This article compares the characteristics of Facebook Libra and the central bank's DC/EP mechanism

Original title: "TokenGazer | DCEP vs Libra: Digital Currency Competition in the Context of Globalization"
Author: TokenGazer

Libra kicks off

Libra's mission is to build a simple, borderless currency and financial infrastructure that serves billions of people. Libra consists of three parts that will work together to create a more inclusive financial system:

• It is built on a secure, scalable and reliable blockchain;

• It is backed by a reserve of assets that give it intrinsic value;

• It is governed by the independent Libra Association, whose mission is to foster the development of this financial ecosystem.

schedule:

Since Facebook officially announced Libra, it has triggered a huge discussion about global stablecoins due to its broad user base and potential financial impact. The main concerns can be summarized as follows:

Issuance mechanism and price stabilization mechanism

There are three main ways to issue digital currency stablecoins: 1) Issued at par based on a certain anchored liquid asset; 2) Issued as a share of an ETF (Exchange Traded Fund); 3) Based on the issuer's own credit endorsement. Libra's original plan was based on a basket of stable assets: US dollars, euros, pounds, yen, Singapore dollars, etc. But Marcus previously stated that Facebook's cryptocurrency plan Libra will likely create multiple cryptocurrencies based on a single fiat currency (subdivided into US dollar stablecoins, euro stablecoins, and British pound stablecoins, etc.), rather than the original plan based on a basket of currencies.

Judging from regulatory feedback, including the G7's opinion on GSC (Global Stablecoin), the mechanism of stablecoins must ensure fair and transparent pricing mechanisms and secondary market operations. This includes how market makers are used in the secondary market to ensure liquidity and price stability. Libra uses a basket of stable assets and may also face problems such as front running, speculation and arbitrage opportunities, and potential conflicts of interest when its asset portfolio is rebalanced.

According to the Libra White Paper, the fiat currency paid by users will be invested in "a range of low-volatility assets, including cash and government currency securities provided by stable and reputable central banks." However, users cannot enjoy the interest generated by Libra's investment assets. The interest returns on reserve assets will be "first used to pay the operating expenses of the association" and then used to "pay dividends on initial investments to early investors in Libra investment tokens."

Because the global economy is always in a state of inflation, and holding Libra does not enjoy interest, long-term holding of Libra will lead to a decline in asset purchasing power, which is not a wise choice. However, since Libra adopts a 100% reserve system, the value of assets held is relatively stable. This nature will make Libra be used in some countries with social unrest and currency depreciation, and even replace some legal currencies. At the same time, holding Libra tokens will also enjoy many benefits, such as convenient online payments, cheap cross-border transfers, etc.

From the perspective of the credit system, the fiat currency deposit portion of Libra's reserve assets is riskier than individual user deposits, because according to the FDIC U.S. Federal Deposit Insurance Regulations, each bank and each depositor's ordinary account receives a completely risk-free insurance limit of US$250,000 from the Federal Reserve, while Libra's deposits will have to bear the credit risk of the bank itself.

Libra Progress

Since the official announcement of the Libra project in June this year, developers have released multiple blockchain browsers, such as Libranaut, Libraview, Librabrowser, and Libexplorer. Some projects have also integrated the Libra testnet into their wallets, such as ZenGo. In addition, we have also seen other blockchain projects integrate the Move programming language into their systems, such as Solana.

Steady technical development progress and open and transparent dialogue are two key factors that have led to increasing developer interest in the Libra project. As Libra Core moves towards the mainnet, its development roadmap has also been updated in a series of ways.

Above: Libra Mainnet Milestones

Testnet follow-up work

The main purpose of Libra launching the testnet is to make it easier for the development team to troubleshoot, diagnose and resolve software corner cases, thereby quickly improving Libra Core. The testnet has a range of Libra network features and also provides early access services for developers. In the first milestone stage, the Libra Association expects to invite 5 partners to deploy full nodes on the network, and will launch the Libra mainnet in the fourth milestone stage. The Libra Association expects that there will be 100 partners running Libra nodes by then.

