Centralised Creation, Centralised Certainty
Gopalan Ramachandran
CreaSakti is an ally of the Indian economy. Building the five-trillion-dollar economy is our focus.
“Centralised Creation, Centralised Certainty” is the seventh in CreaSakti’s sovereign digital money (SDM) series. CreaSakti and its two predecessors – BERM and IndiaGrow – began working on the SDM project in November 2016.
CreaSakti’s SDM effort has several objectives. The first set of objectives pertains to the logical and operational brilliance of money as we know it now and use it now. The second set of objectives pertains to the principal deficiencies of cryptocurrencies.
We began with the objective of serving sovereign governments and their central banks in the discussions, decisions and design pertinent to digital money. BERM’s assignments for our customers in business, central banking, depository banking, investment banking and government led us early to this pursuit. BERM has been associated with exchange-traded markets, clearinghouses, and international payments and settlements.
Primacy of the sovereign
There has been a surge in the discussion of central bank digital currency (CBDC) over the last three years. CBDC uses an electronic record or digital token to represent the virtual or digital form of a fiat currency. The issuance of CBDC is centralised. The central bank or the monetary authority of a sovereign nation regulates it.
CreaSakti’s focus has been on the sovereign since 2016. Our focus is not on the “central bank”. The central bank is one of many people-centric institutions of the sovereign.
First, central banks serve nations and people. They are institutions created by and empowered by sovereign governments. Second, they gain credibility and acceptance because of their sovereign backing and guarantee. Consider this. Currency bills issued by the Reserve Bank of India (RBI) are guaranteed by India’s “central government”.
Therefore, our comprehensive effort since November 2016 is known as the “sovereign digital money” project. Sovereign governments are the intended beneficiaries. Our principal recommendations were published on February 26, 2021.
Bilateral IOU: A starting point
Money as we know it now is logically brilliant. It is intuitive. It is operationally consistent with specialisation, value creation and the exchange of value within society.
Money is not a pre-existent asset such as gold. Money is not a pre-existent asset that is then passed from the recipient of value to the creator of value.
Money, in its most robust and in its simplest form, is an “I owe you” (IOU). The IOU emerges spontaneously. The recipient of value “generates” the IOU at the time of the transaction. The creator of value “receives” it at the time of the transaction.
The IOU could be on any medium, including a paper napkin. Let us assume it is “bespoke”, “customised” and “bilateral”. Let us assume that the IOU is a “decentralised” creation. The two participants – buyer and seller – in a transaction create and then accept the IOU. They are the counterparties.
The Amana IOUs
The residents of Amana in the United States of America (USA) had fled religious persecution in Germany in the mid-1850s. They reached the east of the USA first. They then moved to the mid-west. They flourished for over 80 years in the vicinity of Iowa City in Iowa on the banks of the Iowa River.
They flourished for over 80 years in social and economic isolation. They believed in private enterprise. They did not believe in freeloading.
They flourished because of their specialisation, work ethic, trust and IOUs. First, they did not use the United States dollar (USD). Second, they did not use gold. Third, they created IOUs on the go.
The IOUs were bilateral and decentralised. Let us consider a farmer, a blacksmith and a brickmaker. The farmer produces grain. The blacksmith repairs ploughs. The blacksmith provides a service. The brickmaker makes bricks.
The farmer generates an IOU in favour of the blacksmith when the blacksmith repairs the farmer’s plough. “This blacksmith” could use “this bilateral, decentralised IOU” to buy grain from “this farmer”. The “farmer IOU” is, thus, bilaterally personalised.
Bilateral, decentralised IOUs are shackles
We will continue to analyse the outcomes in the present tense. The bilateralised farmer IOU makes the blacksmith an unwilling and unwitting prisoner of the farmer. The blacksmith is stuck with one commodity: grain. The blacksmith is stuck with one source of grain: this farmer.
This bilateralised farmer IOU gets nothing except grain and only the grain grown by this farmer. The blacksmith needs tools to make and to repair ploughs, fruits to get nutrients, clothes, and bricks to build a home.
Let us consider another pair of counterparties: the farmer and a brickmaker. The farmer sells grain to a brick kiln owner. The kiln owner (brickmaker) gives the farmer a bilateral, decentralised IOU. This “brickmaker IOU” entitles the farmer to buy bricks.
However, the farmer has a house. The farmer does not need bricks. The kiln-generated IOU is of little use to the farmer. The farmer is now an unwilling and unwitting prisoner of the brickmaker.
Multilateral IOUs
The blacksmith needs bricks. The brickmaker makes bricks. But the brickmaker IOU is with the farmer. The farmer does not need bricks. All three are in a bad predicament.
They do not have to be in this bad predicament. The farmer, the brickmaker and the blacksmith would all be better off simultaneously if the blacksmith could use the IOU issued by the brickmaker.
Could we ask the farmer to endorse the brickmaker IOU in favour of the blacksmith?The blacksmith could then buy bricks from the kiln by giving away the brickmaker IOU. Good idea. The farmer will not any longer be a prisoner of the brickmaker. The blacksmith will not be a prisoner of the farmer. What a fine triangular flow of value and utility!
Natural end of an obligation
There is another important event – an end – and an attribute. The blacksmith could then buy bricks from the kiln by giving away the brickmaker IOU. This is a turning point and an end. The brickmaker IOU returns to the brickmaker. The brickmaker IOU had originated here. The brickmaker IOU had obligated the brickmaker to deliver value to the farmer.
This value has now been delivered to the blacksmith. The brickmaker has no further liability. Will tearing the brickmaker IOU impair the three-person economy? No!
