Proposed Digital Currency for Australia

Source

From evidence provided by Shann Turnbull to the first public hearings of the Australian Senate Inquiry into Digital Currency on 26 November.

A four hour and sixteen minutes audio-visual recording of the hearing is available at: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Digital_currency/Submissions.

Consolidated recommendations

Shann Turnbull:

A Bitcoin should not be recognised as a currency and not be given any favourable tax treatment.

B. The government immediately procure a mobile phone application to allow the government and any citizen to receive or send both official money and $Z like currencies.

C. The government introduces tax registration of all digital wallets transacting official or any other digital currencies or negotiable benefits

D. The government trials the acceptance of cost carrying mobile money within its departments, welfare recipients, payment of taxes and for funding infrastructure.

E. The Bank of England as the prudential regulator immediately ceases to enforce on banks and other institutions systemic unethical and counter productive conflicts for directors and auditors by requiring the introduction of network governance.

F. Neither a centralised or decentralised digital currency be enforced

G. The government provide leadership in testing digital currencies by introducing official supplementary self-liquidating forms of Sovereign (“Positive”) money to finance welfare and infrastructure to increase prosperity and well being without taxes or borrowings.

H. Accept cost carrying or negative interest rate currencies issued on a self-liquidating basis to reduce: (a) the incentive to use money as a store of value to exacerbate inequality and (b) financialization of the economy.

I. Give preference to cost carrying money whose value is defined by a local sustainable service of nature whose consumption is made available to all and governed on a transparent and democratic basis.

J. The government should not facilitate any digital currencies that can carry out the role of being a store of value and/or are not tethered to a sustainable service of nature to define its value.

K. A bespoke regulatory regime is required to maximise the common good to deny currencies whose characteristics are not best fit for purpose are discouraged and/or denied.

L. It is recommended that the government takes action to counter market failure in creating incentives for developing the technology and supportive infrastructure that can best further the common good by introducing the most economically, socially and politically effective medium of exchange and unit of value.

Discussion

Shann Turnbull, in a letter to British MP Andrea Leadsom :

" I recommend that:

A. Bitcoin should not be recognised as a currency and not be given any favourable tax treatment.

The Senate Inquiry obtained advice from the Australian Digital Currency Commerce Association (ADCCA) and a tax lawyer that Australia should and could, without changing the law, follow the UK example and treat Bitcoin as a currency. This led to a discussion of how Australia taxes foreign currency transactions and concerns over currency and tax sovereignty. Questions were then raised as to how economic value could be determined for tax purposes of decentralised currencies, especially in regards to long-term values for Capital Gains Taxes (CGT).

The ADCCA advised the Senators that the first Digital Summit meeting was held with the G20 meeting in Brisbane last month. Another meeting was planned in San Francisco next year and with for the next G20 meeting in Turkey. The President of the US Chamber of Digital Commerce, a sister organisation to the ADCCA, also provided evidence online from Washington D.C. with another online US based participant shared UK experience.

One Senator expressed concern that even with existing official currencies, shadow banks are globally trading hundreds of trillions of dollars in derivatives with trillions of dollars being avoided in tax from these activities and those of global multinational corporations. The implication being that decentralised currencies would exacerbate the situation in future to deny Sovereign States a viable tax base.

Both the Senators and those providing evidence accepted that Bitcoin was here to stay and governments are forced to live with its existence. It was also accepted that cooperation was not likely to occur anytime soon for nations to agree on a global tax regime to stop multinational corporations shifting profits to minimise their tax even with existing official digital currencies.

However, the exceptional ability of crypto currencies to create an audit trail with the suggestion of ADCCA that all digital wallets should be licensed with a tax number could be used to overcome a number of problems that cannot be adequately managed with existing official currencies. These possibilities reinforce the arguments I presented in my submission to the Australian Senate for the Government to accept digital currencies or introduce their own custom designed supplementary digital currency that possessed characteristics of what I have described for a hypothetical $Z currency (GMWG 2011, SMWG 2012, Turnbull 2013b,c; 2014b, c).

