responsible innovation will give more people access to the financial instruments at our fingertips. Digital payment systems will become very important in the future. If the U.S. doesn’t take the lead, other countries will do the same. Foreign companies or countries can act without the same regulatory oversight or lack of commitment to transparency; “Facebook will not roll out libra payment systems anywhere in the world until it has the approval of U.S. regulators”; “but if health doubts become full-blown hostility,” We will put a lot of progress at risk, which will damage our nation’s reputation for innovation, reduce our economic competitiveness, and ultimately concentrate more power in the hands of existing players.”

The above statement highlights that Libra is a digital financial innovation that will benefit more than a billion people who do not enjoy banking services, that it will not compete with sovereign currencies such as the dollar, but will strengthen the international standing of basket currencies such as the dollar, and that if the United States does not support it, other countries (mainly China) will lead. Will have a serious impact on the international leadership of the U.S. economy and finance!

But is that really the case?!

This requires an analysis of the nature of Libra, which is prorated to a basket of currencies, to find out what its relationship to sovereign or legal tender is.

One

The result of a comprehensive peg to a batch of currencies is to create a super-sovereign currency.

It must be made clear that the “stable currency” linked only to the single currency equivalent is fundamentally different from the “stable currency” linked to a basket of currencies: the former is in fact the “token” of its linked currency, and the latter is no longer a token, but a new super-sovereign (borderless) currency! As a borderless currency with a basket of currency assets as reserves, without independent and rigorous monitoring, it would be very scary!

This idea of pegging to a basket of currencies may have originated in the International Monetary Fund’s SDR. When the dollar crisis broke out in the late 1960s, the IMF envisioned the introduction of sDRs pegged to a basket of currencies, replacing the dollar as the new international hub currency. However, due to extremely complex technical challenges and the lack of adequate legal protection, especially in the face of opposition from the United States, the SDR could end up as an extremely narrow and very limited intergovernmental reserve, making it difficult to become a real currency in global circulation. The root cause is that this vision goes beyond the stage of development of the times: the world is still, and will remain, long-term national sovereignty and independence, need to rely on comprehensive strength and international influence to win the international discourse, including the international central monetary status of the development stage, far from forming a global unity (global village) governance pattern and mechanism.

Under such circumstances, the introduction of a basket of super-sovereign currencies linked to the major national currencies and co-existing with the basket of currencies, and even to challenge or even replace the position of the most important currencies as the international central currency, is bound to be firmly opposed by the most major countries, it is difficult to really launch and operate effectively.

Libra may be innovative in terms of technology and how it works, but it is not much different from SDR in nature, not only is its architecture design and actual operation facing very complex challenges and risk challenges, it is difficult to operate on its own, but it still lacks adequate legal protection, to be composed of civil society, The management association with interest relationship will bring great impact and risk to the global monetary and financial system by managing and co-existing with the sovereign currency.

It is important to note that this is not, as some believe, the inclusion of the Libra currency basket would enhance the international influence of these currencies; The fact is that if such a super-sovereign currency were to circulate globally, it would certainly weaken or even replace the dollar’s position as an international central currency, and the impact on the United States would be profound. Otherwise, the SDR could have been successful.

It can be borrowed that even the euro, which is firmly supported by the strongest countries, must be legally recognized and protected by the euro-zone countries and completely replace the euro zone’s original national currency as the new only regional sovereign currency, and the euro cannot coexist and operate with the original national currency.

Two

Why is the sovereign currency so difficult to replace?

After thousands of years of development, the pattern of its manifestations has been constantly changing, and it has now evolved from a physical currency to a credit currency, and even from a tangible currency to an invisible currency (digital currency). However, due to various reasons, some of these profound changes have not been accurately recognized and grasped, now on “what is money”, especially “what is credit money”, today’s society “why is the national sovereignty or legal tender, and no longer non-state currency”, the theory and practice of the field almost no accurate agreement, With the legal tender constantly exposed the problem, triggering a lot of new arguments and monetary theory, as well as a variety of “digital currency innovation”, but many serious deviation from the nature of money, there is a serious understanding of misleading and social harm, the urgent need to dial the wrong way, the original source!

