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Us compliant stable currency management model: new currency war enters the second stage (II)

Time : 23/07/2021 Author : wjmkrf Click : + -
        On January 4, 2021, the office of the Comptroller of the currency (OCC) approved the Bank of America to use the new technology of blockchain and stable currency [1]. This article is the second in the series "the new currency war enters the second stage". In the first part, we discussed the reform plan of the entire banking system in the United States, from which we can clearly see the layout of the United States, that is, the new currency war started in November 2019, which is divided into three stages: 1) payment reform stage; 2) The stage of banking system reform; 3) This is the stage of financial reform in all walks of life. The reform of the banking system is the second and most important stage, which is discussed in the first chapter.
        If this stage has good results, the third stage will be fruitful. The bank reform proposed by OCC this time is not only a project, but also an important layout of the whole digital economy reform plan of the United States. In the past, people paid attention to the regulation and compliance of stable currency and digital token, and digital asset exchange. This reform has indeed changed the structure and operation mode of banks, and is an important new direction of the new currency war. But this is not a plan for reforming banks, but a bank reform plan for increasing US dollar liquidity. Therefore, we believe that this is a historic great change [2]. Another important topic discussed in this paper is the new compliance stable currency management model, which is an important part of the banking system reform.
        If it is not accompanied by the development of compliance and stability currency, the reform of the new banking system will fail. After Facebook released the white paper on June 18, 2019, people began to take the stable currency seriously. The world suddenly added more than 100 stable currency projects, but most of them did not enter the mainstream vision. We are still focusing on the Diem project of Facebook, mainly because the number of Facebook users is large and they are willing to take the compliance route. The series of actions of OCC in marked an important milestone, that is, bank reform. The United States is indeed engaged in a new currency war. Although the United States was not lightly hit by novel coronavirus in 2020, it has made great progress in digital finance.
        The compliant stable coin is different from the digital token and the stable coin in the coin circle (such as usdt). It has great differences in design principle and supervision. In September 2020, OCC issued an explanatory letter (# 1172, see Appendix 1 for the translation), in which the compliance stable currency management model was described very clearly. This model is a good reference for any institution that wants to issue compliance stable currency. Many of the designs are the results obtained after the OCC and other regulatory institutions of the United States spent a lot of time studying various stable currency projects. Compared with the design of Facebook Libra (later renamed Diem) stable coin project, the OCC model is much more complete, not only better than the first version of Facebook white paper in June 2019, but also better than the second version in April 2020.
        As a stable currency issued by the United States, Facebook must accept this new management model. The model takes into account all aspects, including technology, audit, real-time supervision, financial stability, liquidity, efficiency, consumer protection, etc. it helps to improve the credibility of stable currency, help the government to supervise and protect consumers, and can integrate with the current banking and financial system while maintaining the efficient operation of the system. This model is introduced in Section 2, and our analysis is discussed in Section 3. Appendix 1 provides the translation of # 1172 explanatory letter. As the requirements for compliant stable coins are much higher than those for traditional stable coins, it will have a great impact on the management and system design of stable coins.
        The operation of the financial market, the liquidity of the market currency, the management structure of the stable currency, and the design of the blockchain will all change. As mentioned in the previous article, Bank of America can join the blockchain system and handle stable coins. In addition, OCC is prepared to grant a special "national payment" license to the stable coin issuing company, which will be formally incorporated into the US dollar system. This is a major reform of the banking system. Both traditional banks and new "national payment" institutions can handle stable currencies, but they must be compliant stable currencies with the following characteristics:. There is a 1:1 dollar reserve (so any stable currency that only relies on the algorithm is not a compliant stable currency); Reserves can only be in US dollars; The reserves are all placed in the custodian institution, namely the National Bank (national banks can operate in all States of the United States, unlike state banks, which can only operate in one state); The bank shall verify at least daily whether the balance of the reserve account is always equal to or greater than the number of outstanding stable coins issued; Whether the bank (or "national payment" institution) meets the above indicators on time by the audit institution; Banks or national payment institutions need to comply with existing laws and regulations such as the Bank Secrecy Act (BSA), travel rules, anti money laundering (AML), and know your customer (KYC).
        The bank and the issuer should discuss how to work together to develop the contract. Due to the large liquidity of stable currency, the risk will also increase. Both parties need to take appropriate measures to reduce the risk. For example, the bank can audit the issuance of stable currency that is still circulating. Stable coin is similar to "pre paid debit card", which pays money first and then consumes it. In addition, in December 2020, the US Congress considered granting a special "bank" license to the issuer of the stable currency, with the purpose of strengthening the supervision of the issuer of the stable currency and regulating it by the traditional banking law (so that the issuer of the stable currency is no longer just a technology company). The United States also considers that any stable currency project operating in the United States must have a registered company in the United States, so as to effectively manage the stable currency issuer (this scheme is actually very powerful and is also an important layout of the United States).