When the brickmaker IOU is shredded by the brickmaker, nothing significant is lost. The obligation is gone. The brickmaker owes no one anything.
The paper is gone. The ink is gone. The shredded paper can be used as biodegradable manure. The ink could be extracted and recycled. These will be discussed soon.
In the generation of economic value, the IOUs are facilitators. Money is a facilitator. Money is not an asset. It has a temporary value and an extinguishable value. Money is merely a device. I will discuss this soon in another article.
Endorsement and doubtful authenticity
Bilateral, decentralised IOUs enable the first set of transactions. Then they make prisoners of all. The pistons then jam in the cylinders. The economic engine sputters to an immediate halt.
The IOUs are too bespoke and specific.Therefore, they become “worthless” and “powerless”. They are unusable inventory even while economic and physiological needs remain unfulfilled.
The farmer owns the brickmaker IOU. Its utility will come to life when the farmer uses it to buy bricks.
Or, its utility will be released when the brickmaker IOU in favour of the blacksmith. Then the blacksmith will realise its value.
In this three-person economy, the blacksmith will have to believe that the brickmaker will accept the authenticity of the brickmaker IOU endorsed by the farmer. This is the “central problem” caused by the “decentralised issuance” of IOUs.
Fraud and fake
First, is the farmer faking an IOU? What that involves is the farmer claiming to have sold grain to the brickmaker. The brickmaker would know whether the brickmaker IOU is real or fake. However, the blacksmith would not know whether it is real or fake.
Before we move on to the second part of the central problem caused by the decentralised issuance of IOUs, we will make one more assumption. This farmer has sold several bags of grain to this brickmaker in multiple tranches. This farmer owns multiple brickmaker IOUs. The blacksmith knows this.
Second, the blacksmith takes a chance and fakes one brickmaker IOU. Since there are many outstanding brickmaker IOUs with the farmer, the brickmaker accepts this IOU in good faith. But it is a fake.
There is another hazard. If the brickmaker IOU were a fake, the brickmaker would be unable to determine who faked it: the farmer or the blacksmith. The hazard: the blacksmith could be using a farmer-faked IOU but may be blamed for deceit. Why? The brickmaker knows the farmer but has never met the blacksmith.
Thus, bilateral, decentralised IOUs are a problem for all. This central problem impairs everyone. Therefore, the central problem requires a “centralised solution”.
The blockchain approach
Digital blockchain technology has attempted to address this problem. Blockchain is a system of recording information arising from a transaction in a manner that makes it difficult or impossible for the two counterparties and others to change, to hack, or to cheat.
A blockchain in its general and simple form is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Let us combine Amana from the past with the blockchain technology of the present. The farmer, the blacksmith and the brickmaker are now on the blockchain.
Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. When the farmer, the blacksmith and the brickmaker engage in transactions, their bilateral transactions are added in the distributed ledger.
The decentralised database managed by the farmer, the blacksmith and the brickmaker uses the distributed ledger technology (DLT). Every transaction is recorded with an immutable cryptographic signature.
Thus, authenticity is established and retained. Authenticity is visible and verifiable.
There is no room for fakes. Everyone – the farmer, the blacksmith and the brickmaker – trusts the system. No one can cheat. However, blockchain technology and the DLT preserve the bilateral character of the IOUs.
Prosperous Cholas and centralised money
The central problem caused by the decentralised issuance of bilateral IOUs can be solved in another elegant manner. That is exactly how the rulers and the citizens of India’s Chola dynasty solved the problem.
The Chola dynasty was one of the longest-ruling dynasties. Its recorded history extends from the third century before the Christian era (3rd century BCE) to the beginning of the thirteenth century in the Christian era (13th century CE).
Private enterprise, specialisation, agriculture, manufacturing and maritime trade flourished in the Chola realm. The rulers and the citizens of Chola understood the pivotal role of money. The productivity and the prosperity of the Cholas were predicated on the logical brilliance of money.
Metal money
Paper’s recorded history began in the first century in the Christian era (25 CE). The Cholas had no idea what paper could do until it arrived. But long before that, they turned to metals to make coins.
Cholas issued coins in gold, silver and copper. The sovereign – the Chola monarch – issued money. Farmers, craftspeople, professionals, traders and the sovereign used money to make the Cholas one of history’s prosperous people.
Multilateral trust and centralised certainty
First, the sovereign was one of many counterparties and users of the Chola money. They were part of the economy as buyers of services, grain and manufactured products.
Second, the Cholas earned taxes from land revenue and trade tax. The products sold were governance, infrastructure, environment, health, internal security and international familiarity.
Third, thereby, the Chola monarchs were generators and recipients of the IOUs in multiple denominations. The Chola rulers issued fungible IOUs. One of the two putative counterparties was the Chola dynasty.
Fourth, thereoe, Chola money was generic, multilateral money. Chola money did not fit the description of farmer IOU, brickmaker IOU and blacksmith IOU.
Fifth, Cholas did not have a central bank. The sovereign knew what had to be done to sustain and to expand a magnificent economy within India and across some parts of Asia.
Sixth, Chola money was legal tender. The sovereign made payments in Chola money. The sovereign received taxes in Chola money. This model was consistent with the certainty that one of the two counterparties in a transaction was the Chola monarchy.
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Seventh, thereby, Chola money enjoyed multilateral trust and centralised certainty.
The modern Indian rupee is identical to Chola money. Is that surprising? No! Money as we know it now is logically brilliant. It is intuitive. It is operationally consistent with specialisation, value creation and the exchange of value within society. India’s sovereign digital money will be as logically brilliant, intuitive and operationally consistent with the digital possibilities.
