Jay Zhou is the co-founder of Loopring, a decentralized crypto exchange. He is a specialist in online payments, h aving worked in cross-border payment at PayPal. In addition to his work with Loopring, Jay currently provides blockchain tech-related support and guidance to the Chinese Smart Contract (Ethereum) community and mentors a blockchain course at Stanford University. He spoke to Blockchain Asset Review on Facebook’s Libra and how it is the most comprehensive commercial application of blockchain based on the Satoshi Nakamoto’s 2008 White Paper. He also believes that Libra will also become a global currency in the long-term and how the pegging mechanism of the digital currency is modeled on the HK dollar.
By Tsering Namgyal
Q: How will the US react to Facebook’s issuance of Libra coin? Where do you think Libra will be popular?
A: First of all, the Libra white paper does not mention anything about the United States. There is not a single reference to the dollar, US regulatory system or legal structures. This is ironic because the founding members of Libra come from an American company. In the past, Soros-sponsored hedge funds had caused trouble in the United States and were warned by the United States government for their unconventional (and unethical) practices. In other words, the hedge funds could operate in other countries but were banned in the US. Because of this, Soros had nearly destroyed the pound and some had blamed his funds for triggering the Asian financial crisis two decades ago. Similarly, Libra will not be popular in the US, though it will likely go down well with other countries, especially those with unstable currencies.
Q: Will Libra become an independent currency over time?
A: Libra’s white paper, and their reserve assets and operating models say they are based off gold, euros and the Hong Kong dollar without a single mention of the US dollar. Early use of several currency deposits, as well as credible government short-term bonds were used as Libra’s reserve assets. Libra also aims to establish stability and reputation, but it will transform into a completely open system over time.
In other words, in the early stages of replacing the fiat currency with Libra, we need to guarantee credible reserve assets, but gradually will form its own value system. In the future, Libra will decouple from reserve assets and become a new independent world currency. This is similar to what happened with the US dollar and how it delinked with gold because of the need for more flexibility.
Q: How does Libra stablecoin peg mechanism work? Is it modeled on HK dollar?
A: Libra can be understood as modeled on Hong Kong dollar peg. Hong Kong does not have a central bank. Banks can issue money directly, but if you want to issue Hong Kong dollars, you must pay a fixed percentage of the US dollar to the Hong Kong government. Libra will be the same in the next few years. The global agencies can obtain Libra by paying fiat currency to Libra. Then these organizations, like market makers, can carry out a two-way exchange between fiat currency and Libra with ordinary users.
It should be noted that Libra’s reserve assets will not be based off a single currency. Hence, the exchange rate is not solely the rate of the US dollar and your country’s fiat currency, but a basket of exchange rates. But the dollar will still occupy a large portion of the entire reserve thus continuing to stimulate the exchange among global users. If the development is relatively rapid, the currencies of small countries may accelerate the depreciation or disappear, some governments may even accept Libra to pay taxes and expenses.
Q: Is Libra similar to Bitcoin?
A: Libra has a very similar mission with Bitcoin. When we read the Libra white paper, it is as if we are reading an expanded version of the 2008 Bitcoin white paper; it’s almost as if the two came from the same group or team.
If the white paper on Bitcoin in 2008 was to use a blockchain approach to create a technical currency that transcends sovereignty, then today’s Libra white paper is actually a comprehensive commercial application based on blockchain as proven by Bitcoin. This is similar to the trending 5G network, starting from a long-term test of one or two base stations and then entering the large-scale commercial phase.
Q: What problem is Libra trying to solve?
A: Bitcoin and Libra are both trying to solve the same problem, which is high transaction costs of daily micro-payments. This problem hinders financial inclusion around the world and explains why amongst other things, there are 2bn people in the world still unbanked. Micro-payments in developed countries such as the United States must pass through banks and credit card systems making transaction costs very high.
This is not the case in China as this problem has been solved by the implementation of mobile payment. China’s mobile payment can maximize efficiency by transferring a red envelope, while the United States has to mobilize their bank settlement systems in order to transfer funds. Because of these problems and the delay of mobile payments by traditional financial institutions, it has directly stimulated the birth of Bitcoin and Libra.
So what do we reflect on, what are we losing after we gain the advantage of mobile payment?