ICRC Submission addendum

Since writing this submission http://www.icrc.act.gov.au/wp-content/uploads/2016/09/Submission-10-07-September-2016-White-Label-Personal-Clouds.pdf I have come to a better understanding of the ICRC draft report and the reasons for tariff changes.

The economic efficiency issue driving the ICRC submission is the threat of losing high volume users of ICON water and pressure from other large users to receive bulk discounts. If large users leave ICON Water then to maintain the same level of profit other users will need to pay more.

 An alternative using Water Rewards

The large users of water who wish to move off ICON water need to invest in recycling and use of non-potable water infrastructure. ICON Water can keep these customers and can reduce prices for large customers with Water Rewards and do it in a politically acceptable way. ICON Water can fund and operate the infrastructure for these projects and charge abstraction and operating fees. ICON Water can sell more Water Rewards to fund these projects.

Obtaining funds this way does not affect profit made by ICON Water as the funds are on the balance sheet and there are no interest charges. The price paid by the large customers will include the cost of future discounts received by Rewards holders. The profits from the retained customers cover the cost of discounts.

Similarly, other large users, such as hotels, can benefit by ICON Water funding water saving and reuse services in their premises and by promoting Canberra through issuing interstate and overseas visitors with Rights to Buy Water Rewards.

Issuing Rights to buy Water Rewards to those in the community who save water or use less or who have fewer resources addresses the social charter of ICON Water. Increasing the cost of water to the Canberra community who responded well to reducing water consumption sends the wrong message and will face fierce opposition.

Selling Water Rewards increases ICON Water profit by $70M by retiring the debt. The balance sheet stays the same. What is different is that future income, and with it, future profit will drop depending on when people use their ICON Water Rewards Discounts. Because the Rewards are a high-value investment, this is likely to be well into the future and ICON Water can monitor and control the use of discounts.

The government can use the extra profits to invest in other profitable infrastructure and so more than cover the reduction of income from the use of the discounts.

Here is a five-minute explanation of how Water Rewards works and how it redirects interest payments to ICON customers. https://youtu.be/w37pjSWOFQw

Background to Water Rewards

Water Rewards is an off-shoot of a ten-year research and development effort into identification for the Internet of Things.   The approach has proven to be commercially successful with the implementation and deployment of Edentiti. Edentiti is a verification of identity product and is marketed under the name VixVerify. It is the market leader in Australia for verification of personal identity.

White Label Personal Clouds was formed to take the idea underlying Edentiti to the Internet of Things. One of the Internet of Things is the Internet of Money. Water Rewards is a practical example of the Internet of Money.

The underlying idea is that we can create low-cost systems for a group of autonomous entities to arrive at a consensus. In nature, we see this in the way ants and bees find food through cooperation and sharing information between individuals. Supply and demand markets are an example in economics where the market of autonomous buyers and sellers determine the price of a product. Water Rewards uses the same principles to establish the lowest cost or most economically efficient method of pricing water where there is one supplier of a product.

As demonstrated in this submission Water Rewards will increase the profit of ICON Water by $70M by removing interest charges from the balance sheet and without changing the amount of balance sheet liabilities.

To read more visit https://kevinrosscox.me/2016/10/23/new-money-means-new-finance/

To read more on using consensus or “swarm intelligence” to solve other hard problems visit https://kevinrosscox.me/2016/10/12/making-decisions-by-consensus/

Removing Debt from the ACT Economy

Water Rewards will have a significant impact on the ACT government budget. Rewards increase funds available to the community because it reduces the cost of distributing Capital by at least one order of magnitude. The savings generated by removing the cost of debt are accessible to the community.

The same principles of Rewards apply to all Income generating infrastructures such as Energy Rewards for renewable energy, Rent and Buy for affordable housing, Transport Rewards for Roads and Public Transport, MediSave for health, Education Credits for all education investments, Innovation Credits for industry development.

While there is a temptation to consolidate all forms of Rewards under one body, systems and evolutionary theory suggests they should remain separate and be under the joint control of representatives of customers, the government and the agencies responsible for the products or services. Diversity and distribution of power reduce risk and increase innovation.