Libra Pre-Mainnet

As the Libra project moves toward the mainnet milestone, it is necessary to keep the testnet running while bringing more nodes online. To make this work, the Libra team created a temporary mainnet environment called "Pre-Mainnet". At this stage, only partner nodes can access Pre-Mainnet and allow them to connect to each other. A few partners have deployed nodes and can also support communication with each other. Libra expects to bring more partners online soon and ensure that the Libra network can meet strict performance benchmarks and overall system stability requirements before officially opening access to the new one.

Libra Governance

Libra adopts a regulatory entity composed of diverse independent members, which exists as a non-profit organization registered in Geneva, Switzerland. This entity is also responsible for the management of Libra's reserves. Facebook's own Calibra, as one of Libra's members, participates in Libra's governance. Its diverse and global membership brings a series of challenges to Libra.

On the surface, the Libra Association is a decentralized organization, but in fact many members have a good relationship with Facebook, and each member separates its own responsibilities from Libra. Facebook's goal is to develop 100 members, which are distributed in different regions and should include non-profit organizations and academic institutions in addition to companies. Facebook will maintain its leadership role in the Libra Association until the end of 2019, but the association has the final decision-making power through voting. The Council is composed of representatives of the association members, and the Council elects the board of directors.

Clarity of membership and rights and obligations. Libra's founding members come from multiple countries and industries. Different business lines and positions in the financial system determine that the demands of each member are different. Facebook has repeatedly emphasized that it is only a member of Libra, but it can be seen from the two US hearings that Facebook undoubtedly assumes a leading position in the entire project. This difference in actual identity, how to express it in the process of power and governance, is one of the issues that makes the US political circle feel uncomfortable.

Impact on public policy

The asset structure and usage of stablecoins themselves will have a profound impact on the monetary policies of major countries using them.

Libra is currently designed to consist of a basket of assets, so the interest of Libra itself will be affected by the interest structure of its basket of assets. If a country's currency fails to become part of Libra's basket of assets, or accounts for a very small proportion, and the country is the main user of Libra, then the adjustment of the country's monetary policy, the adjustment and transmission of the central bank's interest rate will inevitably face the possibility of failure.

This situation is more serious in regions where the country's currency and exchange rate are relatively unstable. TokenGazer's research on Bitcoin Google search index (see "TokenGazer | Search Index Analysis: Bitcoin May Be a "Relative Safe-haven Asset") shows that in countries with severe currency depreciation and low economic stability, the search and interest index for Bitcoin is higher. When a country clearly shows a trend of currency depreciation, the Bitcoin search index of that country (region) usually rises significantly. This search feature of Bitcoin is very likely to appear in global stablecoins.

In the case of a stablecoin using a single sovereign currency, there is no impact of monetary policy transmission failure in the country where the sovereign currency is located, such as China and the central bank's digital currency DCEP, but it may also face the possibility of financial disintermediation and money multiplier failure. Therefore, DCEP adopts a two-tier governance structure. When users convert bank deposits into DCEP, the user's asset side writes down the bank deposit, the licensed bank's liability side writes down the user's bank deposit, the asset side writes down the reserve, and the central bank's liability side increases DCEP. In terms of the overall on-balance sheet assets, it is a process of shrinking the balance sheet. The overall impact of this process on finance has not yet been clearly analyzed.

The flow of funds for users to purchase Libra will be significantly different from that of DCEP. Libra is more likely to be an asset transfer between different accounts in a bank account, but there is a very likely trend that the main depositors of banks will change from individuals to institutions, as fiat currency is transferred from personal accounts to institutional accounts and exchanged for Libra. This change will also have a huge impact and change on factors such as customer stickiness and sensitivity to interest rate changes, which may have a huge impact and change on the bank's business model and profit-making methods.

