As the “rules-based order” of American hegemony collapses, the question of how international transactions are going to be settled rises to the foreground
The essential problem is manifold in nature:
- Will there be a new global currency to replace the dollar?
- How will the increasingly fragmented banking system support transactions across the political divide?
- How will sufficient liquidity be established to facilitate trade?
To a large extent, the answers to these questions are tightly intertwined with the issue of trust, a characteristic of human interactions that lies at the heart of Satoshi’s technological breakthrough, which holds the promise to create a new, fair and sustainable financial system
This essay proposes a blockchain-based strategy designed to facilitate the intergovernmental oil trade in a world where the physical transport layer for value (the banking system) is disintegrating at the hands of both multi-polarity, and the consequent backlash, as the hegemon seeks to weaponise the system to create financial isolation between market participants
Regarding the issue of how oil trades may be settled in the absence of banking support, it is naturally tempting to suggest, in the post-bitcoin era, that transaction settlements should occur in BTC. Bitcoin, after all, represents a ready-made, production-quality payment rail wholly independent from banks. However this approach suffers from a number of drawbacks:
- Its acquisition implies either mining it (which requires substantial resources) or purchasing it from tightly controlled sources
- Its high volatility profile poses unacceptable foreign exchange risks to participants
- The liquidity mechanisms of smart-contract based chains are not available to the bitcoin network
- The lack of true fungibility in the protocol allows sanctioning mechanisms, which is the very problem we seek to solve
And though some of these risks may be partially mitigated:
- government-based projects would likely be in a position to commandeer sufficient resources to do mining
- downward volatility may become limited over the longer term via greater adoption and decentralisation of ownership
- the new Taproot extensions in the protocol allow for greater flexibility in functionality
- zero-knowledge proof technology could be incorporated into the chain
…the reality is that, aside from its legal uncertainty and public image problems — which alone are sufficient to shut down adoption by the business community — the chain is ill suited for our purposes
Let’s hence consider some alternatives
Pioneered by Tether and rapidly gaining adherents, the concept differs from bitcoin in that:
- its tokens are collateralised, and
- the token supply is flexible
The setup presents the following problems:
- unlike with fixed-supply currencies where the issuer is irrelevant because holders can trust the issuance, stable coins feature continuous and discretionary supply creation, which brings back concerns over the conditions under which new supply comes into existence, and doubt with regards to the integrity of the supply
- Because in this arrangement the tokens are merely proxies and intrinsically worthless, the absence of on-chain proof-of-existence algorithms creates substantial risk as token issuers may abscond with the collateral leaving token holders with no recourse
- Due to the pegged nature of their value, loss of value in the underlying asset represents an equivalent loss in the token, which makes tokens from nations with poor financials as undesirable and illiquid as are their currencies
We note here that these problems are insoluble
The recent need for large stimulus packages to sustain populations under lockdown -- owing to the recent Covid pandemic -- has gifted governments around the world a new mechanism by which to issue money: government guarantees
Much in the same manner in which the famous MeFo bonds(1) financed pre-WWII Germany (and the same mechanism used by the US during its reconstruction period, after the civil war), governments are now issuing guarantees on debt, rather than issuing the debt itself
This approach offers several benefits:
- the national balance sheet remains unencumbered as the costs are merely contingent
- the operations can be conducted outside the purview of the local central bank, whose presence represents the interests of foreign creditors (the BIS) rather than those of the nation
- the foreign exchange markets remain untouched, preserving the nation’s purchasing power
In a similar way, governments could create token supplies that are merely guaranteed, rather than collateralised, eliminating concerns over custody of the collateral and the need for proof-of-existence mechanisms
Of course, such tokens, if issued exclusively by a government would then be wholly exposed to the credibility of said government, but by virtue of issuing these within the Vow ecosystem, the benefits of backing by the private sector are neatly captured
Finally, a variant of the stable coin could tether its value to a basket of currencies and/or commodities instead of to a single sovereign currency
This approach is, of course, by no means novel and represents the arrangement behind both the IMF’s Special Drawing Rights currency — used to distribute liquidity amongst central banks — and Russia’s recent proposals for a commodity-backed common currency
From a token perspective, whilst this approach reduces exposure to sovereign credibility, hence increasing liquidity, it leaves open the question as to the composition of the basket, and of course, doesn’t at all solve the problem of proof-of-existence
The Cryptospace Federation envisions a solution reliant on the following components, elaborated upon below:
- A secure transport layer
- A nexus for fiat and crypto
- A reserve currency
- Value gateways
- Retail adoption
First and foremost, it is of the utmost importance that the flow of funds be unimpeded i.e. that no one party or group of parties has the capability of censoring transactions on the network, under any condition
It is also highly desirable that information about exchanges of value amongst participants remain private i.e. the parties involved will always know about each other, but no one else should
Additionally, the chain selected must support Turing-complete smart contract functionality, capable of expressing arbitrary business logic
Finally, interoperability with other chains is a plus
With a secure transport platform at hand, we address the issue of how to transfer value from the legacy system onto the new infrastructure i.e. how to onboard onto cryptographic vehicles in lieu of the existing banking system
As the mechanisms are already in place, the fastest path to a solution involves the issuance of a v-currency(3) within each participating nation. This may mean either:
- the legislation of said v-currency as legal tender with a view towards retail adoption (cf. Vow Is For Governments), or
- an official government guarantee of acceptance of said v-currency, at face value and for government business only
Official backing means trading partners can freely accept said tokens with the reasssurance that they represent real value within that nation's banking system, but with the convenience that the value may be transported globally in real-time, via blockchain. The arrangement also implies that the funds used for payment need never leave the paying nation and thus avoid SWIFT and its obstructing policies, fees and the risk of confiscation. Finally, token form allows participation in DeFi mechanisms like liquidity pools (LPs), custodianless exchanges (like Cryptospace's) and DEXs (decentralised exchanges), allowing for much broader market participation
This approach allows each nation to make the transition to the crypto space in the simplest possible manner, neatly sidelining the existing IMFS(4) and its policies, and without adding undue accounting burden to the nation, F/X risk to operations, or protracted legal battles over the status of the new payments rail
When a commodity flows from one country to the other, the essential problem regarding the settlement of the transaction is:
- does the seller accept the buyer's currency? or
- does the buyer have to keep reserves in the the seller's currency?
Either is precarious as it exposes one side of the trade to counterparty risk i.e. to not only the creditworthiness of the counterparty, but to its political alignment, which at the best of times may prove turbid. The problem is, of course, that nations cannot trust each other and therefore their currencies
The solution is, of course, to avoid transaction settlement in national currencies but reach consensus on a common, reserve currency -- which, in fact, is the role that gold once served and now the dollar serves. But what shall be the characteristics of a reserve currency?
Certainly, it cannot be:
- Collateralised (as that raises the Pandora's Box of issues referenced above)
- Denominational (no one nation should be the issuer, as that leads to the current conundrum)
- Off-chain (as that implies governance segmentation and conflict)
In fact, an ideal alternative is already in place: the VOW token -- a currency that also represents the defining step towards a global economic model that will not only cannibalise the existing IMFS, but also usher a new era or prosperity for humankind (for a deeper look please watch the Bitcoin 2.0 CryptoRich Interview video)
Specifically, deployment of the Vow ecosystem in inter-governmental trade carries the following benefits:
- an architecture specifically designed for commercial trade, particularly well suited for cross-border transactions
- an instant community of liquidity providers that makes any nations v-currency issuance immediately liquit
- existing adoption and scalability across the retail sector and its supply chain
- a feature unique to VOW, which makes it the perfect reserve currenty: asymmetric volatily (to the upside, of course)
Of the last feature, it is noteworthy to say that both commercial and governmental VOW tokenholders will eventually comprehend the asymptotic nature of price dynamics in the ecosystem, which directly results in the aforementioned asymmetic volatility. This feature owes to the fact that:
And, of course, appreciation in the reserve token:
- enhances balance sheets
- increases purchasing power, and
- allows for the winding down of existing debt balances
Every v-currency created is automatically paired with VOW in a liquidity pool(5). This means:
- that importers may pay exporters in their own v-currency, as that may be instantly liquidated for the reserve currency, at the exporter's discretion
- that given the algorithmic nature of pricing on LPs, there is immediate and perfect visibility on slippage, allowing traders on the network to adopt strategies to properly position trades to meet their financial goals
- that the issuing government may choose to mediate volatility by merely sizing the pool properly -- an activity it may control strictly, outsource, or open to the public markets, depending on its goals
- that the existing forex (foreign exchange) markets become obsolete (along with their fee structures and control mechanisms)
- that none of this touches the IMFS
- that the currency is instantly available for trade to the installed userbase within the Vow ecosystem, and available for on/off-ramping via the Cryptospace Federation
So how does it work?