Looking at the history of monetary development, the clear road map is: currency is based on the needs of commodity exchange and produce and develop changes, the essence of monetary attributes and core functions are value scale and exchange medium, the basic function is the means of payment and value storage, the development of money from the original commodity physical currency to the state-regulated metal currency, The development of metal-based paper money, further developed to completely separate from the physical goods of pure credit currency, a fundamental change (fission), credit money from tangible paper money and coins, to intangible bank deposits or digital currency, the trend of non-cash, digitalization of money more and more obvious.

Nowadays, the currencies of the world are basically credit currencies, no longer physical currencies. When discussing money, it remains in the physical currency stage, rather than for credit money, and is out of touch with reality and simply not realistic.

So why does the currency move from a physical currency to a credit currency? Whose credit is the “credit” of a credit currency? Why does the credit currency appear as the national sovereign or legal tender?

In fact, with the continuous development and change of money, especially after the emergence of paper money, it is more and more clear that with the development of economy and society, money will become more and more important, more and more rich in function, its performance pattern may be constantly changing, but its essential positioning and core function as a value scale, as well as its means of payment, The basic function of value storage does not change. To play a good role in the core function of money as a value scale, the most basic requirement is to maintain the basic (relative) stability of the currency value.

In order to maintain the basic stability of the currency value, it is theoretically necessary to match a country’s total monetary value with the total amount of social wealth within the sovereignty of that country, which can be protected by law and needs to be monetized (tradable). In this way, money must be separated from social wealth and become a value counterpart or character of social wealth, and money becomes a pure unit of value or value symbol. Correspondingly, gold, silver and so on once served as money in kind, must withdraw from the monetary arena, return to the source of their social wealth (practice has proved that the real supply of wealth as a currency, because its actual supply is often a serious deviation from the change severity of social wealth, it is easy to trigger serious inflation or deflation, It is difficult to maintain the basic stability of the currency value).

Thus, the launch of credit money, the monetary authority (central bank) to buy the necessary monetary reserves (mainly precious metals such as gold, as well as hard currency such as the United States dollar) to put the base currency, to determine the value of the currency, and to gain people’s trust, It is more about financial institutions placing money on debtors through indirect financing, such as loans or bond purchases. This type of money, financed by financial institutions, is in effect secured by the wealth already owned or acquired by the debtor to obtain the money it needs, which is also to assess the size of social wealth by introducing the forces of society as a whole outside the monetary authorities and to place the corresponding currency accordingly.

On this basis, the monetary authorities further select representative items and give them a certain share according to their influence on people’s lives, forming a “total social price index” to reflect the fluctuation of the value of the currency by the fluctuation of the total social price index. Various ways to regulate currency delivery to maintain the basic stability of the total price index (currency value). This makes the currency’s investment and the change of the total amount of money have a lot of adjustment space, thus forming a “monetary policy”, and together with “fiscal policy”, has become the macro-control of today’s society is a very important two policy tools.

It can be seen that the so-called “credit” of credit money is not the credit of the issuing institutions (such as the central bank) themselves, nor is the credit of the government or the finance itself, nor is it the credit of the banks that put money into the currency through loans, but the credit of the whole country, which is based on the national credit on the exchangeable social wealth of the whole country. It is the state that confers the right to issue and manage money to the monetary authorities. Therefore, the central bank issues money, not the central bank’s debt, the central bank has no commitment to the holder of any property, the currency is not supported by government taxes, tax can only be supported by government debt, simply can not support the entire currency (government credit can only be supported by government debt, rather than being a support for the total amount of the currency). The government’s acceptance of taxpayers’ taxes in currency only enhances the liquidity and credibility of the currency.

In order to maintain a country’s total monetary volume and the size of its wealth, it is necessary to receive control of the total amount of money at the national level, and to protect it with national sovereignty and law, without dispersing it to civil society organizations. Therefore, the credit currency also becomes the country’s “sovereign currency” or “legal tender”.

