Thread by @jkw_iii

A better option, a new category? Enough with decrying banks without also advancing a new approach. Here's our go at a new approach...

https://twitter.com/jkw_iii/status/1099461850612334592

Starting at the beginning, users must be the middle. Systems that serve money users should serve money users first and foremost, and no other.

Not a financial institution, not a government, not a spy agency. Money systems should serve people that create it.

/n

Money systems to serving users first will be built to free users from conventional risk of relying upon a single financial system. Reliance on a single system to protect your purchasing power is reckless.

A single point of financial failure is dangerous.

/2

We think of systems like these:

EUR a money system with rules
Bitcoin a crypto-asset system with rules
USD a money system with rules
Financial markets are systems t0o: equities, fixed income, commodities, and FX

All of these systems offer a type of $$ protection with rules.
/3

We've learned over the last few years that defining a new things is an exercise in relativity.

New things are defined by existing things.

If features offered are bank-like, the assumption is its a bank.
If features enabled are exchange-like, as assumption is clear.

but wait
/4

...there's more.

We started at the beginning -- call it the core focus of regulatory systems.

We learned the core focus of financial regulation centers on 2 key ideas:
- custody of someone else's money
- commissions taken from someone else's money for transactions or sales

/5

So the challenge...

Build a system enabling users to receive, hold, send, exchange, and trade their personal purchasing power instantly, privately, and without limit.

Ensure it enables transfers and exchanges without disturbing a financial institution.

Oh, and the links...

/6

Building the system in a vacuum is one thing, a new system must "bridge" cheaply to existing systems.

Linking to existing bank systems is vital to serving users. We believe bitcoin services may prove to be a sound long-term investment too.

Bridges are points of entry/exit.
/7

The basic business is a SaaS model, with a core IP portfolio being developed and accumulated over the long-term, and licensed to users.

Some users will be financial institutions, some investors, some mere consumers.

No transaction fees ever. No top up, load, nothing.

/8

So far, so good. Software businesses are not financial institutions -- a specific type of business model with lots of derivative like casinos, money services businesses, and FX dealers.

Basically the money changer business -- we avoid it. But lets examine the custodial model.
/9

First lets go back to our user model -- they are in the middle.

The agency of control over a digital asset should reside solely with its bearer. The systems, processes, and controls should all work together to ensure that is always true.

So what of custody matters?

/10

For those in the back row, custody relates specifically to a contractual right to hold or administer someone else's money - could be cash or securities.

Bernie Madoff made custody top of mind in 2008. Where was the money and securities being reported on client statements?

/11

Madoff helped us all learn what accountants are taught early: auditing cash and securities is a 3 part job.

i) client reconciliations + 3rd party confirmations
ii) bank statements + 3rd party confirmations
iii) custodial statements + 3rd party confirmations

Confirm it dude.
/12

Dodd-Frank landed in 2009, and we saw organization of the Financial Crimes Enforcement Network (FinCEN) with a focus on global money crimes for the US Treasury.

Between Madoff and Dodd-Frank, custodial roles got lots of needed attention.

If a business holds client money...
/13

The new model considers each of these regulatory frameworks.

Rather than organize as a bank or money services business, the new model avoids highly regulated activities, their risk, and also their costly recurring administration.

Don't hold money for others. Period.

/14

A key model attribute -- utilize third party fiduciaries, like auditors, to report critical balances transparently in real time for users and stakeholders.

- Don't hold people's money, only hold system assets
- Let outsiders count, report, test, and validate system data.

/15

We have built the model layer by layer. Each preceding layer becomes the foundation for the next layer of the system.

- No user money held
- No transaction fees, no financial intermediaries
- Non-custodial systems - the wire doesn't own the telegram

So what do users hold?

/16

The model utilizes a money substitute minted by delivering currency to a system node.

Users compel a node into a systemic debtor role by delivering physical currency or bitcoin to it electronically.

On receipt, the minting user becomes the sole bearer of a digital asset.

/17

So the system node is pulled into a debtor role, having received currency or bitcoin from a user.

The user that elected to self-mint the digital asset now holds the digital asset, if a non-custodial digital wallet. Self-custodied digital assets with non-custodial systems.

/18

So what's missing?

No pre-mine
No administrator maintains an inventory of digital assets

Instead, uses alone establish and extinguish the supply of digital assets according to their own interests and financial objectives.

What else about these digital assets?

/19

The Node is where we look first - it is holding the money received from the users that elect to self-mint digital assets.

The Node - one per $ region - is the lowest level entity tasked with protecting and preserving reserve assets held by the system.

Whose money is it?

/20

The node holds system currency as a debtor, owing it to specific users with an equal quantity of digital assets.

Nodes are obligated to deliver currency or bitcoin on demand.

* Nodes hold reserve cash = demand notes
* Users hold digital assets = demand notes

/21

We think the nature of the instrument held between users and system nodes are is vital to explain how the new model works relative to existing frameworks.

Creation of a debt obligation equal to the quantity of physical currency received eliminates many scenarios. Nicely.

/22

But wait, isn't that just like a deposit agreement? Like when a bank collects a deposit from a customers? Isn't that a debt too?

It is, but deposits are very specific arrangement between a bank and its custodial depositor. The bank is protected from losses by FDIC.

/23

We're getting to the good part where the new model is not like the bank model.

So the bank takes custodial deposits as a matter of practice. Its cheap capital. They are license to lend out deposits. Its a hallmark of banking.

/24

The new model is a different approach, the money held by the Node is its money, solely and exclusively. Just as the obligation to delivery currency is its alone.

The new model eliminates moral hazard present in today's custodial banking system that is tax-payer insured.

/25

The Node holds the cash and the performance obligation, covered by a contractual arrangement ensuring the Node performs on demand.

So what does the user hold in the new system if the Node holds the cash and its promise to deliver?

/26

Systems users now hold a self-custody digital asset - an electronic proxy for the purchasing power contained in the physical currency delivered to mint it.

Users hold digital assets solely in a digital wallet. It's there's alone. No permission slips. No "mother may I"

/27

Once users mint their purchasing power into a standardized digital container, they are free to transfer it borderlessly among system peers without disturbing a financial institution of any sort.

System tools to make moving value among global system peers easy.

/28

Key business model features:

- SaaS model
- users self-mint digital assets held solely by sending physical cash to a Node
- Nodes submit as debtors on receipt of currency holding demand instruments 1:1
- non-custodial systems support transfer and exchange of digital assets

/29

New systems are being built to move the locus of financial control, placing the users of money back at the center.

In the future, the center is you.

/end

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