        The introduction of stable currency in OCC # 1172 explanatory letter is very short, but it is very penetrating, which is very close to our long-term digital currency economic design. This is explained in detail below. The stable currency can only be based on the US dollar because this major financial reform in the United States is a new currency war. Since it is war, there must be strategy and tactics. The strategy is that any US supported digital economy can only use US dollars. If there are other currencies, it is impossible for the United States to fight for other currencies. The new currency war is the US dollar defense war, so only US dollars can be used. Even if it is a digital currency that includes US dollars but is based on a basket of currencies, the United States will not agree.
        In 1944, at the Bretton Woods conference, the British representative proposed to use a basket of currencies (including the US dollar) as the world's reserve currency. However, the United States did not agree. It was this conference that established the international monetary system centered on the US dollar after World War II. The United States did not agree 77 years ago and will not agree now. The reason is very simple. If a basket of currencies is used as the world's reserve currency, and the US dollar is only one of them, the advantages of the US dollar will be greatly reduced. These are discussed in the report interpretation of the impact of digital currency on global reserve currency: digital currency of cross-border payment: the impact of macro finance (VII) [15] of IMF in October 2020.
        Now, there is a new type of currency war, and there are also tokens of the underground economy to compete. If bitcoin is a currency, it will become the world's sixth largest liquid "currency" in early December 2020, surpassing the liquidity of the previous world reserve currency sterling. This shows that the world has changed, and the US dollar defense war in 2021 is more complicated than the situation faced in November 2019. In this complex environment, it is even more impossible for the United States to support a basket of legal currencies. This is the view we have been advocating since June 2019. At that time, we thought that if Facebook's stable currency was not linked to the dollar, the United States would remove it the next day. The stable currency of the US dollar is the pioneer and moat of the US dollar. The US financial system can only accommodate the US dollar.
        Moreover, the stable currency reserve of the custodian unit can only be invested in very low-risk projects, such as government bonds, and cannot be invested in high-risk projects, such as digital tokens. The reason is simple: there must be real dollars behind the stable currency. The price of these high-risk assets will fluctuate greatly, which will cause instability of the stable currency. The stable currency issuer cannot generate money by loans. The currency issuer must maintain a reserve of 1:1. These are not deposits, but US dollars that customers buy stable currency, similar to the "prepayment" mechanism. In this way, when a merchant receives a stable coin paid by a customer, it has two choices: 1) use the stable coin to buy products from other merchants; 2) Ask the stable currency custodian bank for us dollars.
        If 1 is selected, the stable currency will continue to circulate outside (including internationally); If you choose 2, the stable currency will be returned to the issuer, and the merchants holding the stable currency will get us dollars from the custodian bank. Since one stable currency corresponds to one dollar, there can be no leverage. The stable currency can circulate outside for a long time and make many transactions around the world. However, if you want to exchange US dollars, you must return to the US custody bank. When the European Central Bank evaluated the Facebook stable currency in May 2020, it believed that many people would choose to keep their funds in the stable currency rather than exchange them for legal currency (US dollar). The reason is that any payment, including cross-border payment, is very important if we continue to use the stable currency.
        The IMF has put forward this view in 2019, and later in October 2020, the IMF reaffirmed this view, and also believed that the impact of Facebook stable currency on the market is unprecedented, and such a large effect has never occurred in history. Using the above logic, the European Central Bank estimates that Facebook stable currency will have a market value of 4 trillion euros, and all of them are liquid currencies, and this number exceeds the GDP of most countries and is incomparably rich. This 1:1 reserve mechanism was first proposed by the UK. This is the design of the UK fnality stable currency project, and the US OCC followed suit. Due to the rapid flow of stable currency (including cross-border payment), if there is leverage, it may cause economic instability in participating countries or issuing countries.
        The maximum amount of compliant stable currency from the United States is 20 trillion, because this is the total amount of deposits of commercial banks in the United States. As long as 10% of bank deposits become stable currency reserves, the liquidity of US dollars in the world financial market will be greatly improved. There will be US $2 trillion stable currency in the international financial market, which can support a large number of cross-border payments. The Facebook stable currency will also have the participation of nationals of other countries. The reserve settlement report is made public every day. Every day, the reserve institution (which should be the custodian National Bank) must process the reserve settlement report and must also make it public. In this way, customers of stable currency can know how many dollars are behind the stable currency. Since the reserve fund of the stable currency is in the bank, not the central bank, it is risky.
