A Way to Stabilise the Value of Currencies

The main functions of money are as a medium of exchange; a unit of account; and a store of value

Today’s endemic inflation means money is failing as a unit of account.  Inflation means that money as a store of value also becomes problematic and it reduces the utility of money as a medium of exchange, particularly where the exchange takes place over a period of time.  Inflation means it is difficult for people to gain an understand of value because the measure of value keeps changing. Changing the measure of value is like each year changing the measure of temperature so that this year’s 100 degree centigrade is tomorrow’s 105 degree centigrade.

This paper takes the position that general price inflation is undesirable and results in unnecessary risks and costs.

To find a technology to remove general price inflation the paper also assumes that:

  • The existing monetary system is going to remain as is.  
  • The unit of account will remain as national currencies.
The challenge is to invent money technologies that fit within these constraints while removing general price inflation.

The historical record as guide

In the middle ages in England there was no endemic price inflation even though the currencies were routinely manipulated. The likely reason for this was the widespread use of wooden tallies for the exchange of goods and services on credit.

Tallies cost nothing to produce and they are destroyed or recycled after use.  The tally tokens represented a specific credit contract but were not a store of value and hence were able to be created as needed.  They were replaced with modern day loans which are the equivalent of tallies but where the tokens have value.

The 18th Century had a period of price stability which changed in 1913 when the gold standard was effectively abolished with the creation of the USA Federal Reserve.

In the 18th century there was a limited supply of gold but there was enough of it, as a store of value and with the authority of Central Banks, to act as a reference for value.  This meant general price inflation did not occur.

These two cases suggest two technologies that were successful in combatting general price inflation.  In one the medium of exchange for many transactions was zero cost and was created on demand and the tokens in themselves had no value. In the other the medium of exchange had value but its value was anchored in a known value that was kept stable. Extra money tokens were created by issuing more tokens as loans that were destroyed when the loans were repaid. The tokens have value outside their use as a loan with interest. This means the tokens earned interest on interest.

Tallies were replaced as a means of exchange when they were burnt on the orders of the Bank of England and replaced with loans of gold backed money tokens.

Gold was replaced in the USA when the Federal Reserve took over the issuing of currency. It was completely abandoned when Nixon replaced Gold with Oil as the commodity backing the USA dollar by getting OPEC to agree to only sell oil in US dollars.

Without Gold as a reference it became profitable for lenders to get banks to issue new money tokens as loans that were zero cost but earned interest. Without the gold reference point the creation of money tokens as loans and derivatives has exploded. The total value of money tokens is estimated to be several quadrillion dollars which is much more than the total value of tradeable goods and services in any year and more than the value of all assets.

This expansion of money tokens inevitably leads to general price inflation and the Central Banks of the world have recognised this and now argue that endemic inflation is a virtue. Recently they have dropped interest rates so that money tokens themselves have little value. This in turn reduces inflation because there is less interest on interest.

We need a money technology to stabilise the value of money. One way of doing this is to remove the ability of money tokens to earn interest on interest.

Crypto Currencies like BitCoin

Matching pairs of PKI keys are a modern day version of Tally Sticks.  BitCoins are special PKI pairs that have value when they are created whereas pairs of PKI created for a transaction only have value associated with a particular transaction.

BitCoins creates pairs of PKI keys that have value because there is a limit on the number that can be created because of the method of creation. At one level they could be seen as an alternative to gold as something that retains value and hence can act as a reference value.  Unfortunately like gold there is a limit to the number of tokens and they must go up in price if used as a store of value. Like gold they are unsuitable as the basis for a stable currency because there are not enough to be a credible backing for other currencies.  They cannot take the place of Tallies because they are expensive to produce and are not created on demand and they survive the transaction for which they were created. They are expensive to use because when BitCoins are transferred their history of use is also transferred.

Their main attraction appears to be their deliberate scarcity value which – like all scarcity – leads to an increase in price.

PrePayments with Discounts

Prepayments with Discounts is where a buyer PrePays for goods and services of an organisation or individual and receives a discount on the price depending on the length of time the PrePayments have been held.

They have the same characteristics of Tallies. They cost nothing to produce. They are produced on demand and they go out of existence when they are used. Importantly they have no value except as agreed by the issuing organisation or individual.