$Zs do not carry out a traditional role of money of being a store of value. This is because such a role is inconsistent with the role of money to facilitate investment. It is inconsistent because the ability of official digital money to earn interest makes money a competitor for investment. This leads to “financialisation” of the economy (Palley 2007). It also creates inequality by allowing money owners to increase their claims on resources without the money or the owner adding value to society. These negative feature of money concerned Proudohn (1840) who inspired Gesell (1916) to propose depreciating money. A feature favoured by Fisher (1933), Keynes (1936), Buiter (2009) and others.

A $Z currency is one whose value is tethered, but not backed, by kilo-watt hours of retail electricity generated from benign local sustainable sources. This solves both the sovereignty problem and the determination of economic value for tax or long-term investment purposes. It was interesting to note from the Senate Inquiry that the cost of mining new bitcoins was largely determined by the Kwhrs consumed by computers to solve the complex problem of adding new components to the blockchain and obtaining peer group acceptance. The Inquiry was informed that the best place to mine bitcoins was in Iceland that had low cost renewable energy and a cold climate to cool the computers. The cost of Kwhrs places a floor price on the cost of mining bitcoins. So in this way bitcoins represent a proxy of Sustainable Energy Dollars (SEDs=$Z)!

However, currently bitcoins, like all official currencies, are not tethered. But a tethering feature could be introduced by a Sovereign or others, by using “Pegged Sidechains” described by Back, Coarallo, et al (2014). As noted on page 16 of this paper, the cost of servicing the side chains would best be achieved by introducing a “demurrage” fee. $Z require a much larger demurrage fee to allow them to become self-liquidating from the revenues collected by the Sovereign State or other organisations establishing the side chains.

Privately issued demurrage or cost carrying money arose widely in Europe and the US in the Great Depression to provide liquidity when banks could not. The market acceptance of the private issue of cost carrying money, even when there is not a Great Depression, is illustrated by their re-introduction in Germany since 2003 (Gelleri 2009; Migchels 2012).

The above considerations indicate how crypto currency technology could be custom designed to become fit for purpose for every Sovereign State or smaller currency regions that may be more appropriate to sustain the host environment and society on a perpetual basis.

* Modern technology and market acceptance for creating $Z

Two steps are described for establishing $Z on the Green Money Working Group (GMWG 2011) web page at http://www.gmwg.org/. The first step would be initiated by the next financial crisis. It would involve the issue of “helicopter” self-financing self-liquidating demurrage money as occurred during the Great Depression (Fisher 1933) to create ”financial lifeboats” for Small and Medium sized Enterprises (SMEs) (Turnbull 2011a). The second step Digital Currencies – Call for Information: Response by Dr Shann Turnbull would be for the gradual introduction of a supplementary tethered demurrage currency to establish a sustainable unit of value to allow market prices to efficiently allocate resources to sustain humanity on the planet in perpetuity (Turnbull 2010b).

The GMWG was formed in October 2011 in response to concerns that another financial crisis could deny liquidity for SMEs who were members of Coops UK Limited and the British Chambers of Commerce (BCC). The name of the working group was changed in 2012 to the Sustainable Money Working Group (SMWG 2012) because SME members of the BCC did not consider green initiatives as being positive.

The private issue of demurrage or negative interest rate money during the Great Depression inspired the formation of the Working Group. Also, the Bankhead-Pettengill Bill introduced into the US Congress on February 17th 1933. The Bill proposed that the US Treasury, not the Federal Reserve, issue one trillion dollars of stamp scrip (Fisher 1933: Appendix I). At that time private issues of self-liquidating Stamp Scrip were circulating in Europe and the US to finance SMEs (Fisher 1933). A chamber of commerce or a local government body typically initiated the private issue of Stamp Scrip. The scrip was accepted by SMEs as money. There were many types of Stamp Scrip and various ways of making issues. Some might be given away as “helicopter” money and/or as part payment for goods and services.

The reason that is was practical to give away the money was because it lost all value after a specified time unless a stamp was purchased from the issuer and affixed to the back of the note. The revenues from the sale of stamps then allowed the issuer to fully fund the redemption of the scrip over a given time period. This made the scrip self-financing and so self-cancelling. The cost of the stamps represented a “demurrage cost” (Back, Coarallo, et al 2014) to create negative interest rate money (Buiter 2009; Suhr 1989).

