Protocols, Promises & Power _20_11_20
- 1. Promises, Protocols & Power Strathclyde University Chris Cook Senior Research Fellow, Institute for Strategy, Resilience & Security University College London 20 November 2020
- 2. About Me – Legal Designer & Developer Forensic accounting – insolvency & fraud investigation Regulation – markets & enterprises Market & enterprise development Networked market development Research into resilience – institutions & instruments
- 3. Definitions Fintech Finance (Law & Accounting) + Technology ( Data Processing & Communications) = FinTech Financing Short/Medium term, medium high risk/reward development finance for new productive asset or enterprise Funding Long term, low risk/reward funding based on completed asset or mature enterprise 3
- 4. Context Reality-based economy Location (3D Space) Energy Intellect Market 3.0 - evolution of markets Market 1.0 - decentralised & disconnected - People Market 2.0 - centralised & connected - Middlemen Market 3.0 – decentralised & connected - Networks Trend to Services Energy Intensity Capital intensity
- 5. Fintech 1.0 – Tally Sticks Number/Quantity - Notches Description of value exchange & Counter-party Identities Encryption - grain of the wood (Nature's hash)
- 6. Fintech 1.0 – Proofs & Promises Tally-as-Proof - receipt for past, not future utility eg energy use Tally-as-Promise - prepay credit obligation to provide future utility requires trust in promissor Single Entry – the instrument is also the accounting record Authentication – the grain of the wood is nature's encryption!
- 7. Instruments 1.0 - Proofs/Receipts for Value Asset buyers receive a bearer title document eg a Deed Memorandum tally was proof of past value transfer/receipt Issued by seller in exchange for value received identifying buyer and describing value transferred Receipt has zero objective/intrinsic use value
- 8. Instruments 1.0 – Promises/Credit Obligations Promise/Credit returnable in payment for goods & services Issued by supplier in exchange for value received Rate of Return - rate over time at which credit returnable to issuer in payment for services Rate not fixed - depends on existence & amount of flow Promise/Credit is a relationship not an exchangeable object
- 9. Institutions 1.0 Unincorporated associations of individuals Societies - common interest Companies - common purpose Colleges – common knowledge Agreements to share risk, cost and surplus
- 10. Institutions 1.0 Treasuries – issue sovereign promises at a discount returnable in payment for taxes/rentals Mints – apply standards, coin & issue currency (generally acceptable credit instruments/objects) Exchequer – physical ledger
- 11. Fintech 2.0 – Double Entry Bill of Exchange – Assignable Promise
- 12. Instruments 2.0 Equity Debt Derivatives Fiat currency All are exchangeable/tradeable objects
- 13. Institutions 2.0 Corporate (“legal person”) Corporation Sole (eg the Crown) Collective Corporates Public - States, Municipalities Private - Companies limited by shares or guarantee Issues Intermediaries which alienate people Principal/agent problem of management capture “Tyranny of the Majority” - 51/49% governance
- 14. Institutions 2.0 State Treasuries Central Banks Private Banks Derivative Exchanges Clearing Houses Stock Exchanges & Trading Networks Passive investments eg Index funds & ETFs
- 15. Fintech 3.0 – Shared “Triple Entry” Accounting 1998 - 2001 “NewClear” Shared Market Transaction Registry recorded legally binding transactions for any instrument or jurisdiction however negotiated or performed (Cook) Bilateral (P2P) online messaging/agreement Shared Database Associative/Club Market User Agreement Unique registration in time order 1997 -2003 Web-ledgers (Boyle) 2004 Ricardian Contracts (Grigg)
- 16. Fintech 3.0 - Blockchain & Coins Blockchain as agreement between machines & devices - collective machine protocol for encrypted transaction database - authenticates electronic transactions – no 'double spend' - But entire database is encrypted & replicated synchronously for every new transaction Coin Instruments - Proof of past value creation (eg Proof of Work/Stake) - Subjective exchange value but no objective utility
- 17. Fintech 3.0 - Venezuela and El Petro Petro is based on oil - acceptability of currency is based on utility - many different types & qualities of oil - consumers use gas, oil products, energy services not oil Petro is a Proof not a Promise - Proof of payment 'backed' by oil reserves - No obligation to deliver either oil or money - Petro cannot be used instead of Dollar to pay for Venezuelan oil
- 18. Fintech 3.0 – Promises/Credit Obligations
- 19. Institutions 3.0 - Capital Partnership Capital Partner (Investor) provides money or money's worth of goods, services, technology, assets Capital User applies resources to create a productive asset (Land, Energy, IP) with use value/utility Capital Partnership does not own anything, do anything or contract with anyone Capital Partnership is simply an agreement sharing risk and flows of use value/utility
- 20. Institutions 3.0 – Clearing Union Investors Credit Obligations Community Asset Users £ % in £ or Credits Dividend In Credits Manager Mint Payment in £ or Credits Prepaid Credits Shared Ledger Exchequer Custodian Treasury £ Credits