The Cash Flow of ICON Water increases by $70M and increases the profit available to the ACT government. The $1.4B in Capital goes directly to the population so increasing their assets and provides a greater income than available from commercial investments. It spreads investment income evenly across the whole population, and so reduces poverty. ICON Water has a cash flow of $300M, and this will support at least $3B in Water Rewards.

The removal of debt and making income producing Capital Assets available to investors provides an opportunity for a rethink of the investments in superannuation for government employees. The amounts of Investment Funds now available for infrastructure changes what is possible. Funding is no longer a significant barrier to development. Instead, the limits are on the capacity of the City to absorb the investment.

New Money means New Finance

From Wikipedia

Finance is a field that deals with the study of investments. It includes the dynamics of assets and liabilities over time under conditions of different degrees of uncertainty and risk. Finance can also be defined as the science of money management. Finance aims to price assets based on their risk level and their expected rate of return. Finance can be broken into three different sub-categories: public finance, corporate finance and personal finance.

From Investopedia

Finance describes the management, creation and study of money, banking, credit, investments, assets and liabilities that make up financial systems, as well as the study of those financial instruments. Some people prefer to divide finance into three distinct categories: public finance, corporate finance and personal finance. Additionally, the study of behavioural finance aims to learn about the more “human” side of a science considered by most to be highly mathematical.

Finance is the study of Money created as Debt. Interest on Debt Gives Investors a return on Money.


If we change the system to providing a return on Discounted Product or Services, then the tools and techniques of Debt Finance no longer apply as Money has no time value.


I have argued elsewhere “The time value of money tokens an idea past its use by date. ” It means we can remove the time value of money tokens by removing interest from newly created money tokens.

In particular, it means the value of repayments with equal repayments over N periods is:

R = C x (1 + sqrt(1+2 x D x N)) / (2 x N )

R = periodic repayment amount, C = Capital to be repaid, D = discount (or fixed interest), N = installments.

With debt, the repayments are:

R = (C x I) / (1-(1+I)^^N)

In the formula, the symbol x means multiply, / means to divide and ^^ means exponentiation.

The return on investment using Discounted Product or Services or Rewards has no exponential term. Rewards mean money has no time value. Rewards make Finance simple. Rewards replace money markets and the markets in derivates with simple fixed return markets based on the risk of producing products or services.

In the Repayments with Discounts, the value of the Discount can be different for each loan.  The earnings on the Loan are different for each Loan.  In contrast with Debt, all Money is deemed equal. Thus Money created by a government for people to pay their taxes is of equal value to money created as a loan to a consumer for gambling.  The risk of the consumer loan is higher than the government loan, but the money has the same value.  The finance system compensates by charging higher interest rates, but risk management proves to be expensive.  The discount localises the risk and removes the need for high-cost money management risk procedures.

The Discount Loans are transferrable and so are tradeable.  The market in Loans now becomes the Money Market.  Evaluating the risk of Discount Loans is simpler than calculating the risk of fungible money loans. This reduces the cost of finance.

Fair and Equitable Money Creation

The IOU is the building block of our financial system. Money is an IOU that the government sells to us so we can pay our taxes. Because we can be confident the government will allow us to use their money to pay taxes, government IOUs become a general purpose currency.

When we want to issue an IOU using government money, we take out a loan with a bank as debt. Banks are licensed to sell us government IOUs. Banks charge us interest on the IOUs to cover the cost of them buying IOUs from the government or other banks plus a commission to the bank to cover their risk and to pay for their operations.

Banks issuing government IOUs outsources the creation of government money to a third party. The interest charged needs to cover the cost of us defaulting on our IOUs. When we repay IOUs, we first pay the accumulated interest creating compound interest.

Instead of using government money for our IOUs we can bypass the banks and sell IOUs directly. We can agree to repay the IOU with goods and services we produce. To cover the risk of the IOU buyer, we can give them a discount on the goods and services they receive. Discounts do not compound. To cover the cost of inflation we increase the value of the IOUs outstanding by inflation.

The buyer of the IOU gets the interest equivalent paid to the banks and the government and has inflation protection. The IOU seller has the same costs. The IOU buyer has little risk if they need the goods and services and if there are many other sales. Accounting treats IOUs as long-term unsecured liabilities and assets, and they appear on the Balance Sheet.