As an example, suppose country X wishes to buy oil (or any other commodity) from country Y. To effect the transaction X mints the number of v-X tokens it needs (by staking(6) 20% of the value in VOW) and uses them to pay Y for its goods. Naturally, Y is willing to accept v-X tokens as these may be converted into VOW at any point via the LP, and VOW carries no counter-party risk. There may also be reasons for which Y chooses to hold onto v-X e.g. when that currency has greater potential for appreciation than VOW or its own currency
Of course, country X could just buy VOW and use it for payments, but doing so foregoes the benefit of the leverage inherent in the minting of v-X, a monetary supply which also neatly serves the purposes of domestic stimulus
The purchase of VOW from the v-X/VOW LP creates scarcity of VOW in the pool, causing the pool to reprice it at premium over the global markets (the magnitude of which depends on the ratio of the size of the purchase versus the size of the pool). Converserly the v-X price will trade at a discount, allowing commercial buyers to pick it up for use in purchases of X's exports. In doing so, such buyers replenish the VOW supply in the pool, harmonising its price with global markets whilst making a currency profit. Of course, it need not be mentioned that arbitrageurs may also play that role
A direct implication liquidity pools, is that the operating country benefits from instant access to capital, participation from the global markets, and yield generation, which attracts investors to its currency
State-level adoption of the Vow ecosystem would only complement the transaction volume of VOW, which already operates privately within 14 countries. This means that not only does such adoption constitute the joining of nations into a new, blockchain-based monetary union (see the Vow Is For Governments paper) but also that governments gain a heretofore unavailable economic stimulus mechanism with infrastructure already in place
From Vow's perspective, governments are no different from merchants, where the product under discount is taxation. This means that in addition to acceptability at the retail level (which already exists), v-tokens may be issued by governments to reduce taxes (by discounting them), a move that would prove markedly popular for the political party that approves such a project, and that would benefit the nation as stimulus that incurs neither debt nor currency devaluation nor loss of sovereignty
The brainchild of Henry Kissinger, the basic concept behind the petrodollar lies in issuance of a monetary supply ultimately backed by a ubiquitously needed commodity: oil
How does it work?
Any nation can issue a currency, but without the agreements in place that allow its exchange for real value (e.g. commodities) they are not useful. In brokering such agreements, which caused oil to be quoted and settled in dollars, Kissinger placed the US at the centre of global commerce, enabling this single nation to do what no other nation can: print dollars without restraint and without diminishing its purchasing power
The arrangement, however, is coming to an end, not because the world doesn't need oil, but because the US has abused its privilege to the great detriment of the international community, and because real value (e.g. oil, urea, natural gas, gold, etc.) lies in the hands of those affected, a solution is possible
Of course, oil merely replaced gold, the commodity of historical pre-eminence in this role. But oil was a better commodity than gold because we actually use it. We need it. At least for now
There are a number of problems with oil:
- its uneven distribution across the planet gives more power to some nations than others
- over the long term humanity will develop far cheaper and cleaner sources of energy, obsolescing oil
- it's off-chain
- it's a single commodity and thus represents demand unevenly
This means that the value of such a token would be stable with respect to the size of the human population, with the added bonus that even in scenarios of shrinking populations, demand may outstrip said loss in numbers, maintaining stability in value
As a bonus, Vow's discounting mechanisms may also make two significant contributions to planetary well-being:
- deflationary in nature, Vow allows participants to discount prices, counteracting inflationary pressures. In so doing, Vow creates price stability as it transitions the world's wealth to onchain facilities
- as sovereign currencies collapse, VOW rises (since currency devaluation represents a rise in prices ameliorated by discount that require the purchase of VOW). The implication of this fact is wealth re-distribution, another of the world's current woes. As the retail customer becomes better off, the ruling elites lose the purchasing power, and therefore political power, allowing for more fair and equitable policies that benefit the majority