They have other properties beyond Tallies that make them attractive as a form of money.  They have high liquidity because they can always be sold to people who want the goods and services produced by an organisation. They are backed by real output of goods and services and must be exchanged for those goods and services on redemption. Each PrePayment has its own terms and conditions so they are flexible and can easily adapt to changing circumstances. For example the value of the PrePayment can be increased by inflation or decreased with deflation. Also when the PrePayment is for a high risk purpose the Discount Rate can be set high to reflect the risk. They use the existing accounts payable systems and can be thought of as negative accounts payable. This means there are no new laws or regulations needed for their introduction.  Each PrePayment can be for any amount and hence they are suited to Crowd Funding of asset construction.

They are different to loans because no new currency tokens with value are created.  This means the risk of money creation is not present and this saves the cost of interest on interest over the period of the loan.  The interest on interest of a 5% loan over 25 years is double the cost of a PrePayment with 5% Discount over 25 years. The cost of supporting loans using interest bearing money is high and the fewer such money tokens we have the lower the cost of transfer of value.

Likely Development of PrePayments

It is hypothesised that the wide spread use of PrePayments with Discounts will eliminate general price inflation because they are lower cost than loans to achieve the same credit outcomes. They are lower cost because they do not require the creation of new money tokens in the currency in which the transaction is valued. These currencies can be controlled by the Central Banks limiting the number of new money tokens to the number needed to support PrePayments.  Governments could use PrePayments to introduce general purpose money tokens with discounts depending on the length of time the funds have been held.  This is done by entities purchasing Tax PrePayments with Discounts which means that PrePaid tax gets a discount when used.

PrePayments are introduced entity by entity and each prepayment system stands on its own. Exchanges of PrePayments will arise where the risk and reward associated with each PrePayment can be evaluated and a market developed.

Loans will operate in parallel and will be used to regulate the price of money through the market in loans.  This will act as a control on the price of government issued Tax PrePayments.  They will form the same role as the gold standard as they can act as a reference point for national currencies.  Because they are distributed they are more difficult to game.  We could end up with two credit systems both of which regulate the other.

 

Submission to the Review of ICRC Price Increases in Actew Water and Sewerage

This submission outlines a different approach to setting prices. It also gives a different mechanism for funding water and sewerage infrastructure to reduce the cost of finance and to keep the value of the water infrastructure in the hands of the water using community.

Pricing

It is recommended that the operator of Water and Sewerage Services be permitted to set the prices for Water and Sewerage Services as they see fit as a mechanism to help control demand for water and to provide the capital needed to ensure long term water supply security.  The Price Regulator’s role should not concern itself with the price of water but rather should concern itself with whether the operation of these services deliver water efficiently.  The Price Regulator’s role should be to ensure the profits from the sale of water is distributed equitably across the whole Community.

The question of whether the operator is delivering good value can best be answered by benchmarking the costs of supply against other similar jurisdictions. The Pricing Regulator does this and should continue to do it.

The more contentious issues are:

  • distributing the costs of water supply equitably across the generations,
  • distributing the value of the community water resource equitably  across the whole community,
  • ensuring the profits from the community water resource stays within the community

The ICRC has demonstrated that the current method of financing and repaying loans to build water supply means that current users of water are paying more of the capital while future generations pay less. This is caused by the accounting procedures used to allocate  capital costs across the generations and is unfair on the current generation.

Control of Water demand uses a simple price mechanism to control demand.  The more water is consumed the greater the cost. This is unfair as it means that those who can afford to pay are able to get more of the community resource and because it does not Reward those who choose to find ways to reduce their water consumption.  This happens because the accounting procedures use pricing as the the only mechanism for demand management.

The current method of funding means that most of the interest costs on capital loans go out of the Canberra Community instead of remaining within the Canberra Community.  This happens because the current methods of financing exclude members of the Canberra Community from funding infrastructure development from their own savings.

The following proposal addresses these three issues while allowing the Operator to set prices to control demand and to ensure that the community has security of supply.

Funding

The current method of funding Capital expenditure is through loans, mainly from external sources, and repaying those loans along with interest to the external parties. An alternative approach is to Crowd Fund from the Community of water users.  This is achieve by selling PrePurchase Vouchers, to existing water users. PrePurchased vouchers attract a discount when used where the Discount depends on the length of time the Vouchers have been held.  The Voucher value is increased in value with inflation to preserve their value.  The Vouchers are transferrable so that people who cannot use all the PrePurchased amount can sell their Vouchers to consumers of water.

