A contribution from Chris Cook

So a traveller is passing through the sleepy US Midwest town. Looking for somewhere to stay in the area he rings the bell at the Hotel A reception and asks to see the rooms. The owner (A) scowls and tells him to have a look around the rooms if he must, it’s all the same to him, and the traveller puts a $20 note on the reception desk as a token of good faith while he views the rooms.

A promptly crosses the road to hairdresser B and settles his $20 account, and B goes next door to Bar C to bring his own account up to date. C in turn slips $20 due to Ms D the local lady of easy virtue, as she leaves for an assignation at Hotel A; she in turn puts the $20 note back on the reception desk to bring her account up to date. At this moment, the traveller returns to the reception not impressed by the rooms, observes Ms D’s transaction which confirms his view of Hotel A, grabs his $20 and leaves for the next town. What lessons can be learned from this little fable?

Promises, Promises

A credit instrument is a promise issued by a promissor in exchange for value received from an acceptor, and it is returnable in exchange for value to be provided by the promissor in the future. If the credit also carried a legal obligation to provide currency/money then it would be a debt instrument; if it carried an obligation to deliver money’s worth of value then it would be a derivative (forward) instrument; and if it carried absolute rights of ownership over future streams of value from the promissor, then it would be an equity instrument.

Credit instruments – which are based purely upon trust between promissor and acceptor – pre-date modern finance capital by millennia –  and remain as the unseen Dark Energy in the global financial market universe, particularly in the developing world.

Credit instruments are visible to this day in the language of finance: the Tax Return was the accounting event at which acceptors of discounted sovereign credits would return these sovereign promises to the Exchequer for cancellation. The phrase Rate of Return describes the rate over time at which credits may be returned to the promissor in exchange for value, thereby enabling a profit from an initial discount to be realised. Perhaps most strikingly, these credits became known as Stock after the half of a split wooden tally stick which was given to the acceptor by the promissor as a transaction record

This simple early undated form of Stock forked into equity instruments (shares of Joint or Common Stock with variable rates of return) and debt instruments (Loan Stock – with fixed rates of return) which constitute conflicting modern absolute/digital  finance capital claims over productive assets in our analogue world..

Credit Clearing

Acceptance of credits requires trust in the promissor, and A, B, C and D knew and trusted each other well enough on an individual basis to accept each other’s promises bilaterally (or Peer to Peer)  to the value of $20. However, the traveller was neither known nor trusted, and so placed a generally acceptable credit instrument (‘currency’) – a $20 note – on the reception desk.

Secondly, A provided not Dollars, but 20 Dollar’s worth of value to D, B to A, C to B and D to C, and the Dollar was used to keep score of exchange/credit transactions.  The $ therefore served in those initial transactions only as a generally understood standard unit of measure for value in the same way that a metre is a standard unit of measure for length and a kilogramme is a standard unit of measure for weight. This is what is meant by the ‘unit of account’ monetary function, and it will be seen that it is independent of any credits or value which may be exchanged by reference to it.

So when the traveller arrived in Alphaville there were open, undated $20 promises or credits as follows: A to B; B to C; C to D and D to A. These promises could have been fulfilled in Dollars or in kind (Dollar’s Worth), so that C could have had his hair cut by B, or A could have had a sexy time with D, but in the example, the circulation of the $20 note enabled a chain of open credits to be settled.

Had  A, B, C and D each been aware of the existence of each other’s credits then a chain settlement A>B>C>D>A could have been generated. In other words a Shared Transaction Repository (STR) could have enabled chain settlement of these credits without the need for currency at all.

Triple Entry Accounting

Conventional double entry accounting enables enterprises individually to keep track of solvency, liquidity and development through recording asset ownership and obligations to and from counter-parties. An STR represents a third – triple – shared entry which removes the need for audit and reconciliation between individual records. It potentially revolutionises commerce through opening up collaboration in cost saving and resource sharing

My own insight into the potential of an STR resulted from a Dot Com and an application – OilClear – I invented in 1998 which addressed the need to automate paper-based oil market transaction confirmations which at that time still used faxes and even telexes. It became rapidly clear that this function of transaction registration – and contractual certainty – is a generic market utility function.

Around this time I met a Seattle accountant, Todd Boyle, who had been working on internet accounting. Todd had identified and documented the phenomenal system-wide economic potential for cost savings available from integrating and sharing transaction and title data through Triple Entry accounting and what he termed Webledgers.

However, the business model problem faced by OilClear was what I came to call the Internet Paradox: if an application is neutral, it’s not liquid, and if it’s liquid, then it’s not neutral.  Despite years of effort I could find no acceptable route to market. The trade capture concept was introduced by exchanges, and survives to this day in the competing forms of ICE’s eConfirm and the CME’s TradeHub where it forms the basis of significant profits from market data income at the expense of the market participants who originate it..

In the years since OilClear I have been researching, prototyping and developing legal protocols and instruments which will enable the utility Internet Paradox to be resolved.


I identified two types of consensual trust agreements supporting generation and acceptance of two types of credit instruments: people-based and asset-based. The first type supports promises/credits issued individually or collectively and based upon capacity to provide goods and services, so that a promise issued by one person may be accepted by another. Historically trust for ‘people-based’ credit came to be provided by risk intermediaries/middlemen as a banking function and survives to this day in the form of letters of credit and in credit card systems.

