Thursday, December 5, 2013

Zero Coin Bah Humbug - Why Not Just Have Negative Money?

If you are interested in Bitcoin and have not heard of Zerocoin, you should check it out. "Zerocoin is a proposed extension to the Bitcoin payment network that adds anonymity to Bitcoin payments"  Go read it for yourself.  Evolutionary/revolutionary it seems; there's much to comment on, but that will have to wait.

For the moment the name "Zerocoin" got me thinking.  Some coin is much to be preferred to zero coin, and zero coin is much to be preferred to owing coin.  Or so many people think.  Some coin is positive, debt is negative, and zero is that infinitesimally small nothingness through which something positive passes on its way to becoming less than worthless.

Zero is also indicative of perfect balance.  To create debt, the principal that is owed must first be lent to the debtor.  The principal balance of the debt can never exceed the positive amount that is lent, minus any subsequent repayments of principal.  If the principal balance exceeds this difference, any excess is no longer debt.  Absent credit expansion through devices such as fractional reserve banking, the creation of debt cannot increase the amount of money in existence, because debt must balance with the money lent to zero.

Credit expansion is just a fancy name for deceiving borrowers into thinking they are being given money in exchange for a promise to repay it, when all that is being lent is worthless, or at least partially worthless, vouchers for money.  The only saving grace of the debt so incurred is that it can be repaid with equally worthless vouchers.  But the hell of it is that the borrower is unable to create these vouchers as easily as the banks do, essentially out of thin air.  Instead, the borrower must go out and trade actual goods and services to obtain these vouchers.

Suppose, for example, the borrower uses the loan proceeds to build a home or business.  What is actually happening is that the borrower trades the vouchers with various members of society for the goods and services making up the home or business.  Subsequently the borrower trades goods or services to obtain vouchers to repay the principal balance of the loan plus interest.  So the bank earns interest from the exchange of goods and services between the borrower and other members of society, contributing little but the illusion of money.  Meanwhile, the expansion of credit often (but not invariably, depending on surrounding circumstances) causes a rise in prices in a sector of the market, or generally.

If banking and money were allowed to operate in a competitive free market, the rate of interest would be determined primarily by public desire to save money as opposed to spending it.  The currency of a bank that expanded credit would lose value at a rate commensurate to the degree of expansion and the bank's power to deceive the general public into believing that the expansion did not exist, or that its rate is trivial.  A free and competitive market tends to eliminate the power to deceive.  Because many people want money as a durable store of money, and being fully informed by competitors of the inflationary bank, savers would disfavor inflationary currencies and favor stable or better yet deflationary currencies.  Demand for inflationary money and hence interest rates for such dross would be reduced (in real terms) relative to stable or deflationary money.  These pressures would make inflationary banking less profitable (banks have expenses, too) and drive it to the periphery or out of the market altogether.  But I digress.

The "negative money" referred to in the title of this post is like debt cut free from the bounds of money, but without the requirement to have a banking license to create it.  It is like debt divorced from any requirement to lend principal.  Sort of like a "medium of disapproval" or a trade-able "dislike" button.  If carbon allowances can be traded, why not trade registers of annoyance? 

Here's how it would work.  Call it "Negcoin."  Digital certificates are created in a process similar Bitcoin.  Miners mine them, and start distributing them.  They do so by sending Negcoins to people who annoy them, in proportion to the degree of their unilateral annoyance or displeasure.  Each person to whom a Negcoin is sent could refuse to receive it, but would then lose out on the possibility of receiving a Bitcoin from somebody else who wants to acquire the Negcoin. The Negcoin could be held in trust by a reputation agency, if the recipient refuses to receive.  A person who receives a Negcoin without paying for it with a Bitcoin, getting the Negcoin back in a redemption transaction, or mining the Negcoin into existence is not allowed to spend it.

Each Negcoin could be redeemed by payment of a Bitcoin to the payer of the Negcoin.  If that happens, ownership of the Negcoin as well as the Bitcoin automatically passes back to the first payer, who gets to spend the Bitcoin and send the Negcoin again.  Such redemption might be somewhat rare, but might happen sometimes when people who receive Negcoin wish to make good with the people who sent them.

Conversely, a third party could buy the Negcoin from the receiver of it by sending a Bitcoin.  In this transaction, because the payer of the Bitcoin is not the person who received the Negcoin, the Negcoin passes to the payer of the Bitcoin.  The person who had the Negcoin receives the Bitcoin.

A chain of title for each Negcoin could be maintained by a reputation agency or built into the block chain.  Thus, Negcoin could serve to differentiate consistently bad actors from simple newcomers without established reputations.  Most people could expect to receive a few Negcoins along the way, but only consistently bad actors or infamous people would receive and hold very large amounts of them.  Merely controversial figures may receive lots of Negcoin, but would find it easy to sell them for Bitcoin to their sympathizers.  Anyone sending a Negcoin for merely political reasons would have to consider this possibility!  Sending a Negcoin can help its recipients, as well as hurt.  Therefore, Negcoins would tend to be sent only in cases where actual grievances existed, and less so for political reasons.  They could function much like rock-bottom settlement offers and might obviate the need for much litigation.  It is interesting to think about the possibilities.

Are Negcoin technically feasible?  Perhaps not with Bitcoin as it exists today (more on this later).  Negcoin may have to be built into the infrastructure of the digital coin network, with a Newcoin of some type. But there is nothing especially challenging about it; each Negcoin could have a built in redemption mechanism that distinguishes between a simple purchase and a redemption, and reconfigures itself accordingly.  A skillful systems designer/programmer could probably work out several different ways to do it.  So skillful programmers, get busy!  I want to be first with the Negcoin mining rig!