The Cotter Dam is meant to have a life of 100 years.

Using this approach the Cost of finance to the operator through loans over 100 years at 5% per year is the same as Prepurchase Vouchers with a Discount of 8% per year.

An inflation adjusted 8% Discount investment could be offered to Water Consumers and would be a very attractive investment. The water users of Canberra would over subscribe the issue.  Each individual, including children, whose main residence is serviced with water from Actew could be given a right to subscribe. This right would have a value and individuals could sell to others if they did not wish to use it. This means the value of the Community Resource is distributed more fairly across the community.

To increase fairness people who use less than a nominated per head allocation of water can receive extra allocations of the right to PrePurchase Discounted Vouchers as the way to fund ongoing maintenance and development.

The method of PrePurchased Discounted Vouchers distributes the Capital Costs fairly across the generations in contrast to the current approach where today’s water users pay 6 times the capital compared to a person in 100 years.

Actew itself will have an increase in profits because interest costs will come off the P&L.  It is estimated that this will increase profits by $40M+ if the current loan portfolio is purchased through funds raised with PrePurchased Discounts.

Better Use of Capital

The question will be asked where does the extra money come from if all the parties are better off?  The answer is from removing compound interest on loans which over a long period of time adds extra costs. Traditional loans are created by increasing the money supply and the risk of new money has to be covered.  Discounted Prepurchases creates credit without increasing the money supply and hence the cost of the risk associated with creating extra money is saved.

This approach will require no change to legislation.  It will require no change to accounting practises and it will comply fully with existing Australian and Territory Tax and other Laws. The reason for this is that PrePurchased Discounted Vouchers are another method of paying for goods and services and all the laws and regulations around ordinary payments apply to the PrePurchased Discount Vouchers.

The system can be introduced quickly and gives a way for the ACT government to make better use of the Capital tied up in existing water and sewerage infrastructure. This can be done by using the extra profits from the sale of water to provide the income stream needed for other Capital Expenditure through issuing extra PrePurchased Discount Vouchers for other Capital works such as a hospital or roads or light rail. $40M in profit would finance 500M in Capital Expenditure, which after being built, would provide a further income stream after operating costs are taken out. This new income stream could, in turn, finance further Capital Expenditure.

Federated Trust and Electronic Identity

Federated Trust, as it is currently implemented, is trust that the technology we use to communicate with others does what it is meant to do.  This is trust in the technology, not human trust. In the search for efficiency we exclude complex humans and replace them with simple credentials.  However technology has advanced to allow more complex credentials that better represent humans and includes human trust as an integral part of the system. We do this using the Internet of Things and by giving individuals access to the transactions in which they are involved. 

Federated Trust and Electronic Identity systems are systems for organisations not for people. They allow organisations to be confident in the credentials of individuals passed between organisations.

We can increase the utility of Federated systems if each individual is made part of the Federation and is equal to organisations. An individual can then prove to themselves that their electronic identity has not been compromised and incorrect transactions have not been made in their name. This builds human trust into the system.

Once we allow the individual into the Federated Identity system the individual can build their own Trust Network.  The individual does this because the system can remember and link past transactions across multiple organisations.  Some call this memory of transactions a personal cloud.  The totality of memories across many parties becomes a person’s electronic identity in which the person can trust. 

It doesn’t matter where the memories are held. What matters is that the individual can access them and can be confident that they are correct.

Privacy is critical to building human trust in the memory of transactions.  A person needs to know that others cannot spy on their transactions and build false memories of transactions in their name. 

At Welcomer we are building ways for an individual to create their own trusted personal electronic memory of transactions.  This is also the idea behind the IDcubed project at MIT. The project website has a video that explains the idea. Another way of describing it is that an individual builds their own electronic identity from their past transaction behaviour.

Welcomer technology enables a person to build their own personal electronic memory using an Internet of Things.  

Verifier from InFactDecisions is using Welcomer Technology to provide a way for an individual to gather trusted memories of past income transactions.  These past memories of income are passed to a prospective lender so the lender can assess whether a loan is likely to be repaid. 

In traditional loan applications an organisation asks the person to regenerate their income history piece by piece and tell the organisation where the information is stored. The organisation then gathers this information and assesses its validity.