- 21. Clearing Union Acceptor has no enforceable right to delivery of £ (debt obligation) or £'s worth (derivative obligation) Promises may be assigned A>B>C>D & returned by final acceptor in payment for value supplied by Promissor Clearing Union does not own anything, do anything, contract with anyone or employ anyone Clearing Union is a mutual assurance agreement sharing risk and cost of non-performance
- 22. Community Treasury Treasury as Custodian issues assignable promises/credit obligations in exchange for value received from Acceptors Service provider (Mint) manages issuance & maintains shared ledger (Exchequer) & secure messaging Performance of Promissor is mutually assured by Protection & Indemnity (P&I) agreement - Clearing Union
- 23. Energy Fintech – Denmark National Grid Natural Grid
- 24. Energy Fintech - Resource Resilience Since 1973 Denmark's GDP has doubled, energy use has been stable and carbon fuel use declined How? Mandate - minimum carbon fuel input for a given output of electricity, heat or power (Energy as Service) Least energy cost policy; not Least DK (or €, $, £) Cost Massive public investment in renewables, heat, energy efficiency, transport Outcome – decentralisation – trend to a Natural Grid
- 25. Energy Fintech 1778 - James Watt Atmospheric Engine James Watt Steam Engine
- 26. Energy Fintech - Pumping as a Service James Watt steam engine much more efficient at pumping water than Newcomen Atmospheric Engine In exchange for use of the pump, miners agreed a share of one third of coal savings Smart Swap/Capital Partnership – Intellectual value exchanged for value of carbon fuel savings at retail price Not pumps-as-a-commodity - Pumping-as-a-Service
- 27. Energy Fintech – Energy Credit Obligation (ECO) ECO is - Returnable in payment for energy services (heat/cooling, power, mobility) - Issued by Energy Treasury managed by energy service provider (Mint) vs value received - Accounted in energy in a shared energy ledger/exchequer ECO issued, assigned, returned subject to mutual assurance of performance (Energy Clearing Union)
- 28. Energy Loans – prepaid Production or Savings Producer - sells energy forward and locks in price - interest-free energy loan until credit returned vs supply Consumer - prepays energy & locks price or repays out of savings Investor - energy-linked return on investment
- 29. Energy Treasury - Outcomes Independent of location/state denominated in energy, not £, $, € Energy return (no interest/discount rate) Energy Treasury issues ECO - banks may provide Mint services or introduce energy investors to energy investments Energy economics replaces dollar economics Natural Grid replaces National Grids
- 30. Community Energy Treasury - Scenario Point & Sandwick Community Development Trust - Lewis 3x3 MW private wind turbines generate £54k pa for community 3x3 MW Point & Sandwick turbines generate £500k pa and up to £2m pa when debt is repaid Income funds expenditure benefiting community Wind as a service partnership with turbine manufacturers and ECO funding would drastically cut funding costs.
- 31. Community Fintech Mobilising capacity - people & place People – Peer2Peer (P2P) £ credit obligations based on capacity to provide goods & services Place – Land use credits - Peer2Here £ credit obligations based on productive capacity of land/location Social Credit – community 'loyalty point' tokens voluntarily accepted in payment
- 32. Housing as a Service Occupier/Community Members - pay for housing as a service in £ or £ denominated credits - share surplus via credits (Care/Culture Dividend) Manager Members (Service Provider) - receive %age share of £ Investor Members - sale of discounted £ land use (rental) credits funds housing - £ credits may be used to pay rent or sold to other occupiers - Capital & surplus from discount realised as £ credits are returned against rent - “Rate of Return”
- 33. Housing as a Service - Outcomes Treasury - Neutral Governance – no stakeholder member dominates - community custodian has right of ultimate veto Cooperative & Interdependent Associative agreement between independent people Capital Lite – services relationship not transaction-based Sustainable - interests aligned to maximise benefit & minimise cost Peer2Here Land Use Credits enable credit/currency local by definition
- 34. P2P Credit - a Traveller's Tale Hotel A Lady D Butcher B Baker C €20 €20 €20 €20 Traveller€20 Open/Unsettled Promises/Credits A €20 to B B €20 to C C €20 to D D €20 to A
- 35. P2P Credit - Chain Settlement A>B>C>D>A Hotel A Lady D Butcher B Baker C €20 €20 €20 €20 Shared Transaction Repository STR settlement bot identifies €20 chain settlement pathway A< B<C<D<A
- 36. Mutual Assurance – Risk Sharing by P&I Clubs For 150 years, Protection & Indemnity (P&I) Clubs have mutually guaranteed shipping risk Lloyds won't cover For 140 years P&I Clubs have been managed by Thomas Miller as platform service provider
- 37. Service Provider sets guarantee limits, handles disputes/non-performance & manages system Seller A Member Credit Value Platform Service Provider Shared Transaction Repository Buyer B Member Data Data Data
- 38. Community Treasuries Merchants & Consumers share system & non-performance costs Service Provider (Mint) manages mutual assurance limits, standards, secure communications, transparency, performance P2P credit obligations recorded in shared ledger/Exchequer - Mutually assured chains A>B>C>D>A (cf Ripple) - Conventional currency: Treasury/Bank of England £ credits - £ denominated land use credits (currency local by definition) - ECO - energy credit obligation - Voluntary social credit (cf loyalty points)