There will be provisions in the merchant contract for what happens if we run out of USD reserves. In the initial months after we launch, every Gresham Dollar will be 100% backed by USD reserves, so the merchants (and other users) will take no risk in holding GD.
Later on, we will gradually leverage into a fractional reserve, but we will always be completely transparent about our USD reserve levels and how close we are to running out.
Since we don't offer on-demand exchange between USD and GD, it's impossible for there to be a run on our USD reserves. If, at any point, a user doesn't trust that his GD will hold its value, the only way for him to get rid of it involves transferring it to someone else's account, which resets the maturity on the GD, and lessens the need for us to dip into our USD reserves.
In this way, the less that people trust the currency, the stronger it gets.
OK, so if the maturity resets you are at least in a position to be able to issue nominal assets faster than people can claim your liabilities in real dollars, but that doesn't mean you're legally solvent.
I mean, a fractional reserve bank's deposits are fully backed, just mostly not with reserve dollars but with a bonds and loans which are creditors' obligations to repay the bank more than the face value of its deposits.
Your startup has a lot of obligations to pay people dollars. Who has an obligation to pay you?
OK, so if the maturity resets you are at least in a position to be able to issue nominal assets faster than people can claim your liabilities in real dollars, but that doesn't mean you're legally solvent.
Hmm. I don't know if this helps, but because of how the Gresham Dollar system works, GD can actually be divided into two categories:
1. Active GD. This GD's lifetime is counting down and will always convert into some amount USD when it expires. These are proper liabilities and they will always be guaranteed to be funded by USD reserves at a pre-determined level (e.g. 70%).
2. Suspended GD. This GD's lifetime never started counting down and we don't promise that it will ever convert to USD. We only ever take on the liability of activating GD when we have the USD reserves to do so. All GD held back by the Activation Cap (described in another comment) is suspended.
When Gresham Dollar first launches, we will have sufficient USD reserves to convert into USD all GD in existence. We could even afford to activate any Suspended GD held back by the activation cap and and take them on as liabilities, but we choose not to.
As Gresham Dollar progresses into being backed only by a fractional reserve of USD, we will keep less USD in reserve than the total amount of GD in existence. But we will not keep less USD in reserve than the total amount required to fund the Active GD in existence at their required reserve level.
Each Gresham Account is subject to a minimum reserve ratio, which constitutes a promise that we will earmark an amount of USD in our reserves to back the Active GD in that account. All non-merchant (starter, basic) accounts share the same minimum reserve ratio, but each merchant account has its own associated minimum reserve ratio negotiated in its merchant contract. For example, consider an account holding $1,000 in Active GD with a 60% minimum reserve ratio. This account requires that we hold $600 USD in our reserves to back it.
We can easily calculate the minimum total of USD reserves we require to back all Gresham Accounts. We do this by taking the sum of Active GD in each account multiplied by that account's minimum reserve ratio.
For example, if we have three merchant accounts each holding $1 million with minimum reserve ratios of 60%, 70%, and 80%, and there is a total of $3 million Active GD in non-merchant accounts with a non-merchant minimum reserve ratio of 90%, then our total required USD reserves are:
This calculation is agnostic to the amount of Suspended GD due to the activation cap. For example, assuming an activation cap of $20/day, if a user opens a starter account and adds $2 billion GD to it by converting it from USD, it increases our reserves by $2 billion USD, but it doesn't do much to affect the amount of USD reserves we require because only a tiny portion of that $2 billion GD activates per day. If that user then spends the $2 billion at a merchant who has a 50% reserve ratio, our reserve requirement does then increase by $1 billion USD. But because of the $2 billion USD he just provided us, we already have the USD reserves to meet that requirement.
What I call Disruption occurs when our USD reserves become insufficient to back additional Active GD. In other words, the total amount of our actual USD reserves drops exactly to the total level of our required USD reserves. During normal times, when a user spends Active GD, it helps stave off Disruption.
During Disruption, the Gresham Dollar system will continue to function normally in most ways. GD can continue to circulate and people will continue to receive their basic incomes. However, any new GD added to an account will remain suspended until there are enough USD reserves to back it. We will not require merchants to set equal GD and USD prices during Disruption because the value of GD relative to USD will be more difficult to maintain.
Active GD will continue to count down and expire. When it expires, it converts into an amount of USD based on the account's minimum reserve ratio. The GD that doesn't convert to USD gets its lifetime rolled over. For example, during Disruption, if an account has an 80% reserve requirement, each Active GD that expires will convert into 80 cents of USD and 20 of cents new (full lifetime) Suspended GD.
As our USD reserves replenish, we will activate more GD. Whenever Active GD is spent, it becomes Suspended GD in the new account. This frees up USD reserves and allows us to activate Suspended GD elsewhere in the system. When our total USD reserves again become sufficient to back all GD that would normally be backed, Disruption ends. At that point, we reinstate merchant price requirements, and resume converting GD to USD at 100% using our excess reserves.
