Digital Currency: Money That Pays You Interest

By James Zdralek, Senior Usability Design Expert, SAP

What if the world ran on new classes of digital currency that are inflation resistant, create price stability, discourage bubbles and deflationary spirals? What if they could protect citizen’s savings without reducing liquidity when they save rather than spend?

Rapid change will continue due to ongoing digital transformation. What are the possible outcomes? Which future will happen? How are you prepared?

Futures-backed currency, introduced in a previous article, is a type of futures contract. Businesses would issue a futures-backed currency for each product they sell. The value is derived from the rarity of the currency issued, the demand for goods from that supplier, and the trust in that supplier.

A futures-backed currency issued by a luxury car company, for example, would represent a specific model of car with standard features delivered in three years. Tradable on a digital wireless infrastructure using blockchain technology the contract can be divided up a million times. A million people could trade in part of one car’s future delivery.

A prepaid forward contract, the futures contract that backs the new currency, is similar to a bond. When someone buys a bond, they pay a discounted amount for cash that will be received in the future. In the case of a bond, the good paid for is money. In the case of prepaid forward contract, it is an object or service. There is an increase in value when a person holds onto bonds or a prepaid forward contract. This is where the interest in a futures-backed currency comes from.

Key changes to consider

When money is backed by a prepaid forward contract, there will be some key changes. One will be the number of underlying currencies. There are many products that can back currency. Another change will be the delivery date. There is a specific point in the future at which a forward contract matures. The owner of the contract must accept delivery of the goods to complete the contract. It would be incredibly difficult for people to manage the forward contract for millions of products, so two things could happen to simplify this.

The new monetary system could use smart contracts that always trade maturing futures forward to a more distant future. Alternatively, a service similar to a mutual fund could exist. A mutual fund for car futures would be a futures-backed currency without an expiry date. The agency issuing this currency would manage the trading of the underlying assets to ensure that car futures coming to maturity are traded to a person who is about to buy a car. They would make a profit by using the difference in value between immediate delivery and the cars that will be delivered later.

Variety and values

Each manufacturer would be offering their own type of vehicle which will have different predictable values in the future. This would result in different discount rates for futures-backed currencies offered by different manufactures. These discounts are the interest rates offered to people accepting their currencies. Aggregators then collect these different types of manufacturer specific futures-backed currencies into a mutual fund and offer a non-expiring dateless futures-backed currency.

The interest rate in these currencies would be less than that offered by the manufacturers themselves. The ‘mutual fund’ managers would take their cut, but the fluctuations in price would average out and higher and lower rates would mix to give an industry average interest rate. A new currency that pays the bearer directly for holding it could eliminate or at least severely reduce the need for interest bearing accounts. Banks will not necessarily be eliminated if they turn their efforts to services such as aggregating futures-backed currencies.

There would be individual currencies issued by companies, industry aggregated currencies, regionally aggregated currencies and globally aggregated currencies, each with a corresponding lower interest rate as the risk is aggregated over more and more companies. A futures-backed currency system uses aggregation to create a bottom-up solution in which the interest rate is not prescribed by government but is a natural attribute of the future right to goods or services.

This is a key difference and one of the great things about a futures-backed currency. The interest rates offered by the currencies from different industries will be different and dependent on their risks. This will prevent some of the bubbles that form in the current financial system, where interest rates are not industry specific.

A person who does not care about economics would not be able to distinguish between a national currency such as the Euro and a regionally aggregated futures-backed currency. The benefits of a futures-backed currency would be invisible to them but help even if they were unaware.

Newer technologies like blockchain and smart contracts are allowing people to create accounts and transfer money without banks. By using a futures-backed digital currency, people will benefit from inflation-proof money that pays interest directly.

To learn more, read The Future is Money whitepaper.

This story also appeared on the SAP Community. Follow me on Twitter: @usabilitus.


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