Since everyone participating in MONEY 2.0 can only issue money up to their economic abilities, all money is backed by promises of consideration. This principle not only protects MONEY 2.0 from inflation, but also eliminates the need to inject arbitrary amounts of money into the real economy from the outside – or to extract it from there. Not only is money automatically issued in the course of transactions, it is also removed from circulation as assets are spent and negative balances are settled. This renders one of the main avenues of manipulation in traditional bank money obsolete.
For MONEY 2.0 to work in practice, the following parameters need to be met:
1. To assign specific money creation limits to all participants, the “economic abilities” must be quantifiable.
2. To ensure that MONEY 2.0 is accepted on a voluntary basis, participants must be able to trust the mutual promises of consideration.
QUESTION H: How can participants’ economic abilities be quantified?
OPTION 1: Based on their transactions in MONEY 2.0
Since MONEY 2.0 is expressly designed to give participants a choice between different currency alternatives, it makes little sense to judge someone’s overall economic abilities by their transactions in a single currency.
Also, mere account movements don’t necessarily relate to transactions – not least, because drawing this connection would allow participants to manipulate money creation limits via bogus transactions.
OPTION 2: By accounting for turnovers and income
In fact, the need to assess the participants’ economic abilities isn’t specific to MONEY 2.0, but has a long history in banking. Therefore, it seems logical to draw on already existing methods and grant overdraft limits in exchange for proof of income and sales. Where evidence of past income cannot be provided, overdraft privileges can also be granted for securities, which the issuer promises to liquidate if they are unable to perform equivalent service within three months’ time.
To provide for a transparent allocation process and prevent disagreements between administration and participants, binding principles for money creation limits must be incorporated in the currency’s TOS.
QUESTION J: How can participants safely rely on the promises of others?
OPTION 1: The participants must trust each other blindly
Unlike legal tender, which is accepted by the government for paying taxes, MONEY 2.0 depends on the mutual trust of its participants. There are historic examples that exchange systems can work solely based on trust and goodwill – these, however, were implemented in circumstances where the participants knew each other (or in which trust was established by an ideological framework recognized as binding by all), rather than being examples from large, anonymous markets.
Restricting MONEY 2.0 to participants who know each other or share the same world views would certainly limit MONEY 2.0 to such an extent that it could never replace traditional bank money.
Last but not least, to solve a money and interest problem that shouldn’t even exist if certain moral and ideological assumptions were realistic, it seems rather pointless to implement an alternative currency concept that is doomed to failure under those very circumstances. It is probably more productive to create an alternative system where trust and goodwill are not penalized – and which is robust enough to even survive the odd attempt at misuse.
OPTION 2: By making all promises enforceable by law
While making the stability of MONEY 2.0 depend on the ethics and the goodwill of each and every participant poses an unnecessary risk, supporting ethics and goodwill is certainly a good strategy to keep an alternative currency stable.
In the long run, trusting relationships between market participants can only thrive when violations are sanctioned and honest and cooperating participants are protected from abuse. Therefore, MONEY 2.0 must be designed in a way that breaches of the rules can actually be pursued, preferably within the existing legal system.
To make MONEY 2.0 enforceable by law, the rules (and therefore possible violations) must be clearly defined – for instance, by stipulating the timeframe by which all promises are to be redeemed. Equally, enforceability requires an injured party – i.e. someone who has the legal authority to claim damages in court.
QUESTION K: Who carries the burden of defaulted promises?
OPTION 1: The business partners
At first sight, passing the liability for defaulted promises onto the business partners seems like an elegant solution. Sellers are already in contact with buyers and typically have more insight into their identity and creditworthiness than anyone not involved. In certain situations, holding sellers responsible could also keep them from conniving with buyers, which would make the system rules easier to enforce.
In reality, however, introducing personal liabilities would lead to a series of problems. Apart from hard-to-solve practical questions (who, for instance, should inherit the liability if the original trading partner drops out?), MONEY 2.0 would essentially stop being a functional currency. As a seller might hold a – possibly unfounded – suspicion and simply refuse to bear the transaction risk, potential buyers could never be sure if the money in their accounts had any purchasing power at all.
On the flip side, market participants would need to perform background checks on all buyers – something for which most sellers simply lack the proper resources and skills. And as multiple participants would have to perform the same checks on the very same people, the system would also be extremely inefficient.
Finally, participants with exclusive trade partners would face imponderable risks and likely be forced to change their businesses in order to unlink their fate from their trading partner’s.