For the total system, it removes the cost of interest and the cost of inflation and increases the productivity of capital.

Governments can do this themselves and can spend money into existence instead of issue debt.

Local and State Governments can do this by selling their IOUs for their services and taxes.

Doing this saves their respective communities the cost of interest and the cost of inflation.

To see how to do this in a fair and equitable way to raise funds to build water infrastructure see the description of Water Rewards. 

Water Rewards for ICON Water

Every community needs infrastructure. Governments have traditionally supplied most of it as it tends to be a natural monopoly. The provision of roads, ports, electricity, water, land, law enforcement, the judiciary, social services, health, communications, finance, defence and education, are all areas where governments have and continue to have a significant role.

The economic experiments over the past forty years of governments selling off public assets and relinquishing control to private interests have lead to increased inefficiency and rising costs.

The most inefficient industry in the world today is the finance sector. The finance industry profits in most countries are now higher than the profits from supplying goods and services. With modern technologies, we can reduce the size of the banking and finance sector to one tenth its current size. The funds saved will go to the productive economy.

This post describes how the loans system works. It shows the costs associated with borrowing money to build a water supply system for a community by calculating the funding costs for building a dam with a conventional loan.

It then describes an alternative way a community can fund the construction of a dam without using the banking sector. It compares the cost of non-bank funding and calculates the savings. It then describes Water Rewards, a practical way to implement the alternative method and distribute the savings across the whole community.

An Overview of Water Rewards versus Debt

Taking out a loan versus discounts

Let us assume a dam costs $400M to build, the interest rate on loans is 5%, and the loans are repaid over 100 years life of the dam. If the loan is repaid in equal instalments each year, the total cost of interest is $1,615M or four times the cost of the dam.

Instead of a loan, the water authority can sell IOUs that would be used, in the future, to pay for water at a discount. If the discount was 5% for each year the IOUs were held, then if the IOUs were used equally over the 100 years, the discounts would be $1000M. IOUs are 61% the cost of a loan. To be the same cost the discount offered to customers could be 8% per year.

The price of water is set to control demand to match the available supply so the extra profit can go to those who purchase IOUs. The water authority can ensure that its customers are the ones able to invest in IOUs.

Comparing Customer Investments

Customers can invest in bank annuities and deposits, or they can invest in the water authority IOUs. Investing in a bank deposit means that if the bank lends at 5% is likely to return a compound interest rate of 3% to the investor in a bank deposit. If customers invest in IOUs, they will receive a flat 10% discount. Customers pay tax on the 3%, and they pay no tax on the IOU discount. Because the price of water increases with inflation, so the IOUs can rise in value to match inflation. The return on IOUs is at least three times the return on deposits.

Customers could invest in fixed-term annuities. A typical 15-year annuity from a bank provides $8,377 fixed per year for each $100,000. 10% IOUs provide an inflation-adjusted annuity of $11,667 for 15 years. The bank annuity earns an extra $25,655 while the IOUs provide $75,000.

The only difference in the two approaches is in the organisation of funding. There is no change to the pricing or operations of the water authority.

Distributing IOUs to customers

IOUs are an attractive investment and should be made available to the consumers of water. However, water is a public resource, and those who consume less should get more IOUs as the users of water get a benefit from the use. We can distribute IOUs and call them Water Rewards.

Instead of distributing Water Rewards directly the water authority distributes the right to buy Water Rewards. The number of Rights each customer receives could be inversely related to their consumption in the previous year. To purchase Water Rewards a person must have a Right to Buy. As the Water Rewards are an attractive investment the Right to Buy has a value. It means those who do not have the funds to purchase Rewards can sell the Rights. Alternatively, they can borrow money at a lower rate than the discount and convert their Rights to Rewards. The loan can be paid off using the money to pay their Water Invoices.

A holder of Water Rewards can sell them at any time at slightly less than their face value to anyone who wishes to pay for their water with Rewards.

To see how a customer would get and buy Water Rewards try this mockup of a Water Rewards app. https://marvelapp.com/44bjb8j

What is the benefit to the Water Authority

With debt Water Authorities do not set the price of water. Because water supply is a monopoly there is a pricing regulator that reviews prices and sets them periodically. The Water Authority cannot set prices to control demand. In times of shortage of supply, they resort to water restrictions that are costly to administer and do not help public relations. With Water Rewards there is no need for a pricing regulator because the windfall profits can go back to the consumer.

