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  • Martin Schmalzried

Soft Revolution (part 3): reinventing money


While everyone is busy predicting the next financial crisis, the next economic collapse, the impending doom brought by the bankruptcy of States, the chaos of cascading chain reaction defaults on loans in various sectors of the economy, it is still unclear how we are going to get out of the mess that the financial system has become. So far, most are trying to patch it up and bring it back to a state of flotation. But is it still possible? In this essay, I will try to completely rethink money and our financial system.


I have already written an article about how a Universal Basic Income (UBI) could be based on a perishable self-replenishing cryptocurrency. This essay is building on and extending the ideas I have explored there.


The first thing to get out of the way is the core principle and premise on which a self-replenishing cryptocurrency monetary system would be built on: the notion that each and every human being, no matter where on the planet, has a right to access the basic necessities of life to ensure his/her survival and live a life in dignity. This means that a UBI would be at the core of a new monetary system built on the following assumption: each human being will contribute to society to the best of his/her ability and that, in the course of his/her lifetime, that contribution will offset or equate at least the value of the necessities of life he/she will consume. Even in a worse case scenario where a number of people do not contribute to society, UBI builds on the premise that their lack of contribution is part of the natural randomness of human society (some people will be naturally more gifted, others will not and some will even be physically prevented from contributing fully to society such as due to a life accident or natural disability) and that it will be offset by other individuals who contribute much more than they consume. This is a very important assumption and I invite you to read my original article on UBI to explore the rationale behind it and the trust in human nature that underpins it.


A new monetary system would be built upon the automatic creation, upon a person’s birth, of two cryptocurrency accounts, a process I will call the Proof of Birth. The creation and subsequent access to the accounts would be based on a Proof of Unique Existence mechanism based on your heartbeat. Some research has indeed shown that no two hearts are alike. A private key for accessing your two accounts would thus be generated automatically from monitoring a short pulsation of your heart, which will generate a unique temporary cryptographic key to access your accounts, sign transactions or carry out any other actions linked to the accounts. (Some solution should be worked out for people benefiting from a heart transplant)


The two cryptocurrency accounts would represent a person’s earnings or monthly income, and the person’s savings/investment. To illustrate how those two accounts would work, here is an example using regular fiat currencies: each month, you would receive 2000$ on your “current account” and 400$ on the savings/investment account. You can use both to purchase goods/services, but the savings/investment account is special: it allows you to take out a loan on your future earnings based on your estimated life expectancy (national health statistics) and your current savings/investment payment level. This means that if you are 20 years old and are expected to live until the age of 80 years old, you could borrow up to 288.000$ to buy a car or a house… Upon purchasing such a good, you would use your unique cryptographic signature to “lock” your savings/investment account until you have successfully repaid the loan (you would no longer receive the 400$ on your savings/investment account).


Now for the interesting part: each month, you would obviously pay for various goods/services. The people you purchase these goods from would not receive the exact amount of money they ask for the goods/services in question. Rather, an algorithm would calculate how much money they received for the goods/services offered and how many people bought them. The next month, that person would receive an increased amount of cryptocurrency based on three main variables: how much cryptocurrency they were paid, how many individual people paid for that good/service (or how many transactions occurred) and how much money they had left at the end of the month.


Lets look at a few practical examples to help illustrate how this works.


A person wants to become a baker and start a business: he/she has to invest some money to do so. He/she locks up their savings/investment account to purchase the premises, and the capital goods (machines, oven) and the raw materials (wheat, eggs…) to start the business. Once he/she starts selling bread, people buy them with their self-replenishing crypto-currency. The crypto-currency, upon arriving on the account of the baker is destroyed, but the amount and the number of transactions is recorded. At the end of the month, an algorithm calculates how much money the baker has left (probably nothing or a very little amount since most of it went into purchasing the raw materials, and paying for his/her own needs), the number of transactions and the amounts of each transaction and adjusts the pay accordingly. The baker has proven that he/she has contributed something valuable to society, which I will call the Proof of Work, and thus deserves to have an increased pay. Both his/her current account and his/her savings/investment account receive larger payment amounts, thus allowing him/her to lower the number of years needed to repay the loan he/she has taken to open the bakery. Now if the next month the baker changes his/her mind and decides to stop working, the algorithm will adjust his/her salary by gradually reverting back to his/her initial/minimum UBI amount.


Justin Bieber and limits to wealth accumulation


Here lies another feature which would be deeply rooted in this cryptocurrency based system: there would be an algorithmically calculated cap to the amount of money one would be paid, regardless of the amounts received from others.