The Bankhead-Pettengill Bill of 1933 would have largely replaced the operations of the privately owned Federal Reserve as the notes were to be issued by the US Treasury and the stamps sold by the government owned Post Office. It would represent “Sovereign” or “Positive money” (Dyson 2014, Jackson 2013). However, the Bill was replaced by the newly elected President Roosevelt introducing two weeks later the New Deal. This extended the powers of the Federal Reserve that manufactures and distributes non-positive money.

The notes to be issued under the Bankhead-Pettengill Bill would become worthless every seven days unless a stamp valued at 2% of its face value was affixed to the back of the note. After a year the notes could be redeemed for $1.00 each of their face value. During the year the Post Office would have sold 52 stamps with a total valued of $1.04 for each note given away valued at $1.00. In this way the US Post Office would have made a net $US40 billion gross profit on the one trillion dollars issued.

The one trillion dollars was to be distributed to each US State in proportion to its population with half of the money to be spent by State governments building infrastructure and the other half to provide welfare for the unemployed. This approach provides a way for modern governments to stimulate their economies without going into debt or raising taxes. Instead of Central Banks creating money through “Quantitative Easing” to finance financial institutions, governments could issue negative interest rate money directly to the mobile phones of citizens (Turnbull 2010a). Income inequality is so ubiquitous that more citizens own mobile phones than possess bank accounts.

The use of self-liquidating money would have allowed the Australian government to pay its 2009 “citizens dividend” (Jackson 2013: 33) of $900 to all taxpayers to stimulate the economy after the 2008 global financial crisis without incurring debt or taxes. Turnbull (2009c) was published to explain this possibility. When the proposed dividend was being Digital Currencies – Call for Information: Response by Dr Shann Turnbull considered by Parliament the idea of using self-liquidating money was raised by Senator Milne but apparently not understood by her colleagues or Australian Treasury officials. In your 20 November 2014 speech to Parliament during the Back Bench debate on “Money Creation and Society” you raised seven concerns about the proposal for the Government to create digital official money rather than the banks (Dyson 2014, Fisher 1934, Jackson 2013). You stated: “the current system, modified and improved with far greater competition, can service the economy best. However, reform is vital.” The need for root and branch reform is revealed in my essay “Root causes of economic breakdown” (Turnbull 1997c); “Mysteries of a failed financial system and how failure could be avoided” (Turnbull 2009b) and Turnbull (2009a).

Your seven concerns about the Sovereign money proposal related to the existing form of official digital currency that earns interest. This feature makes it not fit for purpose as raised above. The government issue of $Z substantially changes the calculus of your concerns. So does the ability of the government to directly fund the mobile phones of your constituents when the next financial crisis arises. Without the facility of the government providing supplementary liquidity to your constituents many could be forced to use bitoins and other alternatives. For the reasons described in my submission to the Australian Senate Inquiry, even untethered $Z provide a number advantages over bitcoins or official money.

For these reasons and also as a means for the government to collect any sort of taxes on a continuous or instant basis please consider my recommendations:

B. The government immediately procure a mobile phone application to allow the government and any citizen to receive or send both official money and $Z like currencies.

C. The government introduces tax registration of all digital wallets transacting official or any other digital currencies or negotiable benefits.

D. The government trials the acceptance of cost carrying mobile money within its departments, welfare recipients, payment of taxes and for funding infrastructure.

These recommendations would be consistent with your 20 November speech where you stated:

In the medium to long term, we need to create a culture where research and analysis do not shy away from going against the orthodoxy. As hon. Members across the House have said, we need to consider alternatives, and we should be having that discussion; it is healthy to do so, because that is how to make progress. For that reason, the call from Andy Haldane, the Deputy Governor of the Bank of England, for a broader look at new and existing monetary ideas is exactly right. This was also the view of Martin Wolfe (2014) in his column on “Economic ills need drastic treatment” where he concluded that: “The answers are likely to be unorthodox. But so, too, is today’s economic conditions. Rare ailments need unusual treatments. So look for them.”

May I suggest you need to look no further? One way for implementing my recommendations would be to follow the lead of the Royal Canadian Mint. In April 2012 they announced a competition for software developers to design a mobile phone application for their MintChip technology. They also ran a competition of how best such an application could be used. In February 2014 they announced that: “The Mint has issued MintChip accounts to 200 employees at its Ottawa and Winnipeg offices”. This trial is to test how mobile phone technology can introduce a cashless society by replacing notes and coins. CBS news reported on April 13 this year that Sweden is moving like others, to becoming a “cashless society”.

