Will Libra Usher in an Era of Digital Currencies?

Facebook’s plans for a digital currency called Libra have aroused considerable attention. In June，Facebook and 27 partner companies officially announced their plan to launch Libra in the first half of 2020. They said the digital currency – to be managed by a nonprofit institution – would have numerous advantages such as low price volatility and lower transaction costs. Meanwhile，an already established player in digital finance，Bitcoin，has seen its price soar this year as the cryptocurrency market heats up. Does this herald a new era of digital currencies and what effect will Libra have on financial markets?

At a roundtable discussion organized by China Forex，Chinese economists Wang Yongli，former vice president of Bank of China and chief economist of the Neptunus Group，and Peng Wensheng，vice president of China Everbright Research Institute and global chief economist of Everbright Securities，shared their opinions on the prospects for Libra and other cryptocurrenices. The conversation，which follows in edited form，was moderated by Zhong Wei，deputy editor at China Forex.

Zhong Wei: First，I’d like to welcome our two guests. Since the launch of Bitcoin and Ethercoin，there has been considerable interest in digital currencies. The enthusiasm has extended from cryptocurrency mining to blockchain technology development and cryptocurrency speculation. Many of the terms and definitions in this sector – such as digital currencies，digital assets，and virtual currencies –are similar but not necessarily identical. Could you help us in clarifying some of the terminology?

Wang Yongli: Bitcoin and other web-based cryptocurrencies，without being pegged to any legally protected social wealth， cannot retain stable values.  Whether they are called “coins” or “currencies,” they cannot become a real currency. At best they can be treated as “virtual assets” with highly volatile prices.

The value of a currency is determined by its overall concept and functions. It is essential for a currency to maintain stability. This can be achieved only by making the total amount of the currency in a country (or region) correspond to the total amount of the social wealth that can be protected by law within this territory. In this way，a physical currency is turned into pure credit money. The credit refers to neither the credit of the issuer (such as a central bank) nor that of a government (because it is not guaranteed by tax). Instead，the credit of the currency is supported by the wealth of society as a whole and closely connected with a nation’s sovereignty and laws. Credit money is also called sovereign money or legal tender.

Now that it is clear what credit money is and where it originates，it can be figured out what a currency is. That is the clue to the question whether Bitcoin or Libra is in fact a currency.

Peng Wensheng: Currency is defined by the Financial Crimes Enforcement Network (FinCEN)，a bureau of the US Department of the Treasury，as a jurisdiction’s coin and paper money that is designated as legal tender for that jurisdiction and is customarily used and accepted as a medium of exchange in the jurisdiction. On the other hand，a virtual currency is a medium of exchange that operates like a currency in some environments but does not have all the attributes of a real currency. Nevertheless，there is not a clear distinction among virtual currencies，electronic currencies and digital currencies as far as everyday use is concerned. Some Chinese documents even equate virtual currencies with game tokens such as Tencent QQ coins. In a narrower sense，a virtual currency ranges from centralized and decentralized virtual currencies to electronic currencies (e-currencies). The Committee on Payments and Market Infrastructures of the Bank for International Settlements (BIS) defines the latter as the value stored electronically in a chip or a hard disk. The unit of account for e-currencies is the same as that of central bank or commercial bank money. It is also convertible at its face value and redeemable in cash.

Digital currencies are virtual currencies issued through technology such as the blockchain and digital encryption algorithms. They can be either decentralized or centralized.In this sense，the much-discussed Bitcoin and Ethercoin are digital assets rather than digital currencies. They do not have the basic functions of a currency，except for a few uses in the area of payments.

Zhong Wei: Bitcoin，the most influential cryptocurrency so far，was created on a blockchain foundation. Ex-Federal Reserve chair Janet Yellen has described it as a “highly speculative asset.” Warren Buffett，the third-wealthiest person in the world in 2019，likens Bitcoin to the 17th century speculative bubble known as “tulipmania” – one that ended badly. Are there any essential differences between Bitcoin and the Libra? Why has there been so much concern over Libra?

Wang Yongli: Cryptocurrencies such as Bitcoin have been subject to a huge degree of price volatility，owing to the lack of direct support from legally protected wealth. It can hardly become a real currency and differs essentially with other “stable coins” backed by reserve currencies. For example，USDT is so valued as to mirror the US dollar price，and Libra anchors its value to the price of a basket of national currencies. Nevertheless，these “stable coins” are still the token of legal tender. There is little possibility they will become universal currencies.

So why has Libra attracted so much anticipation? That is because it is linked to a basket of national currencies，instead of being a substitute for a single national currency. It appears to be a super currency with no set borders. Additionally，the world’s largest social platform Facebook is taking the lead in this project. People tend to see the 2.7 billion Facebook users as potential Libra users.

Peng Wensheng: Bitcoin is generated on specific，pre-set rules，so its supply is not infinite. Since it is not endorsed or supported by any institution with its own assets，the trust in Bitcoin is mainly from the trust in contracts and algorithms. Bitcoin itself is rather a kind of digital asset than a measure of stored value. Its price is determined by supply and demand.

Libra，however，is meant to be a derivative of a basket of national currencies. Even before its introduction，it has generated a great deal of attention. In addition，Libra has the advantages of scale and better technology as Facebook is a technology giant with a large number of users.

If Libra is to become a real currency in the future，it needs to become a widely accepted form of payment. Afterwards，it must develop its stored value function. That is the key driver of acceptability. Usually something starting from scratch like  Libra cannot progress fast at first，but the economies of scale from Facebook cannot be underestimated. Another crucial factor for Libra’s development is the attitude of regulators towards finding a balance between innovation and regulation.

Zhong Wei: Initial coin offerings link cryptocurrencies with financial technology，such as artificial intelligence，blockchain，cloud computing and big data technology. Can technology create credibility for digital currencies? Can blockchain convince the public that cryptocurrencies are highly efficient and cost effective – and therefore trustworthy?

Wang Yongli: Since the financial sector first came into being，advanced technology has been used to improve efficiency，reduce cost and control risk. The transformation has taken currencies beyond their physical limitations as tangible assets to credit-based，digital money. Presently，cash takes a decreasingly smaller proportion of the monetary aggregate.

Yet there is an “impossible trinity” – or insurmountable contradictions – among decentralization，high-efficiency and security. Bitcoin，