        In order to protect consumers, OCC requires the reserve institution to release the settlement report of the reserve fund every day, so that customers can have confidence in the stable currency. The reserves must be more than the issued stable coins every day, and the amount of reserves must exceed the number of stable coins that still exist (excluding those that have been destroyed). For example, with a reserve of US $1 billion, stable currency issuing institutions can only issue stable currency of less than US $1 billion (such as US $950 million or less). Once the limit is exceeded, the smart contract should stop issuing any stable currency. This is also protecting consumers. The independent audit institution shall investigate the compliance of the stable currency issuer. The independent audit institution may investigate whether the stable currency issuer complies with the laws and policies of the United States.
        Due to digitization, these audit work should be automated, such as using smart contracts. The audit report is sent directly to the regulatory authority. At present, most stable coins are not compliant stable coins. According to the definition of OCC # 1172, most stable coins in the market are not compliant stable coins, or have no reserves, or do not conform to the management model of # 1172. For example: 1) no settlement report is issued every day, and the independent audit institution is responsible for the adjustment; 2) At the time of issuance, the project party has stable currency but does not contribute to the reserve fund (it is equivalent to taking stable currency for nothing, resulting in excessive issuance of stable currency); 3) The project party has issued excessive stable coins (such as usdt which has been criticized by the outside world) and does not comply with the principle of maintaining 1:1 correspondence throughout the time; 4) Reserves are placed in foreign banks that cannot be regulated by the United States; 5) Stable coins are based on other currencies including digital tokens (such as bitcoin or Ethereum); 6) There is no independent audit, or the audit report is not disclosed, or the audit report is intentionally delayed (for example, usdt is criticized by the outside world).
        If it is not a compliant stable currency, the Bank of America cannot handle it and can only use it in the underground market. Many scholars have reached the same conclusion on this point, including Wang Yongli's view in how to view the relaxation of the use of stable currency by OCC in the United States [14]. As we mentioned in the previous article, OCC accepts stable coins not for the purpose of currency speculation, but for the purpose of improving the liquidity of the US dollar. Therefore, stable coins in the currency circle will not be accepted by OCC. In January 2021, the OCC of the United States approved banks to join the blockchain network, which can handle stable coins or issue stable coins themselves. This is an important watershed in the development of the US banking industry. In previous articles, we said that the United States has introduced a new banking structure and regulatory policy.
        On December 23, 2020, the US regulatory agency FinCEN proposed to regulate personal wallets, and our team has launched the Stresa regulatory platform to regulate personal wallets. A new digital economic model has emerged, as shown in Figure 2. Figure 2 shows the management of stable currency Issuers on the left, including banks (or "national payment"), regulators and auditors. On the right is a virtual asset service provider, which provides digital currency services to customers. This is only a sketch, and the actual system is much more complicated than this. Figure 2 is like a butterfly. It takes the stable currency issuer as the center, and the left and right sides (wings) are under strong supervision. These two supervision methods and mechanisms are different, but they interact with each other. It is called the butterfly model.
        In the second part of the interpretation series of the IMF's "digital currency of cross-border payment: the impact of macro finance" report in October 2020, the author proposed that the new currency war should take the compliant stable currency as the pioneer, rather than the central bank digital currency (CBDC). Because there are too many factors to be considered by CBDC (this is the view of the bank for International Settlements), the central bank will definitely think twice when issuing. The chairman of the Federal Reserve said that the dollar CBDC needs to be slow down, and the fednow system (a supporting tool of the US CBDC) may not come out until three years later.
        Therefore, the CBDC of the United States does not know when it will be released, but the Facebook Diem stable currency will be released in 2021. In the report of the IMF in October 2020, it believed that there might be only one global stable coin (GSC) in the world. (Note: does the IMF doubt that the stable coins made by other teams cannot compete with Facebook stable coins in the market? Or does the IMF think that CBDC will compete with Facebook stable coins first?). The next generation blockchain system supports compliant stable coins. Figure 2 shows that there are both issuers and users of stable coins. Both parties can use the blockchain system.
        OCC proposed that the custodian bank should publish the reserve settlement report every day, but did not propose a technical implementation plan. If the traditional banking system is used, the bank can settle accounts once every night. The OCC # 1172 explanatory letter clearly allows the traditional system to perform reserve settlement. But if blockchain is used, will there be different considerations? If the traditional digital token blockchain system is used, the transaction is completed and the settlement is also completed. This will be
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