“The prevailing framework we use to guide macroeconomic activity is based on outdated paradigms. Models that are typically used to govern money creation and interest rates, for example, still treat private banks as simple intermediaries, ignoring the fact that they are big, active, money-creating elements unto themselves.
That banks have their own motivations and profit-making strategies injects major opacity into the system. It’s no wonder that the 2008 mortgage crisis was difficult to see coming.”
So says Alex “Sandy” Pentland, a professor at M.I.T. described as “one of the most cited authors in computer science,” in collaboration with Alexander Lipton, a Connection Science Fellow at the Massachusetts Institute of Technology.
The two dream of creating a somewhat complex cryptocurrency that is backed by “alliances of small nations, businesses, commercial traders, credit unions or even farmers [who] put together enough assets to back a large, liquid currency.”
The Digital Trade Coin (DTC) “boils down to assembling a pool of assets, contributed by sponsors, appointing an administrator, who will manage the pool, and digitizing the ownership rights on this pool. In addition, we build a special-purpose narrow bank, which facilitates activities of the administrator,” they say.
Inspired by Ripple’s protocol to facilitate a very high number of transactions, they are to incorporate permissioned validators to transfer eCash once that has been tokenized.
The tokenization process in its simplest form firstly involves the providers of commodities, such as an alliance of farmers. They then interface with a “narrow bank” which has the function of receiving cash from participants, giving it to the farmers, then issuing tokens to the participant in return.
That token can then be exchanges with others and re-exchanged into fiat if desired by reversing the above process, so ensuring a stable currency.
Stable, but very complicated. Trusted third parties here are necessarily introduced to tokenize the commodity, but why such commodity is needed rather than algorithmic maintenance of stable value, like MakerDAO, is unclear.
The main selling point here appears to be that this money is not controlled by the “selfish policies of the rich central banks that control much of the money.” It is instead controlled by the merchants.
Yet the authors themselves say “If the alliance members are geographically and politically diverse, they could have greater immunity from the risk of default than if they were backed by a single large entity. Indeed, this is exactly how the Bank of England got started in 1694: as an alliance of merchants.”
Why then would this new alliance not become just another Bank of England? From merchants’ perspective, that questions might be irrelevant, but for end individuals who have to trust this merchant money, that question might raise a million more questions.
Verification is one of them. They say there could be certificates of the backing commodities, like gold certificates, to ensure the tokens are backed. But who ensures the authenticity of these certificates and how much fraud should be expected?
The idea, in any event, is not new. And what innovation there might be here we can’t quite see, save for the proposal that there should be an alliance of sorts.
They make such proposal apparently because for the Bank of England to tokenize fiat it would be complicated, but for the merchants to do so and in the process form a new Bank of England of sorts, it might be easy.
Yet we think it would be far easier for a merchant to do it, or a start-up. And there are quite a few of them already doing so, including Digix.
These individual merchants then can compete with each other to ensure the most stable value or the most attractive currency for commerce.
In this way there can be many alternatives to the Bank of England and individuals would need not trust a group but the free market and its competitive process.
In this current landscape, such alliance currency would be merely one of many. Its advantage therefore would have to be not just stable value, but also trustable value, and more widely a certain higher level of convenience or perhaps lower fees.
But this proposal by one of the most cited computer scientist does indicate that there are many different approaches underway and that a boom in innovating money itself is currently ongoing.