Regulation

Libra is positioned as a global stablecoin. From the perspectives of the G7, the US government, member businesses, and host countries, Libra faces a multi-dimensional regulatory environment:

1. Because Libra's basket of assets makes the issuance of Libra similar to an ETF, and Libra's own reserve asset management, risk control, and potential conflicts between the pursuit of profit model and asset security have made the U.S. Securities and Exchange Commission (SEC) pay close attention to Libra;

2. As a global stablecoin, Libra will most likely play an important role in international remittance payments. A series of existing standards and regulatory practices apply to Libra: CPMI-IOSCO's Principles for Financial Market Infrastructures advocate a safe and stable payment and settlement environment, risk quantification of multilateral markets and participants, and network security of financial market infrastructure, which will have an impact on Libra participants;

3. The Financial Action Task Force on Money Laundering (FATF) provides an effective framework for combating money laundering, terrorism-related financial activities, and other illegal financial activities. FATF also proposes global unified regulatory standards for digital currency service providers.

4. The Basel Committee on Banking Supervision has also carried out a series of work on digital currency assets, including the continuous assessment of banks' services and risk exposure to cryptocurrency assets;

5. The Financial Stability Board (FSB) will also work with multiple independent regulatory bodies to examine potential loopholes in the current regulatory system when dealing with digital currencies and global stablecoins.

6. Due to their different businesses and countries, each Libra member may face regulatory requirements in the country where their business is developed and in specific industries, including payment, custody, etc.

Different countries also hold different views on Libra:

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France, the rotating chair of the G7, has asked European Central Bank executive board member Coeure to set up a G7 special group to conduct in-depth research on cryptocurrencies and digital currencies such as Libra.

During the G7 Finance Ministers and Central Bank Governors Meeting, French Finance Minister Bruno Le Maire said, "The sovereignty of countries cannot be jeopardized. The recent announcement of Libra was clearly one of the key concerns of the participants, and everyone agreed that it was necessary to act quickly."

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German Finance Minister Olaf Scholz said Facebook's plan "does not seem to be well thought out," and there are data security issues. "I believe we must act quickly and (Libra) cannot go ahead without resolving all legal and regulatory issues."

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Haruhiko Kuroda, governor of the Bank of Japan, said that if Libra is to be used globally, countries must seek to reach a global coordinated response mechanism. This is not something that can be discussed by the G7 central banks alone.

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In the United States, Federal Reserve Chairman Powell said at the U.S. Congress's semi-annual monetary policy hearing that the Federal Reserve supports responsible and compliant innovation, but Libra has raised many serious issues regarding privacy, money laundering, consumer protection and financial stability. He does not think the project can move forward without addressing these issues. Powell also mentioned that the Federal Reserve has established a working group to track the project and is coordinating with other central banks around the world.

U.S. President Donald Trump has said unregulated crypto assets could facilitate illegal behavior, including drug trafficking and other illicit activities. If Facebook and other companies want to become banks, they must seek a new banking charter and be subject to all banking regulations like other banks.

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Alexei Moisseev, Deputy Minister of Finance of Russia, said that the Russian Ministry of Finance will not make special regulations for Libra. "No one will ban it. On the other hand, in Russia, no form of cryptocurrency will become legal tender. The ruble is our national currency and all operations should be done in rubles. On the contrary, cryptocurrency will have a status similar to that of foreign currency. People can buy, sell, and keep it, but they cannot use it to pay." In short, Libra will not be banned. Libra has a status similar to that of foreign currency in Russia, but it cannot be used for payment.

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ECB Executive Board member Mersch said Libra could reduce the ECB's control over the euro, weaken the transmission of monetary policy, and reduce the euro's international influence. It depends on the extent of Libra's licensing and the weight of the euro in Libra's reserves.