• Institutional architecture for creating $Z

The creation of tethered $Z requires two types of institutional infrastructure. One to create: the money and the other to establish the tether. My preferred way to create $Z is not by the Government, Banks or by mathematical processes used by Bitcoin. As proposed in my essay on “Who should create money and credit?” (Turnbull 2012b) my preference is for the process to be initiated on a decentralised market driving system by those who create wealth by being producers, consumers, traders or investors.

In this way the total money supply could be determined by market transactions rather than by the current system that relies on the blunt policy instruments of interest rates and reserve requirements established regulators or in the case of Sovereign money, bureaucratic judgements, or in the case of Bitcoin by the built in diminishing incentive to mine additional money.

The Foundations of the Australian Monetary System 1799-1851 (Butlin 1968: 26-30) describes how hand written promissory notes circulated as hand-to-hand money. Each hand added their endorsement so it represented a private sector bottom up mutual credit scheme. It was a democratic open technique for creating money as proposed in my seminar discussion on: “Can Democratic Money with Environmental Values Reduce Market Failures?” (Turnbull 2013b). The biggest bottom up mutual credit scheme existing today is the Swiss Wirtschaftsring or WIR (Economic Ring) founded in the 1930’s. However, participation is restricted to businesses. Stodder (2005) reported it was “highly stabilizing” to the business cycle.

To create $Z a mutually controlled credit union would procure guarantees for contracts between its members so that the contracts could become widely negotiable and used as a medium of exchange for third parties. Part of the cost of the credit insurance would be attached to the contracts with the contracting parties paying part of the credit guarantee fee according to their perceived risk in liquidating the credit created. The credit risk would need to be sub-underwritten by non leveraged high net worth individuals and institutions seeking income on what may otherwise be non income producing assets.

The credit union might carry out other banking functions like liquidity intermediation. It would be important that only “Positive Money” would be created on contracts that were based on real goods, services and productive investments that did not involve financial assets. That is there would be no “fractional” banking. This adds a second dimension to Positive Money by having money not backed by government fiat but by real world goods, services and investments. The contracts for consumption, production and/or investment would also add another third new dimension for making money positive by having its value tethered to a sustainable service of nature. I hope this may also sustain the advocacy work of Ben Dyson, the founder of “Positive Money”, who kindly participated in a SMWG panel session last year.

The value of the insured contracts would be negotiated by the parties involved to be defined in retail units of Kwhrs generated from benign local sustainable energy sources. To minimize the possibilities of price rigging that has occurred with LIBOR and Foreign Exchange (FX) trading, the retail value should be subjected to auditing by all retail consumers of power who may also be suppliers from their own domestic renewable sources. The reference value for money would then become tethered to millions of customers/suppliers members of a domestically located cooperative for power distribution. The opposing interests between producers and consumers provides a basis for establishing contested political markets for control of the organization with self-stabilizing checks and balances on a highly open and transparent basis. The governance architecture for achieving this outcome is based on my PhD Thesis (Turnbull 2000b) and the literature I have developed with colleagues describing “Network governance”.

My co-author, Professor Michael Pirson and I recommended that regulators should require all systematically important banks to introduce network governance in our peer reviewed article: ‘Could the 2008 US Financial Crisis been avoided with Network Governance?’(Turnbull & Pirson 2012). The John Lewis Partnership illustrates network governance in the UK. How Network governance can add value with citations of our literature is posted at: http://preview.tinyurl.com/GovernanceArchitect. In my latest publications I point out that the Cadbury Code and those developed from it in the UK and Australia creates unethical conflicted counter-productive toxic governance (Turnbull 2014a, d, e, f). As “City Minister” please also consider my recommendation:

E. The Bank of England as the prudential regulator immediately ceases to enforce on banks and other institutions systemic unethical and counter productive conflicts for directors and auditors by requiring the introduction of network governance.

My answers to your 13 questions use $Z as a basis of reference. I have set out below your 13 questions in bold with each sub-question underlined. As above my recommendations are presented in italics identified by capital letters from A to L. My recommendations are consolidated at the end before the final section listing the public discussions of the SMWG."