Li Lihui: Potential risks of stablecoins and countermeasures

On December 28, the “2021 First Digital Finance Frontier Academic Conference” was successfully held online. The conference was hosted by the Tsinghua Economic Management Digital Financial Assets Research Center and chaired by Professor Luo Mei, the director of the center. Li Lihui, former president of Bank of China and advisory member of the Digital Financial Assets Research Center of Tsinghua Economic Management, delivered a keynote speech entitled “Stable Coins: Potential Risks and Countermeasures.” This article is organized according to the content of the speech.

In recent years, digital finance has developed rapidly, and digital currency is an important part of it. We collectively refer to currency forms using digital technology as digital currencies, which can be roughly divided into legal digital currencies and non-statutory encrypted digital currencies. Non-statutory encrypted digital currencies can be divided into two categories. One is the so-called virtual currency, which generally lacks asset support and has ups and downs in transaction prices; the other is the stable currency that is discussed today. Stable coins claim to anchor a sovereign currency, backed by financial assets, and can maintain the stability of value.

Li Lihui: Potential risks of stablecoins and countermeasures

The stablecoin market has developed rapidly and is highly concentrated. According to Coingecko’s data in July this year, the total market value of global stablecoins exceeded US$110 billion in early July. The top 3 stablecoins accounted for 90% of them, of which USDT accounted for 64 billion U.S. dollars, USDC was approximately 26 billion U.S. dollars, and BinanceUSD was approximately 11 billion U.S. dollars. At present, countries around the world lack clear laws and regulations on stable currencies, effective financial supervision, and credible external audits.

The largest financial market is in the United States. Let’s focus on the dynamics of American stablecoins. The first is that the US President’s Financial Markets Working Group recently published a “Stablecoin Report” . Currency or other digital assets that refer to the stable value of assets. Stablecoins and their activities have risks of speculative digital asset transactions, which may cause systemic financial risks.

In response to these situations, the “Report” recommends that certain activities in the stable currency mechanism should be defined as systemically important payment clearing and settlement activities as soon as possible and included in the existing regulatory system. In addition, the existing laws of the United States should be supplemented as soon as possible, and the activities of custodial wallet providers and stable currency issuers to comply with the affiliation of commercial institutions are restricted in order to effectively control the various risks of stable currency and related activities.

Li Lihui: Potential risks of stablecoins and countermeasures

The second development is Facebook’s launch of Diem, an alternative to Libra, from the past aiming at a basket of currencies to a single anchor dollar. The founding organization of Diem has a global user base of more than two billion. Once it is approved, it is likely to quickly develop into a super-sovereign global currency, penetrate the economic life of the common people, fully compete for traditional financial services, and form a transcendence The multinational financial unicorn of banks may have a major impact on the existing financial system and monetary system.

Since Diem’s ​​basic support is still the US dollar, it may also become a tool for the United States to continue to promote the hegemony of the US dollar currency in the digital economy era. This may have an impact on my country’s digital renminbi’s entry into the international market and affect the process of renminbi’s internationalization. It remains to be seen whether the plan will finally be approved. It is worth noting that a vice chairman of the Federal Reserve mentioned in a speech on June 29 that private institutions should support the issuance of stable coins with a reasonable structure and believe that it will support it. The role of the US dollar in the global economy. 

Li Lihui: Potential risks of stablecoins and countermeasures

Proponents of stablecoins believe that stablecoins may be widely used by households and businesses as a means of payment. If stablecoins are well-designed and properly regulated, they can support faster, more efficient, and more inclusive payment options. But at the same time, we must also recognize the risks of such new financial products.

my country is a big economic country, and implementing a higher level of economic and financial opening, including the opening of the capital market, has become a basic national policy. Although my country explicitly prohibits the trading of virtual currencies including stablecoins, stablecoins based on distributed architecture and decentralized protocols may still have an impact on my country’s financial market. Focusing on the future, we should actively cultivate the core competitiveness of digital finance, actively respond to the impact of decentralized finance, protect the interests of investors, maintain the stability of the financial market, and ensure the sustainable development of financial innovation.

There are three specific suggestions:

First, make the digital renminbi the world’s best central bank digital currency. Further improve the underlying technical structure and application scenario design, and strive to maintain the leading position of my country’s central bank digital currency experiment in the world. Building the world’s best central bank digital currency is not only conducive to promoting inclusive finance to effectively respond to the impact of virtual currencies on the current monetary system and financial system, but also conducive to promoting the balance and coordination of the global monetary and financial system in the digital economy era.

Second, establish a financial security barrier with a distributed architecture.

Digital currencies and other decentralized financial tools based on new digital technologies are potentially disruptive. We should focus on the possible paths for new financial tools to cross the barriers of financial infrastructure under this framework, and make technical countermeasures and policy plans to build digital finance. Security barrier.

Third, establish penetrating supervision in industrial integration.

Digital technology innovation is changing the mode of financial services, gradually forming a new financial format that is interactive, cross-cutting, and intersecting. The new format calls for regulatory innovation. The digital financial supervision system should be jointly built and shared by financial supervision departments, covering all financial institutions, including scientific and technological institutions involved in financial services. At the same time, it should penetrate different financial markets and financial businesses to realize the whole process and the whole process of financial supervision. Intelligent orientation.

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