By Newman Banks
In previous articles in this series, we discussed the definition and characteristics of Good Money. The most important properties require that:
- Good Money derives its value from real goods and services.
- Good Money must allow for the rapid exchange of goods and services with close to zero transaction costs to the buyer or seller.
- Good Money should be reasonably and predictably stable.
- Good Money should be flexible.
- Good Money should clearly reflect and represent the value of goods and services.
- Good Money exchanged in a transaction should be transparent and be easily recognized as relatively equal values of goods and services.
- Good Money should represent a certain “standard of value”.
In this third article of the series, we want to talk about how the new concept of the privately branded digital currency, Leondrino, combines all the properties outlined above and is therefore able to meet this new standard of “Perfect Money”.
The essential idea of creating this new digital currency is foundationally tied to the first property – Good Money has to derive its value from real goods and services. This property is something that almost all cryptocurrencies and even government issued fiat currencies fail to satisfy. In fact, each Leondrino derives its value directly from a predefined and identified good or service (or set of goods and/or services). Specifically, this means that the exchange one unit of Leondrino is defined in terms of an equal value of a specific good or service. Further, this value is enforced through a binding legal contract between the company producing the good or service and the administrator of the Leondrino currency (Leondrino Exchange). The contract allows different variations and degrees of freedom built into the value of the private branded Leondrino so that the administrator of the branded Leondrino can manage inflation and deflation aspects of the digital branded currency. Therefore, the unit value of the Leondrino has a controlled and limited ability to deviate from the real value of the underlying good or service. Note that, as mentioned, this good-based value property of Good Money is not incorporated into any other digital currency, where the value is often derived from mining algorithms and CPU times. As essential as this property is, it is not sufficient by itself as a base for digital currencies to meet our full definition of Good Money.
The next property of Good Money is related to the ability to enable rapid and low-cost transactions. Once a value-based infrastructure is established and operational, the next step is to ensure that sending and receiving digital money generates minimal transactional costs to the participating parties. Paying for a good or service in Leondrino follows essentially the same process as any electronic transaction today – nothing more than making payment to the company for a specific good or service, except the typical merchant transaction fee using Leondrino is close to zero. And this holds true for international transactions worldwide – without substantial additional “foreign transaction” fees. The payment is processed based on a predefined value of the branded Leondrino currency, the parties are verified, payment is reconciled and the transaction is fully settled almost instantaneously. The only part of the transaction that might take time is the possible shipping of a purchased good.
The third property of Good Money is stability, that is, currency that maintains low volatility and offers highly reliable and predictable value over time. Stability in value is often the Achilles heel of digital currencies. In fact, the most famous digital currency, bitcoin, has fluctuated heavily in the years since its inception. At the end of 2013 a single bitcoin unit (which can be sold/traded/exchanged in fractional units) reached a high of over $1,000 USD, only to lose value in the subsequent year, decreasing to $250 USD for a single bitcoin unit. Since then bitcoin has been steadily trending higher in value, driven by an increasing acceptance of the bitcoin in the marketplace economy as well as in financial circles. Despite rumors about bitcoin Exchange Traded Derivatives (ETDs*), acceptance has grown to the degree that there is the possibility that citizens at least in one city in Switzerland, may able to pay their local taxes with bitcoin. Because bitcoin value is intrinsically subject to speculation and ETD volatility, it is not difficult to imagine that if this acceptance comes to a standstill, or even wanes, a sudden and potentially significant decrease of bitcoin value will follow. This direct relationship to the property of stability of Good Money is where Leondrino demonstrates value as a currency and even as a prospective investment asset. Due to the direct coupling of Leondrino to real goods and services, market forces will tend to keep the value of Leondrino closely aligned to the prices of the underlying goods and services. Additionally, there is an algorithm built in to the brand-specific monetary policy which places controls on the fluctuations of the value of each privately branded Leondrino. The forces of supply and demand are monitored for each privately branded Leondrino, so that both the long-term value of the Leondrino and the short-term variations of the price can be managed according to the brand-specific monetary policy against the value of the underlying goods and services. Apart from keeping prices stable, timely management and thoughtful application of each brand’s monetary policy also provides sufficient and appropriate liquidity on the buy side as well the sell side of the privately branded Leondrino as a stable and relatively predictable investment asset, aligned with the health and growth of the brand which has issued the Leondrino.