Water Authorities normally have to get permission from their owners to raise extra revenue. Raising money by issuing Rights is simpler and requires less negotiation and administration.

The Customers of the Water Authority get a financial benefit when the price increases and this makes for a close customer relationship. This relationship can reduce operating costs through finding leaks, cheaper meter reading and funding of local water reuse.

Withholding Rights and taking back Rewards is a low-cost enforcement measure for customers who abuse the system.

The Water Authority controls how many Rights are issued and adjusts the number to meet capital needs. If the Authority issues too many then they can, as a last resort, increase the price of water so that the service continues to pay for itself.

The owner of the Water Authority does not have to raise funds from banks and does not go into debt. The Water Authority does not have to pay interest, and this improves the cash flow of the authority. The Water Authority can issue as many Water Rewards as its cash flow can support. The funds make it easier to bring improvements and more efficiencies to the system. If the Water Authority does not use the funds for water, the Community can use them for other Capital works.


Making Decisions by Consensus

Any sustainable group of interacting agents have to make decisions on how to work together to achieve the best outcome for the group. Human groups use a variety of strategies including markets, representative governance, or assigning authority to some members as ways to work together.

In small groups, such as families, decisions tend to be by consensus. Larger groups find agreement challenging and so we invent strategies to overcome the inevitable disagreements. The simplest approach is to abandon consensus and to use centralised enforcement. Unfortunately, the cost of centralised decision making with enforcement increases exponentially with the number of members in a group.

One way to reduce costs is to form subgroups and get agreement between the subgroups. The subgroups are stable and in turn, we can develop a consensus between the subgroups.  With this approach, costs increase linearly with the number of members. One method is to create subgroups around each entity. An organisation of many entities is one such group. A tribe is another. Individuals have subgroups with whom they interact for given purposes. In general, any entity interacts with many other entities and each purpose becomes a subgroup.

Entities do not have to be people or organisations. An entity can be a loan and we can create very large systems with loans where all the parties both borrowers and lenders to the same loan form a subgroup.

The Internet provides us with a new set of tools to reduce the cost of consensus because we can create many more subgroups for all types of entities and handle the interactions between them efficiently. It enables the group of entities with which an individual interact for a purpose, to be a subgroup. This grouping of interacting objects is often called a swarm and the behaviour called swarm intelligence. With the Internet, we can create many subgroups and control them so that leakage of data outside the subgroups is minimal. For human systems, this leads to enhanced privacy and freedom from surveillance.

An issue with consensus groups is what happens when a person or entity will not agree or breaks the consensus. Consensus on enforcement is low-cost with small groups.  Peer group pressure is an example.  When someone does not conform, they are left out of the group but can join another group.  When a merchant’s prices become too high, you leave the group of their customers and join another merchant’s group. The more variety, the more alternatives, the greater the chances of consensus.

This post outlines some examples of how the Internet enhances agreement by having entity based groups for different purposes.

  • Where is it?
  • What is my address?
  • Who am I?
  • What price should I charge?
  • How can I find a place to live?

Where is it?

Here the objective is to discover the physical location of an object.

At some point in time let us assume that all objects know where they are and they know the distance from every connected object. When an object moves, the object that moved is the only one that has to recalculate its position.

To answer the question, “Where is it?” the swarm including the object, knows where they are at all times if they know the distance to connected objects. The algorithm to calculate positions is the only thing that needs to know the position of each object and it only needs to know while it is calculating. It asks each object, in turn, where they are, does its calculations and reports back any change in position to each object. The algorithm does not remember the position of any object. Objects never know the location of other objects unless the others wish them to know.

To find the distance between objects each object keeps a record of previous measures of distance and can use those records to check and calibrate current measures of distance.

If an object wants to exclude another from its group it can do so by refusing to tell the other where it is.

The difference between this and current methods of location is that an object is the only one who knows where it is at all time. Its location is a private attribute that it provides to the known algorithm.  It only provides its location to others who it approves and only via known algorithms.  If a group member goes against the wishes of an object and provides the location without permission then, the object stops communicating with the offending member and tells others of its concerns.