However, the future is visible in the past, in the mutual risk sharing agreements which are still routinely in use in the form of Protection & Indemnity (P & I) Clubs in the shipping world and also in certain types of Islamic risk sharing eg Takaful. The attraction of credit service provision for banks is that administration, risk management service provision for a credit P & I Club (Clearing Union) would require only working capital, since performance risk is mutualised..

In relation to productive assets, production or revenue sharing agreements enable the sharing of value generated from the use over time (utility) of productive assets, particularly land/location; resources (particularly energy); and increasingly, intellectual value (IP). I term the consensual production sharing protocols  for flows of value from productive assets ‘Capital Partnerships’. Such swaps of asset-based value flows have been around a long time, and survive to this day in forms of Islamic finance.

Bearing in mind the universal needs for shelter and for warmth, transport and other forms of energy, credits returnable in payment for the use of land/location use (rental) credits will be locally acceptable in exchange, while energy use credits will be acceptable independently of location. In other words, the funding of land and energy assets using such prepaid land and energy credits give rise to locally and generally acceptable forms of asset-based credits currency which may be used as currency to settle outstanding/open P2P promises.


Fintech tokens/objects such as Bitcoin and Ether have a historic parallel in the Memorandum Tally – the second type of split wooden tally stick record which recorded receipt or proof of past value and which supported bearer documents of title such as Title Deeds. In my analysis, Fintech 2.0 requires issuance of promises/credits returnable in payment for future utility, rather than tokens representing past ‘proof of work’. To use the humble Snickers bar as an analogy, a Snickers bar receipt has subjective value in exchange only to those who collect Snickers bars or who believe others will in turn accept the receipt from them in payment. A Snickers bar credit/voucher issued by Snickers, on the other hand, is as subjectively valuable in exchange to the acceptor as the physical Snickers bar for which it may be presented in payment.

It seems to me that to create for every transaction at vast expense of energy a consensus of machines across an entire database/STR is in fact unnecessary and represents wasted resources. An STR requires consensus between people, not machines, using enterprise-specific and market-specific protocols/user agreements. Such agreements govern the issuance, exchange (by reference to a mutually acceptable unit of account), clearing and settlement which may take place either via Ripple-style chains generated A>B>C>D>A of people-based credits; via currency settlement using asset-based credits, or both.

The Promise is the Key

Since my knowledge of Fintech systems and cryptography is limited the following suggested system description for a complementary FinTech 2.0 architecture is necessarily high level and speculative.

Transactions will be agreed using mobile devices either directly (physical presence) or remotely (network presence). Authentication will combine geo-location of the mobile payment device with simple bio-metric data such as voice and/or image recognition.

The Promissor’s device generates a promissory message identifying both promissor and acceptor and transmits it to the acceptor who then responds with an acceptance message. Both devices then transmit the accepted promise securely to an STR to which both subscribe thereby creating a combined timed shared transaction record. This creates a unique multi digit code number analogous to the grain of the wood (nature’s hash)  in split tally stick records.

The outcome is an STR of promises which is fine for a world of people who know and trust each other, and  who do not require privacy, but is inadequate beyond such a utopia. In order to create an acceptable combination of access and privacy, consensual user agreement protocols are necessary between people, rather than between machines, to provide privacy to an agreed standard.

The Community is the Currency

There are essentially three types of Community: those connected by place/location; those connected by a common interest; and those connected by both. Since over two thirds of bank credit money in existence today is based largely upon the capitalised use value of location (through mortgage loans) local rental credits may logically be the basis of FinTech 2.0.

Mutual ‘Clearing Union’ (Credit P & I Club) agreements for P2P credit issuance and clearing may then be integrated with these local credits as user agreements for local STRs. So local credit creation and clearing systems may combine automated ‘chain settlements’ A>B>C>D>A  of open P2P credits, using settlement bots, with settlement using bank and asset-based credits.

Such local STRs enable the aggregate issuance of credits/promises by individuals to be visible to system users and/or managers without compromising privacy in respect of individual relationships and transactions. Individuals would be members of multiple Communities, with Community ID’s linked to a Basic ID.

Fintech 2.0

In my analysis, the conflicts – which arise from absolute property rights – between instruments which are either of absolute infinite duration or absolute finite duration are intractable. Digital Fintech instruments are created as objects which do not connect to an analogue world.

Here in Scotland there are three verdicts in a criminal trial: conventional absolutes of Guilty, Not Guilty but also an indefinite verdict – Not Proven. The indefinite duration of the credit instrument, and its returnability in payment for people-based and asset-based value enables the connection with the real world to be made.

So Fintech 2.0 may comprise two elements: Protocols and Promises, enabling a resilient political economy to be built bottom-up through a form of ‘Open’ Capital complementary to modern proprietary finance capital.

Transition via Fintech 2.0  from commodity transactions to smart service provision on shared platforms/ STRs is being driven by powerful economic rationale:

  • Efficiency – colossal savings in service delivery are realised at the retail price.
  • Capital Intensity – finance capital used by intermediaries is replaced by intellectual capital deployed in service provision.

A collaborative service economy built around Fintech 2.0 potentially asks a new question of the rational Homo Economicus: “Would you rather have a smaller percentage of something or 100% of nothing?”

Photo by tashalutek

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