In September 2019, Germany and France's near-banning attitude towards Libra had a great impact on Libra. French Minister of Economy and Finance Bruno Le Maire said about Libra that they would not allow Libra to develop in Europe. German Finance Minister Olaf Scholz said at a panel discussion in Berlin that Facebook's cryptocurrency Libra would be explicitly rejected, and he also pointed out that "we cannot accept any parallel currency." At the same time, German regulators are reportedly currently working with European and other international allies to "ensure that stablecoins do not replace fiat currencies."

social contact

We used "Facebook Libra" as the keyword in Twitter and collected the latest 500 tweets. After data filtering, we obtained the following analysis data.

Libra Twitter Sentiment Analysis:

Libra word cloud:

In the sample, 35% of people have a positive attitude towards Facebook Libra, 49% remain neutral, and the remaining 16% have a negative attitude. Compared with the sentiment analysis results of DCEP, the data is more scattered and the attitudes are more polarized. In the Libra word cloud, the names of Mark Zuckerberg and Jack Dorsey are particularly prominent, and New and global are also high-frequency words.

Central Bank Digital Currency DCEP

DCEP, the full name of which is Digital Currency Electronic Payment, means digital currency and electronic payment tools.

DCEP issuance mechanism

Unlike Libra, which uses a basket of currencies as its value support, DCEP is a complete substitute for RMB banknotes and coins, with their functions and attributes.

The central bank defines DCEP as a digital payment tool with value characteristics. The so-called value characteristics simply mean that value transfer can be achieved without an account. Like paper money, DCEP does not require an account to make payments, transfers, and other value transfers.

DCEP is a legal tender with unlimited legal compensation. According to the Regulations of the People's Republic of China on the Administration of Renminbi, no unit or individual may refuse to accept RMB in the form of standard terms, notices, declarations, notices, etc. No unit or individual can refuse to accept DCEP.

Mu Changchun, director of the Digital Currency Research Institute of the People's Bank of China, said in his Get course that the DCEP issuance process is the same as paper money. The issuance process of paper money is that after the People's Bank of China prints it, commercial banks pay the People's Bank of China a currency issuance fund, and then transport the paper money to the outlets, and then people go to the outlets to exchange it for cash. The exchange of digital currency will still maintain this structure: commercial banks open accounts at the central bank, pay 100% of the full reserve, and individuals and enterprises open digital wallets through commercial banks or commercial institutions.

For users, they don’t even need to go to a commercial bank. They just need to download a wallet app, register and use it - they can receive payments from others, or bind their bank cards to exchange digital currencies.

In this process, DCEP replaces M0, that is, replaces paper money, and cannot be M1 and M2. This means that the central bank digital currency held by the public is still a liability of the central bank, which is credit-guaranteed by the central bank and is legal tender.

DCEP's two-tier operating system

The issuance of digital currency by the People's Bank of China is a very complex project. China has a vast territory and a large population, and the economic development, resource endowment and population conditions of various regions vary greatly. In order to cope with this diversity and complexity, DCEP adopts a two-tier operating system.

The upper layer of the DCEP operating system is the central bank to commercial banks, and the lower layer is commercial banks or commercial institutions to the public. The adoption of a two-tier operating system will help to fully mobilize the enthusiasm of the market, use market mechanisms to achieve resource allocation, mobilize the enthusiasm of commercial banks and commercial institutions, and give play to social forces.

The two-tier operating system applies not only to the exchange of DCEP itself, but also to the research and development of technical routes. The People's Bank of China is open to the technical route of DCEP and will not interfere with the technical route selection of commercial institutions. As long as the central bank's requirements for concurrency, customer experience, and technical specifications are met, commercial institutions can adopt any technical route, such as blockchain technology. The People's Bank of China is technology-neutral and can adapt to any technical route adopted by commercial institutions.

This operating system can achieve system optimization, joint development, and joint operation through the competitive selection of the "horse racing mechanism", which is conducive to integrating resources and promoting innovation. In addition, the system can also allow DCEP to be promoted with the help of commercial organizations.