Take superstar singers who are listened to by billions of people around the world. If the algorithm would simply convert the amounts and number of transactions received into a self-replenishing income, it could generate ridiculous amounts of money (which is the case today for extremely popular personalities) but completely disconnected from the satisfaction of all of the Maslow Pyramid of Needs. The cap would simply be how much income they have left after each month. To make a comparison with fiat, if on the first month Justin Bieber makes 1.000.000$ on his current account and 200.000$ on his savings/investment account based on the algorithmic calculations looking at how many people paid to listen to him during a live concert or bought his album that month, if the next month he has 800.000$ left, then the subsequent month, regardless of his concert revenues or album sales, he would get a lot less. This mechanism allows for two things: first it favours spending money which is beneficial to human economic activity as a whole since someone had to work to produce the goods/services that Justin Bieber will have bought (each person’s expenditure is another person’s income) and second, it prevents wealth accumulation without the need for heavy handed government intervention. Basically, if you receive systematically more money than you need, then that money serves no real purpose.


Also note that substantial forms of investment which are considered essential to human needs such as real estate ownership would be calculated in addition to the amount of money available on the current account/savings account. This is to avoid wealthy people to drain their accounts and accumulate real estate in order to escape the algorithmic limit on wealth accumulation. This would however not apply to any goods which are not deemed essential like gold or rare paintings for instance. What is considered an essential human need would have to be decided by the government and worked into the crypto-currency system in one way or another (for instance, for real-estate, it could be via blockchain ownership transfers linked to the crypto-currency blockchain).


Elon Musk and successful entrepreneurs


But what about great innovators or successful entrepreneurs who can make a huge difference in this world and might be limited by this income “cap”? In reality, there is no limit to the amount of income you can receive, so long as you spend it. So looking at successful entrepreneurs like Elon Musk, they would get a large share of the revenue generated from the sale of their products, and so long as they reinvest that revenue (in the form of an algorithmically increased income the following month) in some entrepreneurial endeavour, they will get even more income the following month.


A concrete example would be the following: say Elon Musk gets 1.000.000$ in salary thanks to the successful sale of Tesla cars. If he invests that 1.000.000$ into his Space X project, the following month he will get for instance, 2.000.000$ because the algorithm sees that he is creating great value for society (due to continued sales revenue from Tesla cars) but spends everything he gets and has little left at the end of the month (which means he has used that money for productive purposes like researching reusable rocket technology). This can self-reinforce up to the point where Elon Musk does not know what do to with all that income (and savings/investment available to him which could be huge!) and will gradually settle at an equilibrium. So this system actually incentivizes innovation and productive investment: the more you invest in research/innovation, the more money you get to do so.


Investments, savings, and return on investment/interest


Here, I will make a brief critical examination of the role savings/investments play in our current financial system which is linked to the reason for putting an end to wealth accumulation. Savings and investment are a crucial part of how our financial system works. To simplify, any money that is “sleeping” on your savings account in your bank is put to use by banks in the form of a loan by using the multiplier effect of money. That is, thanks to your savings, the bank can lend money to entrepreneurs or other households. However, the bank always asks borrowers to pay an interest on their loan. This is not only to cover for risk, but also to force people to work harder or to make profits in order to pay for the interest. That is one of the engines of economic growth. The stock market works in a similar fashion: when you invest in stocks or bonds, you expect to receive a certain amount of return on your investment. That return is generated by the “extra” hard work of someone somewhere (increased productivity by a combination of human labour and technology). Thus, in very simple terms, savings and investments in our financial system are a way for people with excess wealth to pressure (proponents of this system would say “incentivize”) people in need of wealth to work extra hard, and profiteer from that extra hard work mostly through dividends on investments or to a lesser extent via interests on savings accounts (this is not the case anymore since interest nowadays, due to central bank policy of low rates, banks and inflation swallow all of the meagre interest paid out on savings accounts).


In a perfectly equal society, investments and savings are a way to mutualize or socialize productivity gains and the fruits of hard work. For instance, say everyone had 100.000$ to invest in the stock market, and invested in index funds which cover an entire nation’s publicly traded companies. Then everyone would get the exact same return from the overall performance of the economy, mutualizing/socializing the individual gains/losses.