Of course, money also functions as a medium of exchange and a means of payment. Therefore, it is necessary to make use of various technical means, constantly improve the performance pattern and mode of operation of money, and continuously improve the efficiency of currency operation, reduce the cost of its operation, strengthen the supervision and control of risk. However, no matter how the performance pattern of money changes, its essential positioning and core function can not be changed, the purpose of financial services for the real economy can not be changed.

Having clarified the essential attributes, development logic and fundamental requirements of money, it is not difficult to draw the following four conclusions, namely, the “three difficultones”:

A. “Denationalization of money” is difficult to achieve

In the absence of national sovereignty and independence, the lack of national sovereignty and legal protection of wealth corresponding to try to replace the national sovereignty currency, promote the “denationalization of money” (Hayek vigorously pushed), in violation of the law of monetary development, not progress but backward, must not be achieved on the ground.

B. “Network cryptocurrencies” are difficult to become currencies

Compared with the principle of gold design, strictly limit the total amount and stage supply, lack of national sovereignty and legal protection of wealth corresponding to the network of cryptocurrencies (such as Bitcoin, Ether, etc.), contrary to the basic logic of credit money, its currency is difficult to maintain basic stability, easy to rise and fall, so it is difficult to become a currency in circulation, Can only become a special digital asset, can be used for speculation, or as a network community (business circle) dedicated currency, but can not replace or subvert the national sovereign (statutory) currency to become a super-sovereign currency! Engaged in this digital asset speculation, the risk will also be very prominent! The conduct of open futures and derivatives trading and public private placement of funds, etc., with such network cryptocurrencies as the target, must comply with relevant financial regulations and laws and regulations.

Such network cryptocoins too emphasis on privacy protection, difficult to meet financial regulatory requirements, easy to use for illegal transactions, must strictly monitor the use of fiat currency to buy and sell such cryptocurrencies compliance, in particular, to emphasize the use of legal tender in the process of trading encryption currency “original name, original currency, original account access” principle, Prevent the sale and purchase of cryptocoades as an intermediary and means to evade foreign exchange, transfer assets, commercial bribery, terrorist transport, etc.

C. Tokens can only be linked to a legal tender equivalent

It needs to be made clear that in cases where a country is only allowed to circulate the only legal currency, it does not mean that the existence of “tokens” that are given special rights and obligations is not permitted, such as “game coins” for entertainment venues, meal tickets (cards) in some unit canteens, shopping vouchers (cards) in some shopping malls, points for e-commerce platforms or “tokens” “And so on. But such tokens must be used within the specified scope, and only the original currency in and out, its transfer, gift should also be controlled, to prevent it from becoming a commercial bribery, corruption and bribery tools.

Even if the use of new information technology such as blockchain to introduce a stable currency linked to the single currency equivalent, no matter how its performance patterns and mode of operation changes, the same can only be its linked currency “token”, can not become a real currency, can not replace or subvert fiat money, must accept the basic supervision of tokens!

In fact, so far, a variety of digital tokens linked to the legal tender equivalent, in addition to the main use of various network cryptocurrencies transactions, did not play the kind of subversive role promoted by its issuers, the practical application of the scene is limited, compared with fiat money, did not show a clear advantage, many of the life is not long.

D. The idea of a super-sovereign currency linked to a basket of currencies is difficult to succeed

If it is possible to launch and play a role in the “cyber cryptocurrency” and the stable currency, which is only linked to the single legal currency equivalent, then it is envisaged that a new “non-nationalized currency” with a combination of a basket of currencies to create a new “non-nationalized currency” without borders and sovereignty is bound to compete with the sovereign currency, and may not be co-enserved with the sovereign currency. This is simply not realistic in the case of national sovereignindependence being difficult to eliminate! Even the IMF has stepped in to create a super-sovereign eSDR.

So Mark Zuckerberg’s testimony doesn’t speak of Libra’s key issues, and it’s hard to be convincing to cover up the shocks and risks of trying to create a super-sovereign currency by just the potential benefits of digital finance innovation (not certainty).

Author: Wang Yongli, Chief Economist, Shenzhen Haiwang Group, former Vice President of Bank of China

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