As of 2018, Alipay can be used in 200 countries and regions; it supports direct transactions in more than 20 currencies such as the US dollar and the British pound; and it can make cross-border payments in 38 major countries and regions around the world. WeChat Pay is also expanding rapidly. As of March 2018, it has been legally connected to 49 countries and regions, can make cross-border transactions in 20 countries and regions, and supports direct transactions in 16 currencies. The two-tier operating system can make Alipay and WeChat Pay the best way for DCEP to flow freely around the world, and provide a good boost for DCEP to become a world currency.

On the other hand, the two-tier operating system can also avoid financial disintermediation. If the People's Bank adopts a single-tier operating system, that is, the People's Bank directly issues digital currency to the public, the People's Bank will become a direct competitor of commercial banks. In this case, the People's Bank can replace commercial banks in all financial business. But this is unrealistic, and the People's Bank cannot cope with all complex situations.

Although DCEP adopts a two-tier operating structure, which means that the People's Bank of China will not compete directly with commercial banks and commercial institutions such as Alipay and WeChat Pay, the launch of DCEP will undoubtedly strengthen the People's Bank of China's control over currency circulation. In addition, its higher security and convenience, as well as a wider range of usage scenarios (such as the ability to transfer money without an Internet connection) may lead to the "deposit migration" of commercial banks, which will affect the stability of the financial system.

To this end, the central bank will impose restrictions on the use of DCEP, increase the cost and institutional friction of bank deposits in exchanging DCEP. In addition, in order to guide holders to use DCEP for retail business scenarios, the central bank may also take corresponding measures. These measures may include:

Time and amount limits. The central bank may set transaction limits and balance limits based on the different levels of DCEP accounts. It may also set daily and annual cumulative transaction limits and stipulate large-amount reservation exchanges.

Transaction fee restrictions. If necessary, the central bank may implement tiered charges for DCEP exchanges, with no charge for small-amount, low-frequency exchanges and higher fees for large-amount, high-frequency exchanges and transactions.

These measures can also play a role in combating money laundering.

Regulation of DCEP

The public has a demand for anonymous payment. In the past, paper money could meet the public's anonymous demand, but current electronic payment tools cannot meet the anonymous demand - Internet payment and bank card payment are closely tied to the traditional bank account system and are tightly coupled with the account.

At present, the information about the account coupling method of DCEP is still unclear. According to the previous speech of Fan Yifei, deputy governor of the People's Bank of China, DCEP may adopt the form of loose account coupling. If DCEP is based on the form of loose account coupling, it will greatly reduce the dependence of transaction links on accounts or even eliminate the need for accounts, which can not only maintain the properties and main value characteristics of cash, but also meet the public's requirements for portability and anonymity.

In this case, while facilitating public payments, DCEP also needs to maintain a balance, that is, it cannot facilitate crime. In terms of anonymity, the central bank's digital currency must achieve controllable anonymity and only disclose transaction data to the central bank as a third party. The reason is that if there is no anonymity of the third party in the transaction, personal information and privacy will be leaked; but if complete third-party anonymity is allowed, it will encourage crimes such as tax evasion, terrorist financing and money laundering.

In the case of DCEP adopting a loosely coupled account system, the People's Bank of China can require operating institutions to asynchronously transmit transaction data to the central bank every day, which is convenient for the central bank to grasp the necessary data to ensure the achievement of regulatory goals such as prudent management and anti-money laundering, and can also reduce the system burden of commercial institutions. The People's Bank of China can use big data to carry out anti-money laundering, anti-tax evasion, and anti-terrorist financing. In other words, although ordinary transactions are anonymous, based on big data analysis of behavioral characteristics, the People's Bank of China can lock in individual money laundering behavior and true identity.