On a micro level it can be exemplified with the following: Take two workers, one working for Telecom company A, another working in Telecom company B. In the first year, Telecom company A made a loss of 10% and had to cut back on worker’s pay while Telecom company B made a profit of 10% and could pay out exceptional bonuses to the staff. Now imagine that the worker of Telecom company A bought 100.000$ worth of stocks of Telecom company B, and the worker of the Telecom company B bought 100.000$ worth of stocks of Telecom company A. Suddenly, both workers might find themselves in an equal financial position again since the dividends paid out by Telecom company B would compensate for the loss of income for the worker in Telecom company A, and the loss of value in the stocks of Telecom company A would offset the gains make by the bonus the worker of Telecom company B received. Here we can see that the worker from Telecom company A benefited of the excess profits generated by the worker of Telecom company B thanks to his investments. If next year the situation reverses, then we have a true mutualization/socialization mechanism for smoothing out the fluctuations and uncertainties in the economy for the benefit of everyone.


In a highly unequal society, however, when 1% of people own most of the wealth (and by extension, stocks), then it is almost akin to a form of slavery: people who have nothing to invest are pressured to work hard, either by taking out a loan to meet their most basic needs (shelter, transportation), or by being robbed of the fruit of their labour via a measly pay thanks to a calculated pressure on the labour market via unemployment, in order to generate the interest on wealth for the richest, a mechanism which self-reinforces itself with time and constitutes another “Road to Serfdom” besides socialism.


Coming back to the idea of this self-replenishing crypto-currency system, individuals can only take out a loan based on their own life expectancy and calculated productivity (the amount and number of transactions that are linked to their account) and so they basically owe it to themselves. The UBI amount that they will receive regardless of their productivity can be seen as a return on investment on an initial capital that each person is entitled to in our current economic system, based on the collective ownership of the land which, originally, belonged to no one.


What does this mean in practice. Imagine the following: each citizen, upon birth, inherits 500.000$ from the government, which are directly invested in an index fund which covers all economic activity in that country. If the country grows at a rate of 5%, then that person is granted, each year, a dividend payment of 25.000$ which are unconditional. Every additional effort to generate value in the society will add up to that 25.000$. A similar scheme is applied in Alaska where every citizen is granted a payout from the Alaska oil wealth trust fund. In essence, the citizens of Alaska are considered as the collective owners of the natural resources (in this case, oil) available in their State, and are entitled a right to a share of the profits made from their extraction and use. It is as if they had all bought an equal share of the oil (as in the 500.000$ example above) and received the dividends from its exploitation.


Large companies


It is rather clear how this system would work for independent workers and small entrepreneurs who directly sell a good/service to others, but what about large companies of 100 or even 1000 employees?


In this regard, I would invite you to read my article about worker owned cooperatives, as it is a prerequisite to what I will advocate for hereafter.


As soon as a business is larger than the individual, that is, a minimum of two entrepreneurs, they have the power to create, via their unique cryptographic private key, a new account which has a sole purpose: the centralization of payments made to/from the business and a transfer of the payment proceedings to the respective accounts. For instance, let’s take a company of 100 workers/entrepreneurs: it requires some capital to function. This capital can be invested directly by the workers/entrepreneurs via their ability to borrow from their respective savings/investment accounts. The company uses those funds, collected in the common account, to buy things (raw materials, machines…) and produce things. All sales are centralized in that common account. The total amount of money generated is then split between the respective workers and will determine their salary the following month based on two main parameters: how much they invested initially or upon joining the company and labour market forces.


This last point is a recognition that not all workers/entrepreneurs are equal in the value they bring to a company or in their willingness to carry out a task at any price. Since everyone receives a UBI, if the company needs to hire a worker carrying out a repetitive task on a production line, the “share” paid out of the collective sales made by the company will adjust until it finds someone willing to carry out the task (for instance, the worker would get 1% of the total sales made which will automatically adjust his/her salary the following month based on the algorithm we discussed above)


The investment in the company will be tied to their work contract and will be released/reset if they leave the company or if the loan is repaid via the rise of their income. Take the case of a worker who has invested 50.000$ in a company upon taking up a job there and has worked in such a way as to increase his income to 10.000$ on the current account and 2000$ on his investment/savings account could already have repaid his loan within a year (using some of the current account income to pay off the investment) and thus free up 2000$ per month x his life expectancy in terms of investment/savings.


Finally, what such a system enables is, to some extent, the recoupling of externalities with company owners/workers. In the current financial/monetary system, the owners of a company can be spread across the whole world, completely disconnected from the location of the company they own. This allows for several things like delocalization (exploiting cheaper labour in third world countries) or minimizing/ignoring externalities (if the company owners don’t have to breathe the toxic fumes of their company or eat the poisoned food full of pesticides, they don’t care as much). Recoupling worker ownership mechanically creates some form of ethical behaviour due to self-preservation instincts: workers can’t delocalize themselves, and they don’t want to breathe the toxic fumes that their factory spews out.