Next on our list of properties of Good Money is the need for flexibility, and is one of the most prominent features that make digital currencies so attractive. Using Leondrino it is possible to establish a great variety of tailor-made digital currencies according to a given purpose. For example, startup businesses can raise financing through the issuance of their own digital currencies from which early investors can derive benefit by acquiring an asset which is based on the prospective success of the startup. Offering digital currencies as an investment asset contributes to a broader democratization of start-up financing, and provides a pathway for small “investments” by many people (think crowd sourcing). Another flexibility is to design digital currencies exchangeable and valid only within certain geographies. This concept would directly foster benefits to the local economy, which can also include the local populations. Currencies can be designed to be time-limited, meaning they are only valid for exchange for a short period of time. This concept will incorporate virtually no investment advantage for the currency holder, but would drive more immediate spending, which would directly help companies overcome short-term liquidity challenges. Conversely, other currency strategies could include a long-term view, where future services can be paid for at today’s “rates” but not spent for those services for months or even years in the future. Consider a highly conservative monetary policy, for instance, in a “health dollar” which is limited to an annual inflation rate of its currency to less than 2%. Not only would the real cost of healthcare be restrained, future costs for healthcare services could conceivably be less than the average inflationary rates of the Consumer Price Index – if paid for by “health dollars”.
The property of clarity of Good Money related to the prices for goods or services is a consequence of directly linking the value of the Leondrino to the value of real goods and services. This direct linking enables the market forces of supply and demand to find equilibrium in the exchange rate of Leondrino that reflects not only the current market value of the underlying goods and services, but is also aligned with expectations for maintaining equilibrium in the value of Leondrino and the underlying goods and services in the future. Clearly identifying value through directly linking Leondrino and real good and services provides a window into direct price discovery without the need for further investigation.
Building on clarity of value is a primary advantage of Leondrino and corresponds to the sixth property of Good Money, an understanding of the equality of values exchanged – money for goods. In a barter economy it is impossible to keep track of the exchange prices between all the (variable, unequal and various) goods exchanged across all parties. As a matter of fact, for 1,000 goods exchanged, there are virtually hundreds of thousands of possible exchange price scenarios. This challenge is solved by the common ability of all users of Leondrino to recognize its clear and transparent value – and it is solved in real-time. Conducting a transaction using Leondrino combines the advantages of barter economies, which are based on tangible goods, with the comfort and familiarity of working with traditional fiat money. However, Leondrino cannot be manipulated by central banks which is crucial for Good Money.
Finally, the last property of Good Money must reflect a certain and consistent expectation as a standard of value. Establishing a “standard of value” (a well-defined and understood exchange value – equality of money for real goods) is one of the greatest advantages of Leondrino. Good Money, which derives its value from real goods, can be quickly sent anywhere in the world, and market forces drive that money to where the demand for Good Money is strongest, especially in the context of an understood standard of value. A clear standard of value also drives acquisition (without regard to geography or international monetary complications or barriers) of real goods and services to where they best meet an understood standard of value. Consumers are most satisfied when they know they have acquired a good value. This possibility of unencumbered international trade using Leondrino enables a truly global economy based on Good Money as a vehicle to acquire a solid value.
This article is the last in this “Good Money” series. In the future, we will highlight some details of Leondrino Exchange’s technologies and its algorithms and provide some emphasis on how private branded Leondrino currencies can contribute to the establishment of Good Money economies – and the prospect of creating “Perfect Money”!
* An Exchange Traded Derivative (ETD) is a financial instrument whose value is based on the value of another (potentially variable or even volatile) asset, and that trades on a regulated exchange.