In addition, for anti-money laundering considerations, the People's Bank of China will restrict the use of DCEP. In addition to the restrictions on time, amount, and transaction fees mentioned above, Mu Changchun said that the People's Bank of China also has grading and limit arrangements for digital wallets. For example, a wallet without identity authentication can only meet daily small payment needs; but by binding an ID card or bank card, you can get a higher-level wallet; you may get a wallet without a limit by signing at the counter.

DCEP’s technical architecture

DCEP adopts a hybrid architecture, but as mentioned earlier, DCEP's hybrid architecture does not presuppose any technical route.

Mu Changchun said, "It is currently a horse racing situation. Several designated operating institutions have adopted different technical routes to develop DCEP. Whoever has a better route will eventually be accepted by the people and the market, and will eventually win the race. So this is a process of market competition and selection."

At present, there is not much information disclosed about the technical routes adopted by various institutions. However, it is worth mentioning that due to the high concurrency requirements of DCEP (the number of transactions per second must reach at least 300,000/second), DCEP does not use blockchain technology in the People's Bank layer of the two-tier operating system. The current blockchain technology cannot meet this high concurrency requirement in terms of performance. However, for the common smart contract function in blockchain technology that can automatically execute agreements, Fan Yifei pointed out that smart contracts that are beneficial to monetary functions can be considered, but smart contracts that exceed monetary functions should be treated with caution.

Social Media Reactions to DCEP

We collected the latest 500 tweets on Twitter using "DCEP" as the keyword, and after data filtering, we obtained the following analysis data.

DCEP Twitter Sentiment Analysis

DCEP Twitter Word Cloud

Sentiment analysis results show that in the sample data, 53% of people have a positive attitude towards the central bank's DCEP, 36% remain neutral, and the remaining 11% have a negative attitude. It can be observed from the Twitter word cloud that when people talk about DCEP, they tend to associate it with bitcoin, Libra, and stablecoin. New and worlds first are often used to describe DCEP. At the same time, btcvice is also a high-frequency word.

List of digital currencies in other countries

The Block, a cryptocurrency research organization, surveyed central banks in more than 60 countries and found that 18 have publicly announced the development or pilot plans of state-issued digital currencies. One of the earliest examples is Ecuador’s digital currency, which was announced in 2014 and officially launched in 2015. According to the Cato Institute, a research organization, Ecuador’s digital currency project was eventually closed in 2018 due to a lack of users and payment volume.

As can be seen in the chart above, at least five countries/central banks have announced and issued their own digital currencies. The remaining 13 are developing or launching pilot programs with third-party blockchain software providers. The above chart does not include countries that have announced that they are "considering" issuing digital currencies or are "studying" digital currencies.

Summarize

Libra's issuance mechanism, membership composition, and global customer base have led to multiple questions from global regulators about Libra in terms of financial stability and public policy, governance, anti-money laundering, operational stability, and other aspects, and its progress has suffered a major setback. On the contrary, China's central bank's DCEP is relatively clear in terms of monetary policy and regulatory framework. On social media, the evaluation of Libra is relatively negative, while that of DCEP is relatively positive.

Judging from the current global payment infrastructure and business reality, there is almost no emerging payment and transfer system with independent architecture for the global market. Limited by complex international supervision and legal frameworks that vary greatly from country to country, current cross-border payment transfers and settlements still rely on FEDWIRE (Federal Electronic Funds Transfer System) and CHIPS (Clearing House Interbank Payment and Settlement System) that support global settlement of US dollars. Only some decentralized distributed ledger technologies such as Bitcoin and Ethereum are applied to a few marginal scenarios and businesses. New infrastructure that can effectively improve the efficiency of current international transfers and settlements will be a huge blue ocean.

The global customer base of Facebook and Libra members is a strong backing for Libra to serve as this new international infrastructure. In contrast, DCEP and China's payment business and blockchain infrastructure have relatively few global customer groups. The internationalization path of DCEP is not clear, and perhaps it can only be explored in the process of continuous progress.