What is my address?

A common utility is the directory problem.  You wish to make a connection with someone, but you do not know where they are. The traditional solution is to have a centralised directory where you put your address, and people ask the directory.  The distributed solution is for you and those with whom you wish to communicate only to know your address.  That is, you have a directory of your own.  Someone outside your group knows who you are but does not know how to connect to you. They ask their connections do they know your address. If they do not know then they can ask their connections and so on.  You can set up rules on whether you wish to connect by being asked and you only connect to those who agree.  Social networking sites use this approach. The difference in a distributed system is that there is no need to have a social networking site.  The algorithm is the social network.

Who am I?

The objective is for your electronic identity to remain consistent. It means when two parties reconnect they are confident they know each other. At some point in time let us assume that all objects know their identities and they know how to identify themselves to other objects to which they are connected. Let the location be part of a measure of trust in the identity of the other party. If there is a change in trust, such as a person is now in a different physical location, then the swarm can ask all connected parties to recalculate their measure of trust and see if they are prepared to continue to accept the identity of the changed party.

What price should we charge?

The traditional way of setting prices is through demand markets. When demand is high, the price goes up. When demand is low, the price goes down. Setting prices this way works well when there are one-off sales. It is expensive when the sales are commodities and buyers make repeat purchases. If fails when there are monopoly buyers or sellers.

One way for consensus pricing is to agree on a base price for all production. Prices can increase to some maximum but rather than all the growth in income going to producers some goes to those who restrain their consumption. The increase could be in the form of Rewards for non-consumption. The base price, the Rewards and rules of operation use consensus to come to an agreement on prices.

How can I find a place to live?

In our society, we agree that it is desirable for most people to have a permanent place to live. We know that people like to have space in which they are comfortable, safe and private. We have developed ways to achieve this. The most common way in industrialised societies is through home ownership.

Some people are unable to obtain a home of their own through the usual channels. Consensus Homes establishes a way for members of a group to each have all the rights of homeownership to a dwelling.  They obtain the rights by consensus of the group. Each person wishing to participate negotiates with others in the group and decides to live in a particular dwelling. They live with or without others look after it and agree to buy the mortgage over the property through regular payments.  The person builds equity in the mortgage that they can transfer as a deposit for a traditional home purchase or to another dwelling within this or another group.  Enforcement comes by people who fail to pay regular payments having to leave the dwelling.

An Identity Commons not a Common Identity

The dictionary definition of a commons is “land or resources belonging to or affecting the whole of a community”.

An Electronic Identity Commons is “a shared identity resource where community members mutually identify each other.”

Most electronic identity systems base identity on identification with data. They identify using attribute data about an entity. The identification data Identities become nodes in a network of Electronic Identities. If the data is the same, the identity is the same.

Identity founded on data proves to be expensive. It is expensive because protecting data is costly and the cost rises exponentially with the number of unique entities in the system.

With the Internet, we now have a highly connected world with rapid communication. Maintaining the integrity of our personal information in this environment costs more than the value of having an Electronic Identity. It leads to increasing breaches of privacy and security. The advent of intelligent bots and the Internet of things means privacy will continue to erode and with it a reduction in value of data based Identity.

We need a different approach.

An Identity Commons

In the real world, our relationships with others create our Identities. We are a spouse, a citizen, a shareholder, a member of a political party or a member of a church. It is our relationships in a community that define us and give us an Identity.

In a community, we mutually identify each other. We cannot have an Identity in a community unless the community agrees to grant us one and unless we agree to recognise others as part of the same community.

We build Electronic Identities by mutually identifying each other with peer to peer identification using data but, Identity is no longer synonymous with data. It uses data for peer to peer identification, but it is separate from the data. Its authenticity comes from proof of relationships using networked mutual recognition. Electronic Identities closely model our real world Identities.

We can use any entity as a peer. The sources of identity can now include organisations, houses, refrigerators, cars, the land, computer programs, mobile phones, credit cards with which we have a relationship.

We can restrict the spread of personal data to those relationships we trust.

Our Identities strengthen each time we use them. They strengthen because they change with changing circumstances.

The building blocks of our Identity are our peer to peer relationships rather than our data characteristics. Our relationships include the history of our peer to peer interactions. These relationships wax and wane and break.

