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Sep 4, 2020

The potential impact of Libra USD stablecoin on USD CBDC

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The Libra Association updated its white paper in June this year. It can be seen from the new white paper that its products and business strategies have undergone significant changes. First, it will launch a series of Libra stable coins based on a single legal currency. From this, we can predict that when Libra is launched, the most likely event is that it will first launch a USD-based Libra stable coin.

In terms of operations, it also pays more attention to compliance and communication and cooperation with financial regulatory agencies in various countries. The latest actions of the Libra Association also indicate that the compliance meeting is the focus of Libra’s business. Its recently hired chief executive officer, chief compliance officer, and the chief legal officer all have extensive experience in financial industry compliance. From this point of view, Libra has returned to its normal development track.

At the same time, in the US market, there are also very active forces to promote the development of USD CBDC. If the USD CBDC is launched, what is the relationship between it and the Libra USD stable coin? Will Libra USD stable coins be banned?

First of all, I think the two will coexist. The Libra USD stable coin will be based on the equivalent USD and issued on a 1:1 basis. Its issuance process will strictly abide by various US financial regulations, including user identity authentication and anti-money laundering. The Libra USD stable coin is a digital version of the existing USD. According to the existing regulations in the United States, since it allows the issuance and circulation of U.S. dollar stable coins like USDC and PAX, and the Libra U.S. dollar stable coins uses the same mechanism, there is no reason for U.S. financial regulation to prohibit the Libra U.S. dollar stable coin. Even if the United States issues USD CBDC in the future, it does not need to prohibit the issuance of other USD stable coins in the market. Because the essence of this USD stable coins is the USD already in the market.

So, can we conclude that the Libra USD stable coin will not pose a challenge to USD CBDC? I think it is impossible to draw such a conclusion. I always think that the Libra stable coins are nothing more than a Trojan horse. The biggest threat to the existing financial market is not its stable coins, but the Libra blockchain that supports its operation. Libra’s underlying blockchain is likely to have a disruptive impact on existing financial markets, including USD CBDC.

The Libra blockchain can technically support the issuance of multiple types of stable coins. And the Libra Association is now planning to issue a series of Libra stable coins based on a single legal currency. These series of stable coins will first include the fiat currencies in the basket of fiat currencies currently used as Libra reserves. But the digital stable coins it may support will never be limited to these few. Any sovereign country may issue its digital stable coin on the Libra blockchain. Since the Libra blockchain is available globally, various stable coins circulating on it can be obtained and used globally. Various stable coins, therefore, compete on an equal basis. If the members of the Libra Association are indeed made up of 100 members worldwide. Then these members will have a great say in the circulation and use of Libra stable coin. This naturally affects the global use of stable coins issued on top of it. Any digital stable coins, including U.S. dollars, issued on the Libra blockchain will be bound by the Libraries Association.

Since various types of stable coins compete on the Libra blockchain in an equal manner, any stable coin issuer needs to follow the market operation mechanism to establish its position in the digital currency market. Various digital stable coins compete on an equal basis, which is not particularly good news for the US dollar, which currently dominates the global market. Therefore, this will naturally also affect the market influence of USD CBDC.

For the various stable coins on the Libra blockchain, whoever can first gain more users’ use in the Libra ecosystem can establish a superior competitive position. The Libra USD stable coin has existing advantages in this regard, but this advantage is not naturally guaranteed forever. If a certain kind of stable currency is widely used because of a certain application or a certain region, it is likely to be more popular than the US dollar stable currency in the Libra ecosystem.

USD CBDC is still in the research stage. It is still unclear what underlying technical foundation it will use to support the issuance of USD CBDC. In this regard, a very crucial factor is whether the underlying technology will be developed by the Federal Reserve alone or in cooperation with other central banks, that is, using the same underlying technology infrastructure. I think it is unlikely that the Fed will adopt the first method, because that method is not essentially different from the current clearing and settlement system that supports the circulation of US dollars, so the US dollar CBDC will not bring a significant benefit. I think the greater possibility is that the Fed will use the same financial market infrastructure with some other central banks.​​ Then issue and manage their own CBDC following their respective monetary policies. Such a method can well solve the current shortcomings of legal currency in servicing cross-border transfers and transactions.

If the Fed adopts this approach, the USD CBDC will compete more directly with the Libra USD stable coins. If this is the case, then the demand for the Libra USD stable coin in the market will be greatly reduced. The reason is obvious. Now that there is a USD CBDC directly issued by the Federal Reserve, why is it necessary to use a USD stable coin issued by a private institution? If this happens, then digital currencies other than the US dollar will run and circulate in the Libra ecosystem.

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