【Observation】Binance Research Report: Libra Stablecoin Will Not Compete with USDT

【This report was launched in April this year, not an "update" of the original title, but due to recent promotion by Binance Research in the community broadcast. Therefore, the original title "Binance Updates Research Report! Libra Stablecoin and USDT Won't Be Competitors" has been deleted.】

Facebook's global cross-border payment project Libra, officially announced in June 2019 with its first version, has inspired the entire cryptocurrency community, while continuously facing scrutiny from multiple governments and financial institutions, once thought to be unachievable. It wasn't until the release of the Libra 2.0 whitepaper in April this year that the redesigned model aligned closely with financial regulatory requirements and reduced its threat to traditional national currencies. Libra 2.0 may lack the disruptive nature of 1.0 but is more likely to be realized.

Tracking the progress of Libra 2.0 frequently, key positions such as the association's CEO and legal counsel are held by traditional finance professionals familiar with anti-money laundering operations and having good government relations, currently awaiting a payment license from the Swiss Financial Market Supervisory Authority. What are the differences in this "high-compliance version" of Libra and what are its new opportunities and challenges? We have compiled the report released by the Binance Research Institute:

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Review of Libra 1.0

Binance Research stated that in the first version, Libra deliberately described the Libra coin as a cryptocurrency oriented towards retail users, but this concept completely disappeared in the second version. In fact, it has always been a stablecoin running on a permissioned consortium chain.

Will the new Libra coin affect currency stability?

The Financial Stability Board (FSB) of the G20 has stated that Libra may replace sovereign currencies, posing risks to the stability of national currencies. Libra has stated that it will cooperate with regulatory authorities to establish a better stability mechanism.

It was reported that a major change in Libra 2.0 is the "enhanced protection of Libra reserves," consisting of 100% reserves composed of cash, cash equivalents, and ultra-short-term government bonds (rated A+ or above).

In response to this, Binance Research pointed out that there are only 37 countries evaluated at A+ or above for ultra-short-term government bonds, and most countries' bonds fall below this standard, hence the higher risk of currency substitution. For this reason, Binance believes that using government bonds to guarantee currency stability poses a conflict.

Differences between Libra stablecoin and crypto stablecoins in the market

Libra has applied for a financial payment license in Switzerland, and Swiss authorities have established an association specifically to handle the review, inviting regulatory and central bank representatives from around the world to participate and propose stricter regulations based on the Bank for International Settlements' payment system standards. Binance stated that since most global payment systems are controlled by central banks, what Libra is attempting is akin to a private company like SpaceX launching rockets into space.

According to Binance Research, Libra has adopted a three-tier regulatory design: (1) Libra Association level, (2) Protocol level, and (3) VASP level. The first two are internal controls, with the most stringent being external VASP (Virtual Asset Service Provider).

Regarding VASP, a newer regulation is the Travel Rule proposed by the Financial Action Task Force (FATF). Since January 2020, the Travel Rule applies to crypto assets, requiring regulated organizations to submit information on asset owners. Therefore, the Libra Association will provide an off-chain protocol to comply with the Travel Rule and record-keeping requirements. Binance Research also emphasized that all user data may be requested for submission at any time.

Due to such stringent regulations, Binance Research believes that Libra's stablecoin will not directly compete with crypto stablecoins. Stablecoins currently in the market (such as Tether, Paxos, Centre, and TrustToken) are designed for cryptocurrency exchanges, cross-exchange transactions, and decentralized finance (DeFi) purposes.

However, Libra's stablecoin aims to promote financial inclusion and establish retail and corporate financial infrastructure. Its features like Hash Time Locked Contracts (HTLC) will bring significant advancements to existing payment systems. As a permissioned system, any entry into external systems requires consent and compliance with regulations.

Therefore, Binance Research believes that although Libra's stablecoin entering the ecosystem of cryptocurrency exchanges may pose a threat to existing competitors, it is likely to be hindered due to its permissioned nature. Unless its future development matures further, there will not be direct competition. Binance Research also suggests that if Libra succeeds, it may lead to new crypto stablecoins mimicking its model to enter permissionless network ecosystems (such as Ethereum).

Finally, Binance Research stated that although some believe that the revised Libra lacks ambition compared to its previous version, Binance still believes that, even if it takes some time, Libra will have a significant impact on the global payment industry.