An Identity Commons can coexist with data based Identities.  The data based Identity is treated as a separate Identity.  This means we can introduce an Identity Commons incrementally and only use it where it is cost effective.

An Identity Commons built using these principles will be private, scalable, secure, low-cost and adapt to changing circumstances.

Don’t Blame the Bankers

Bankers and the Financial Sector get blamed for our economic ills. They are not to blame. They do a good job of trying to control the complicated financial system we have inherited. They cannot change the system on their own, but they can work with us to change it into a simpler more efficient system.

The money system

We use money tokens to transfer value by exchanging money tokens for goods and services. We can create money tokens with an IOU. The IOU means we agree to repay the money at some time in the future. Anyone can issue IOUs. What we call money is a Government IOU. Governments create money, or a government IOU, by promising that they will accept the money tokens they create and sell to us so we can pay our taxes. Because most people trust the government and most pay taxes they will accept the government’s IOUs; the government money becomes a currency. That is, we can use government IOUs (money) to transfer the value of anything.

Banks make IOUs for us using government money. We call this debt. Government money is fungible. It means our IOUs created as debt have the same value as a government’s IOU.

Why the current money system is expensive to operate

The current loans system is convenient, but it causes excessive costs. When a bank gives us a loan as a debt, the loan is our IOU. Unfortunately, our IOU is not the same value as a government IOU because it has a greater risk of not being repaid. The financial system, governments and banks have created a complicated system to account for the difference in value between our IOU and a government IOU.

To cope, we do the following.

  • We give money tokens a time value using compound interest on money.
  • We have invented the idea of capital which is the surplus money left over when we repay our loans.
  • We create capital as money tokens with value.
  • Because money tokens have a value, we can create capital markets as a way to distribute capital.
  • Banks can create government IOUs for us but only if we have an asset or some form of income as collateral.
  • We regulate banks to ensure they do not create too much money.
  • Central Banks have a policy of targetted inflation to reduce the value of all money tokens when too many are created.
  • We create insurance policies to compensate investors for bad loans.
  • As well as insurance we invent other derivates of money to recover the cost of bad loans.

All these mechanisms are expensive to operate and all involve actual costs incurred by the financial system.

A lower-cost way to make loans

We can remove the need for most of these artefacts by repaying the loan with goods and services rather than with government money. By giving goods and services of greater value than the money created for the loan means investors get a return without impacting the value of government money. If the borrower cannot repay the loss is localised and does not affect government money. If government money inflates so that it decreases in value, we can give more goods and services and so compensate lenders without impacting government money.

Doing this on an individual loan means the loan is isolated from the government money system. Using these rules we save the interest on debt, and we save the cost of inflation for any loan. We can provide insurance by working with others with similar loans to provide more goods and services to cover unpaid loans. We remove the need for most financial derivatives.

On short term loans, the cost savings are small. On long-term loans, the cost of loans more than halves. We can use the approach for any loan both present and future, and we can do it without impacting the existing system. However, because the loans have lower costs we can expect many loans to move to repayments in goods and services instead of repayments in money.

Doing this replaces money markets as the way to set the price of capital indirectly with the cost of debt. Instead, the risk associated with the reason for the loan establishes the cost of capital directly for each loan. These prices can set the price for conventional debt loans. It means we do not need a money market to set prices. Removing the need for money markets to set the price of capital saves costs.

By reducing the need for capital markets, we reduce the impact of changes in government interest rates.  Systems, where changes to one component affect all parts, are brittle.  Removing this dependency will make economies more resilient and adaptable.

The practicalities of changing IOU repayments to goods and services

When individual loans operate independently, we can still get economies of scale and spreading of risk if we have a knowledge of other loans for each entity both as a lender and a borrower. It works well if we have a secure, reliable distributed system with autonomous linked entities. We call such systems complex adaptive systems where entities synchronise their activities by communicating with other entities through a distributed network structure.

An area of need is the removal of public debt. We can do this by communities self-funding infrastructure. Here is an outline of how to do this.

Here is a proposal for a Water Authority to replace all its debt with promises to repay with goods and services.

Here is a proposal to a public housing authority to provide affordable housing to all who need it.