The mechanims are already in place. Adoption is occurring at an accelerating pace. It is merely a matter of time before the Vow monetary union makes its benefits obvious to everyone
Conceived to serve primarily as the nexus between fiat and crypto, affiliation in this network has thus far focused on the private sector. However, given the current geo-political situation public participation is quickly becoming the next obvious step
Governments joining the federation would benefit from a cloud-based, state-of-the-art, multi-tenant platform designed expressly as an onramp/offramp path for sovereign currencies to onchain facilities
With its battle-tested infrastructure and partnership with Vow, the Federation is uniquely positioned to deliver immediate solutions, including:
- rapid implementations of new v-currencies
- a two-week integration path into white-labelled mobile wallets, granting access to the installed user base
- deployment and operation of the attendant liquidity pools
- the capacity to deliver existing communities of liquidity providers, and
- with its deep expertise in compliance -- born of operating in the private sector -- of connecting governments to private enterprise already on the ecosystem
In short, the Federation has all that's needed to bring any nation into the Vow ecosystem in the shortest time to market possible
The VOW token is issued and managed by Vow Limited (VL), a company existing under a COBO from the JFSC in the bailiwick of Jersey, UK.
VOW is a fixed-supply utility token issued under the ERC-777 specification on the Ethereum blockchain. Its primary utility is in allowing merchants to issue discounts, which are recorded on the blockchain, to its customer base
The discounting mechanism, enabled via the company's capacity to track bank card purchases via a portfolio of direct integrations with the world’s leading financial service providers such as VISA or FiServ, encourages and incentivises retail demand, and hence productivity along the entire supply chain
Carey Olsen in Jersey have provided VL with a legal opinion that both VOW and v-currencies are simple utility tokens. Similarly, Frost Todd Brown in the USA, has provided a legal opinion that these currencies do not constitute securities under US law, nor are they considered e-money for FinCEN purposes
The tokens are presently listed on centralised, and decentralised exchanges and actively traded on liquidity pools
The Vow model utilises a dual-token strategy with v-currencies used for transaction settlement, whilst VOW itself is used as a reserve asset. By tethering the value of v-currencies to the local currency, the system:
- eliminates cognitive load at the consumer level
- eliminates foreign exchange risk exposure to the merchant
- provides a smooth transition to blockchain-based systems
In essence, the expansion of v-currency monetary supplies serves as a proxy for the aggregate, cumulative demand of real goods and services. It price, in particular due to its accumulative nature, cannot but rise across time, guaranteeing a deflationary dynamic without the associated decrease in demand
- Owing to the punitive prohibitions of the Treaty of Versailles — which effectively denied Germany access to capital — and at the suggestion of then-governor of the Bank of England, Norman Montague, the famous Metallurgische Forschnung Gessellschaft (the Metallurgy Research Corporation) was formed. A shell company with no assets this entity was able to raise substantial funds used to buy weapons during Hitler’s rise to power, by virtue of government guarantees issued by the Reichsbank, under the direction of Hjalmar Schacht, a protégé of Montague’s
- Vow currencies (or v-currencies) are tokens tethered to national currencies and used within the Vow ecosystem
- V-currencies are issued on the basis of a Vow reserve, presently in the ratio of 5:1 i.e. a 20% reserve. All any government needs to do is purchase some Vow, stake it and generate 5x in the local v-currency
- International Monetary and Financial System -- that set of institutions established by the Bretton Woods accord, which dominates money in the world today comprising the BIS, DTCC, SWIFT, IMF and others
- A liquidity pool is a financial innovation with roots in a specialised smart contract whose primary function is the management of asset prices. For a more in-depth look at the technology please view this TalksAboutVow video
- Staking is a mechanism whereby a token holder allows a smart contract to lock his tokens until some condition is met, typically, in exchange for some benefit. In the case of Vow, staking is done for the sake of minting v-currencies