Taxes and services of general interest


In such a system, what would be the role of government and how would it collect taxes or organize services of general interest? First, let us not forget that the government would be composed of people that already receive a UBI sufficient to cover their needs, so there is no need for taxation in this regard. The only issue is to incentivize people to take up the various jobs that are necessary for the functioning of government and where that money would come from since the government does not “sell” things directly to people, it taxes them on a mandatory basis to pay for it’s expenditures and services, many of which are provided without an additional cost to society (for instance, calling the police, unless it’s a prank call, shouldn’t cost you anything).


Now regarding the government, only the legislative would function differently. It would be composed of a parliament split into two equal chambers. One would be composed of individuals through sorting, the other of individuals running for election and appointed by vote. The remuneration would be determined by a fixed ratio: elected members of parliament would receive twice the amount of the minimum UBI, and members of parliament selected by sorting would receive four times the amount of UBI. Here, I will presuppose that getting involved in politics is more of a “calling” and that the incentive is much more than just financial and takes the form of power and the possibility to contribute to shaping an entire society which is no small privilege. Members of parliament selected by sorting would be compensated more because they did not choose to run for election. They would have the possibility to lower their pay in exchange for part time arrangement, but would not be allowed to refuse (in order to avoid corrupting politics by driving away people with certain opinions for instance). All decisions would be discussed on equal grounds by both chambers and passing law would require a majority in each chamber. In essence, it is almost as if any political decision pushed by elected members of parliament would have to be vetted by a “mini referendum” (since, given a large enough sample, a chamber comprised of members of parliament selected by sorting would be more representative of the will of the people). Should the chambers disagree, a full scale referendum would be held. During their time in office, the current and investment accounts of the members of parliament would be locked for the duration of their mandate. A new set of accounts, completely separate from the main system, would be created, with a current account bound by the rules described above (2x UBI, or 4x UBI) and an investment account with the same conditions as their former locked investment account (to allow them to continue to make important purchasing decisions like buying a home, during their mandate). No money could be transferred to those accounts (so no one could corrupt them via financial means) but the purchases made by elected members of parliament would be counted as a regular transaction by the main system (otherwise a member of parliament that would purchase something from someone would not be compensated)


Elections would be held at minimum every 5 years or quicker if changed by a referendum. The main crypto-currency system would have a voting system integrated for electing members of parliament or voting on referendum questions. It could also be used to issue votes of no confidence (a procedure would allow citizens, with a sufficient amount of support, to initiate a revocatory referendum)


But how would all the rest of government services function? The executive and the judiciary would be hired like any other individual under the “services of general interest”. However, they would be paid via a centralized account controlled by the members of parliament which has access to a funding scheme with fixed salaries based on seniority and a ratio which can be no more than 3 to help with hiring in sectors in which there is a shortage of workers. For instance, when hired by the government, you would have access to UBI + (1000 units * 1,4 to account for labour market offer/demand in the sector where you would need to be hired). Upon fulfilling certain criteria like climbing in ranks, responsibility or seniority (after a certain number of years), you would get UBI + (2000 units * 1,4) and so on.


Lets take the example of universal single payer healthcare. On the one hand, you have doctors, hospitals and pharmaceutical companies, on the other, you have patients that need treatment. The government would remunerate doctors/hospitals/pharmaceutical companies based on market forces (the cost necessary to incentivize people to work as doctors, to run hospitals or to research/produce new drugs in order to meet the demand of patients, adjusted via the ratio). The government (elected politicians) would remain in charge of determining certain things like which healthcare services are covered under their scheme (are massage therapists included or not? What about homeopathy? …) In case they are not covered, then people can still pay for those services individually just like for anything else.