It is hard to imagine that anyone would want to use MONEY 2.0 under these circumstances, and the chances that MONEY 2.0 could ever compete with traditional currencies would therefore be just as slim.
OPTION 2: All participants collectively
If the burden of defaulted promises can’t be passed on to individual participants, all participants bear it collectively. This automatism is due to the characteristics of an anonymized money system. If participants fail to meet their obligations, the money circulating isn’t fully backed by service promises anymore. That, however, leads to inflation, and as all balances lose in value proportionally, the damage is distributed among all money owners.
On closer inspection, it becomes apparent that money-holders – similar to the holders of vouchers – bear a default risk. If the promise that the money creation was based on proves to be irredeemable, the money becomes worthless. Unlike individualized money, where the capital loss is borne by individuals, the losses in an anonymized money system affect all money-holders collectively.
All losses combined add up to the costs of money-holding – and therefore the widely-held belief that money can be a stable store of value is hardly sustainable. Where the medium circulating as money has no intrinsic value, it can only be as valuable as the goods and services which it represents or which it can buy – these, however, are transitory by nature.
QUESTION L: Who should administer MONEY 2.0?
OPTION 1: All participants together
The idea of an alternative currency which is administered by all participants collectively may seem intriguing at first – in practice, however, there would be significant disadvantages.
To ensure that MONEY 2.0 is safe and stable, someone has to make sure that the rules are followed and any members who abuse the system are called to account. For this task, however, those in charge need to know the identity of each market participant which, in a collectively administered currency, would lead to serious privacy issues.
As an expedient, responsibilities could be shared and chores like pursuing possible rule-breakers or verifying new members could be assigned to participants individually (at random, for instance). In the end, however, tasks which are vital for MONEY 2.0 and need to be handled professionally would end up in the hands of members who, in all likelihood, lack the experience, time or interest. Also, the amount of work involved would deter possible participants and pose a significant disadvantage compared to traditional bank money.
OPTION 2: A duly mandated central office
When it comes to an efficient administration, taking a look at traditional banking certainly pays off. Many of the challenges facing alternative currencies concern areas with decades of experience. Even the problem of overdrawn accounts, along with the last resort of legal action, isn’t new – with the main difference that in MONEY 2.0, any such interventions happen on behalf of its participants.
In MONEY 2.0, anyone issuing money commits themselves to rendering services or selling goods equivalent to the money issued within three months’ time. The administration recognizes that the promise has been met by the money arriving in the participant’s account. Where participants don’t meet their obligations, the central office issues a warning first. If the problem isn’t corrected, the outstanding amount is settled via the system account (following an automatism defined in the currency’s TOS). The account holder now owes consideration to the central office rather than to all participants, and the central office can collect the due amount like a regular unpaid bill (demand note, and ultimately legal action). Where necessary, the claim can also be converted to traditional bank money.
To prevent inflation and ensure that the money circulating stays in balance with the redeemable promises, the participants fund a system account designed to pay for defaulted obligations. The contributions to this account amount to a money-holding fee that is levied as a percentage on existing balances – as a consequence, participants are also aware of the costs of money-holding.
As long as different currencies are allowed to compete with each other and everyone has the right to launch their own medium of exchange, the power of each currency administration is limited and cannot be abused to dictate the terms of money usage to others.
QUESTION M: Who can participate in MONEY 2.0?
OPTION 1: Anyone with whom the rules are enforceable
Since MONEY 2.0 depends on the credibility of all promises and the participants typically don’t know each other, the central office must be able to enforce the commitments where necessary.
For currencies based on MONEY 2.0, the typical sphere of operation is therefore the city or country where the currency administration is located. A multinationally organized and networked administration, however, can operate worldwide, just like large companies can also be represented in more than one country.
Moreover, it is possible to admit passive accounts which have no money issuing power, but, much like prepaid credit cards, can be charged with money already existing. Passive accounts would be accessible to everyone, restricted only by an expiry date to make sure all balances eventually return to the money cycle.
OPTION 2: Anyone who wants to
Since all participants in MONEY 2.0 have the power to issue money, enforcing the rules is a must. Hence, anyone living in a country where legal enforcement would be impossible or too expensive cannot participate in MONEY 2.0.
– To create an alternative money system in which all market participants can issue money under a collective brand, and which doesn’t require a higher authority for implementation.
– To limit money creation with each participant’s ability to render equivalent service in the near future.
– To establish a central administration which monitors the rules and, if necessary, enforces them by law.
– To ensure that the alternative system is used instead of the current money system, therefore REPLACING it.
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