Reaching Disruption depends both on our total USD/GD ratio and the distribution of GD. Disruption will theoretically arrive at the soonest possible date if the following happens:
1. All GD becomes distributed in such a way that it active (i.e. is not subject to the activation cap).
2. Everybody sits on their GD and lets it expire.
3. All GD is backed by the highest possible minimum reserve ratio.
Given #1 and #2 above, our USD reserves will drain at the fastest possible rate. And given #3, our total USD reserve requirement is at its maximum. Disruption will occur as soon as our total USD/GD ratio decreases to be equal to that minimum reserve ratio. For example, if the non-merchant general minimum reserve ratio is 70% and it is higher than any specific merchant's minimum reserve ratio, Disruption occurs when the total USD/GD ratio decreases to 70%.
We can use this information to predict the soonest possible (worst case) date of Disruption. Whenever the total reserve ratio is less than the highest minimum, Disruption could theoretically occur at any moment depending on the changing distribution of GD. For example, if our present total USD/GD reserve ratio is 60% and there's a merchant account out there with a minimum reserve ratio of 70%, attempting to transfer all the GD in the world into that merchant account will trigger Disruption.
A slightly less conservative -- but still very conservative and improbable -- Disruption date estimate comes from taking the current distribution of GD and assuming that all of it is allowed to expire where it sits (i.e. everybody stops spending at once). Users will be able to view both of these pessimistic Disruption date estimates through the online interface and will feel encouraged to see both dates continually moving further into the future.
Furthermore, they'll be able to track exactly how much of their GD is guaranteed to convert to USD in the event that either of these two pessimistic scenarios starts immediately.
Okay. That was a lot. Anyway, you could think of Suspended GD as a commodity that's not backed by anything, just like Bitcoin. And if we have sufficient USD reserves, we take it on as our liability by activating it. And you could think of Active GD as a liability for the amount determined by its corresponding reserve requirement.
Maybe? =)
I mean, a fractional reserve bank's deposits are fully backed, just mostly not with reserve dollars but with a bonds and loans which are creditors' obligations to repay the bank more than the face value of its deposits.
Right. From the perspective of any individual bank, it can appear solvent if you just add up the nominal values of assets and liabilities. I prefer to think more in terms of liquidity rather than solvency. But I digress.
Maybe a better analogy than fractional reserve banking is a central bank maintaining reserves of foreign currencies. They don't need to maintain an amount of each foreign currency that's equivalent to the total amount of their own currency in circulation. That would be absurd.
Your startup has a lot of obligations to pay people dollars. Who has an obligation to pay you?
Nobody. But they have various incentives to help us build our USD reserves.
> Later on, we will gradually leverage into a fractional reserve, but we will always be completely transparent about our USD reserve levels and how close we are to running out.
So again, you'll be co-opting merchants into a credit issuing agency.
you haven't explained any benefit to the merchant, other than a brief marginal increase in sales, for which they're taking on risk.
What happens if you fly afoul of banking regulations (since you seem to be acting as a bank in this situation), and get shut down by the government?
Thanks for grilling me on this. It's very helpful.
So again, you'll be co-opting merchants into a credit issuing agency.
That's certainly one way to think about it. Things like store credit and gift cards are pretty standard. You could think of a Gresham Account as a continually replenishing gift card that's usable at multiple stores.
Or maybe I don't understand your question. What do you mean, exactly, by "credit issuing agency"?
you haven't explained any benefit to the merchant, other than a brief marginal increase in sales, for which they're taking on risk.
Well, the increase in sales won't be brief. These new customers will be receiving income streams that they didn't have before. Those income streams are permanent as long as Gresham Dollar exists as a currency.
Initially, there is absolutely zero risk to the merchant because Gresham Dollar will be backed 100% by USD. Any time we want to renegotiate reserve ratios with a merchant, that merchant can say no. Their existing GD will still convert.
If you're an extremely conservative merchant and you just want free money, you'll sign up for the period during which we back your account with 100% USD reserves and then you'll part ways with us. You're free to do that.
Maybe you won't want to though. Maybe you don't want to lose business to your competitor who IS still accepting Gresham Dollar at a 95% reserve ratio.
What happens if you fly afoul of banking regulations (since you seem to be acting as a bank in this situation), and get shut down by the government?
I hope this doesn't happen, and I have reasons to believe it's unlikely. But if it does, the way Gresham Dollar is set up, we will always have sufficient USD reserves to meet all of our promised GD-related obligations.
A lot of people wouldn't be happy, including our investors, but it wouldn't be the end of the world. And if we get noticed, then we made a statement and raised awareness for basic income. And maybe we collected some useful data along the way.
Later on, we will gradually leverage into a fractional reserve, but we will always be completely transparent about our USD reserve levels and how close we are to running out.
Since we don't offer on-demand exchange between USD and GD, it's impossible for there to be a run on our USD reserves. If, at any point, a user doesn't trust that his GD will hold its value, the only way for him to get rid of it involves transferring it to someone else's account, which resets the maturity on the GD, and lessens the need for us to dip into our USD reserves.
In this way, the less that people trust the currency, the stronger it gets.
Does that answer your question?