At this point, you might think: this is very dangerous, as access to a funding scheme which is not paid for directly via taxation could be abused. First, elected members of parliament would not be able, technically speaking, to send any of that money to their accounts (since they are locked for the duration of their mandate). Even if elected members of parliament tried to corrupt citizens to gain votes, the second chamber (elected by sorting) would put an end to it with the help of the judiciary. Second, it is not that different from taxation and how current governments function. Taxation at the source (taken directly from your income) is money you will never have at your disposal and so receiving a 4000$ UBI which would be taxed 50% to fund government expenditure or receiving a 2000$ UBI is basically the same thing. Also, even if governments are limited by the amount of taxes generated for their expenses, they can still print money via a number of ways: central banks, loans from private actors… and thus end up spending more than they receive. In the scheme above, their spending would not work any differently than an individual paying for the doctor, except it automatically socializes and mutualizes the costs associated with healthcare. So instead of you, receiving a higher level of UBI and shelling out thousands of crypto-currency in one shot for a costly operation, the government would pay for it with it’s “unlimited funds” account (you would get it for free). Thus the UBI amount would be calculated minus the costs of all the services that would be handled by government and would thus not need to be paid for directly by individuals. This system could be subject to democratic control where people could vote to “privatize” certain sectors of the economy (increase their UBI and restrict the services paid for by a government fixed funding scheme). Conversely, citizens could vote to “collectivize” certain services if they would prefer to enjoy them for free, handled by the government. A democratic sanction would also be in place in case governments abuse or misuse of such a fund (vote of no confidence…) Finally, let us remember that unlimited government expenditure is not a problem per say. It is only a problem when that unlimited spending amounts to no equivalent delivery of a service or creation of a valuable good. So as long as such government spending pays for a healthcare service, an efficient court system, or a working garbage collection service, it’s not a problem at all. The whole point of this crypto-currency system is to reward productive and valuable work.


A similar mechanism could be used for everything else: the government would set the legal requirements for how many times garbage collectors should collect trash and how to dispose of it, and then pay people to carry out that job using the fixed funding scheme at the government’s disposal.


How would you calculate UBI?


It would have to be dependent on the average costs of living with a certain margin for financial security and which services are government funded or privately provided. In this case as well, an algorithm could help. Given a long enough time period, an algorithm could discern incompressible costs and spending patterns and adjust UBI accordingly.


How would this new monetary/financial system affect the legality of various economic activities?


The government would remain in charge of defining which activities are legal or not, so in this respect, nothing would change. For instance, governments could still decide that producing and selling cocaine is forbidden and punishable under the law.


How would you transit from the current system to this new one?


Currently, it is clear that there is no incentive for people, especially those that have accumulated wealth to radically change the financial/monetary system. However, in the case of a major collapse of the financial/monetary system, wealth accumulated in currency could amount to nothing under hyper-inflation. At that point, such a switch may be acceptable to a wide majority of people. In the end, such a system provides much stronger guarantees in terms of plain survival and in terms of the permanent right of access to certain basic goods/services.


Who would set up the underlying technology and keep it up and running?


The Smart Contract technology and the upcoming Proof of Stake (POS) update to the Ethereum network could be a basis for running this cryptocurrency system. Ethereum’s smart contracts could be configured to replenish automatically each account based on an algorithm (automatically destroy the value of the transactions while recording them to calculate the next month salary to be paid), verify that the account owner is a unique, living individual (heart beat, perhaps some other biological inputs), and provide for collective decision making via voting. People could use part of the cryptocurrency automatically generated each month in a POS mechanism to increase their overall income (they would receive an interest on the cryptocurrency they lock up in the POS mechanism) and secure the transactions system, and the continued access and use of their accounts would be conditional to maintaining a pruned node of the network (a hardware device which stores part of the transaction history).


A team of developers, remunerated for their services by the people using it in a similar fashion to open source services like Wikipedia, would be in charge of maintaining the code and rolling out updates, which would have to be voted on by the network users (each user would vote to accept the update and rolling out the update would require a majority vote).


How private would it be?


The transactions would be visible to everyone and traceable as well since the accounts are directly linked to an individual, but the object of the transactions (the goods/services exchanged) would not. So the government or other people would only see the value of each transactions, not what the underlying exchange was. Government would only investigate using traditional tools (police investigation mandated by a court) in case of a clear violation of the law (selling cocaine, unauthorized weapons…)


Wouldn’t people simply form “currency swap” groups where they would mutually exchange their left-over crypto-currency to artificially increase the amount paid next month?


There would not be a great incentive to do so. First of all, what would more of the crypto-currency enable them to do if they cannot manage to spend the leftover they already had? Second, if they own certain essential assets like real estate, those cannot be swapped and will weigh on the total amount they will get paid anyways. Third, it would be silly for them to swap their left over crypto-currency when it would be more advantageous for them to pay for something they need or want which would achieve the same result (draining their account) but at least generate some productive human activity.


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If you have any thoughts, please do share them! This idea is a work in progress.

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