With Verifier the lender tells the borrower what is needed to verify their income. The borrower then searches their trusted electronic memory of transactions and supplies the information required.  With Verifier the person does the work of gathering the information and its validity.  With Verifier the borrower only has to reveal relevant information to the lender. This leads to privacy friendly loan applications and increases the trust in the information supplied. With Verifier information entered previously by different applications, like  a pay system, can be reused. This reduces the amount of effort for a borrower and reduces the chance of incorrect information being transmitted.

Governments could use this same process for border control by telling people what is needed for entry and for the person to then present that information from their electronic memories that they have built themselves. 

This system would be built on top of existing physical electronic passport infrastructure as an alternative. There would be no need for any agreement on how to identify a person or any form of standard or centralised credential.  What is needed is a trusted way for a person to recall their electronic memories as they move around the world and for each individual government to decide what history of transactions they require to allow entry.

An identity created by a government for its citizens (which identifies their bodies to the government), will not enjoy the same enthusiastic uptake as an identity created by a person for their own use.

 

 

Has Crowd Funding Come of Age

Equity funding normally means ownership of the means of production. In this talk it is extended to mean ownership in the output of the means of production.  This provides a better way to Crowd Fund investments.  The approach provides lower risk Investments than is available with normal equity funding.  It is also a cheaper and lower risk approach for the Company than traditional loans.

The idea behind most early stage equity funding is to invest in a portfolio of startups and to expect that some (most) will fail but those that succeed will pay for the ones that fail. This approach is high risk because even if a winner is picked it is often difficult to realise the full potential of the investment because of the uncertainty surrounding ownership and the rewards from ownership.  What is proposed here is an investment model using Direct Crowd Funding.  A description of how this can work for any infrastructure can be found at https://kevinrosscox.me/2014/06/26/crowd-sourcing-infrastructure/.  Here I concentrate on its use in early stage investments.

Instead of funding an investment with equity we Crowd Fund by PrePurchasing output from the investment before the product is built. A music album can be purchased before it is produced etc.

Crowd Funding of an enterprise can be achieved by abstracting PrePurchases of Output to be any saleable output resulting from the Investment.  PrePurchases are investments where the value of the output received increases over time at some rate.  This is achieved by the purchaser receiving goods in the future at a Discounted Price.  Assume an investor puts in $100 with a Discount rate of 10%. In two years time the investor can purchase goods with a value of $120 with their $100 PrePurchase.  The PrePurchase amounts are transferrable and can be sold together with the Discount. PrePurchases can increase in value by the rate of inflation so preserving their value.

With modern computer and communications facilities, keeping track of PrePurchase amounts and who owns them, is a relatively simple process because a PrePurchase is simply an advanced sale. The regular billing, accounting and tax procedures for sales are used for PrePurchases.

For early stage startups the Discount Rate can be high – say 30%.  As the business attracts customers so new sales will have a much lower discount.  It is anticipated that investment funds for stable businesses will be about 10%.  As the Discounts applied to new sales drops so the investment value of high Discount PrePurchases increases. To an investor who wishes to hold PrePurchases a 30% Discount has greater value than a new PrePurchase at a Discount of 10%.  The difference in value will depend on how long the investor wishes to retain the investment but it can give the investor an immediate Capital Gain if the higher Discount PrePurchases are sold.

PrePurchases being available to purchase goods and services from the Company means that the investments are liquid.  This is not the case with direct equity investing.

PrePurchases are treated as unsecured liabilities on the Company Balance Sheet.  If they are used with the discount then there are no tax consequences.  If they are transferred then the increase in value is treated as a Capital Gain.

Using this approach means that investors with high Discount Rates are more likely to keep their funds in the Company.

If a Company is sold, the PrePurchase liabilities are transferred to the new owner and so the investor is protected from losses caused by ownership changes.  If new capital is needed then the investor is protected from dilution effects.

The legal and tax rules around PrePurchases are well known because they are the same as any purchase agreement where delivery of goods is delayed.

The approach is especially attractive to long term investors like superannuation funds, pension funds or government funds for Industry.

Staff can be given bonuses by issuing them with the entitlement to obtain PrePurchases at some time in the future. This does not incur a tax event at the time of entitlement and is the same as other entitlements such as termination payments. The tax event takes place when the entitlement is acted upon.

PrePurchases with Discounts is another method of Crowd Funding that turns all buyers of product or services into investors in the output of the Company.  This means PrePurchase investors, buyers, employees, shareholders all have the same incentive to produce a profit on the output of goods and services.