Utopian Financial Infrastructure

Payments Using Fiat Currency

This chapter elaborates on the Utopian meanings of the phrases "payment using fiat currency", "pay using fiat currency", and "paid using fiat currency". Even in today's world, countries issue their currencies by fiat; therefore, they are fiat currencies. So, these phrases have an implied meaning in today's world. We will show the differences between the Utopian meaning and the present-day implied meaning.

This chapter outlines a single logical thread, which is broken down into sections to highlight distinct phases of reasoning, allowing readers to follow the logical flow.

Three Forms of Payment

There are three forms of payments in Utopian societies:

  1. Payment using local currency
  2. Payment using gold currency
  3. Payment using fiat currency

Of these, payment using gold currency is discussed in the "Foreign Trade in Precious Commodities" chapter. This form of payment is easy to understand. Visualizing such payments in terms of physical gold enhances understanding. It helps convey the sense of giving away something precious.

Payment Using Local Currency

There is no physical currency in a Utopian society. All money in a Utopian society exists as a digital record. Therefore, within a Utopian society, payments must occur digitally.

The term "digital payment" seems to be an appropriate name for this type of transaction. Moreover, this term helps distinguish it from present-day "cash payment" or "payment by cheque". We will continue using this term for a few more paragraphs before explaining why it should be discarded.

Within a Utopian society, "digital payment" involves the payer, the recipient, and their respective accounts. The payer's account decreases by the amount paid, and the recipient's account increases by the same amount. This entire process occurs within a single conceptual database in a single transaction. The single conceptual database is under the full control of the society's UFI.

Payments between Utopian societies cannot be processed as outlined above. Here is the reason: The payer and recipient are in different societies. So, their accounts are in different conceptual databases, each under the full control of their respective UFIs. In this case, the single transaction has to update data in different conceptual databases. Transactions are implemented by software, and any software runs under some authority. Because the accounts are in different databases, the software implementing the transaction does not have the authority to update at least one of those databases.

Since Utopian societies lack physical currency, any money payment between Utopian societies must also happen digitally. Referring to any payment as a "digital payment" does not clarify whether it is a local payment or one across society boundaries. Therefore, when referring to a payment between entities within the same society, we call it "payment using local currency".

The term "payment using local currency" is meaningful only within a Utopian society. It cannot be used in the context of a payment across Utopian societies, because the recipient's society will not accept the "local currency" of the payer's society.

Payment Using Fiat Currency

The chapter "Money Transfer: Part 1" outlined a mechanism for payment across society boundaries. When we use the phrase "payment using fiat currency", we are referring to that mechanism of making a payment.

Make a payment using fiat currency = transfer money across society boundary using the one-way money transfer mechanism, which uses the currency exchange rate.

Let us look at it from the "fiat currency" perspective.

In order to make international money transfer happen, some software makes it happen. That software implements the conceptual transaction, and makes the payment. Here are the actual steps to accomplish the international payment:

  1. The payer's UFI decreases the payer's account by the to-be-paid amount.
  2. The recipient's UFI increases the recipient's account with an amount that is equivalent to the amount that the payer pays. The equivalent amount is computed using the currency exchange rate.

This conceptual transaction is made possible through the joint efforts of the two Utopian societies. The joint effort is possible because the two societies use the same underlying software. This in turn is made possible by their agreements and cooperation in this matter. Each UFI's software is limited to modifying its own database, but it can communicate with the other UFI's software to complete the conceptual transaction.

Here are the implications of the international payment:

  1. In the payer's society, the total money decreases; it gets destroyed.
  2. In the recipient's society, the total money increases; it gets created.

That is, some amount of local money is destroyed in one society, and an equivalent amount of local money is created in the other society. This is the use of the monetary sovereignty of the two societies cooperating in accomplishing the international money transfer.

The word "fiat" in "payment using fiat currency" indicates that some currency was created and some currency was destroyed in the process.

The phrase "payment using local currency" does not imply the creation or destruction of currency. It is merely a transfer of the money units from one account to another.

This is the full meaning of the term "payment using fiat currency". The payer is said to have "paid using fiat currency".

Present-day International Money Transfer Mechanism

Let's conceptually outline the procedural steps of an international money transfer in present times.

  1. The payer goes to a local currency exchange organization, and exchanges the required amount from local currency to the recipient's currency. Some exchange rate applies, but for this discussion, it does not matter.
  2. The payer puts the foreign currency (obtained from the currency exchange organization) in an envelope and mails it to the recipient.
  3. The recipient receives the envelope and the money inside. In the recipient's society, this money is the local currency.

Let us consider the implications:

  1. The payer's society does not lose any of its local currency.
  2. The payer's society has less of the recipient's society's currency.
  3. The recipient's society gains some of its local currency.
  4. Money was neither created nor destroyed in this international money transfer.

Let us call the currency of the payer's society as P-dollars, and the currency of the recipient's society as R-dollars. Further, we will use the term P-society instead of payer's society, and the term R-society instead of recipient's society.

The currency exchange organization was necessary in enabling this international money transfer. The currency exchange rate is based on the demand and supply of the constituent currencies. A sensible and reasonable currency exchange rate can only be established after a sufficient amount of R-dollars reach the P-society.

How did the currency exchange organization get those R-dollars? At some initial time in the past, the P-society did not have any R-dollars. Somehow, the first few R-dollars were transported from the R-society into the P-society. Only then, some currency exchange organization can have R-dollars.

How can the first few R-dollars legitimately reach the P-society? They can reach the P-society only as a payment for something.

At some initial point in time, someone from P-society spent some effort in giving something of value to someone in R-society, and obtained the R-dollars as compensation. We will call this person the "initiator". The point here is that the R-dollars were "earned" by the initiator by spending some effort.

In the initial days, there will be multiple such initiators in the P-society. All these initiators have no use for the R-dollars locally in P-society, but they know that R-dollars are valuable in R-society. A few organizations in the P-society recognize the value of R-dollars.

So, the initiators find the organizations that value the R-dollars, and exchange the R-dollars that they earned, for some reasonable amount of P-dollars.

Currency exchange organizations originated from these initial exchanges of P-dollars for R-dollars.

Token Money and Currency

The word "fiat" means a decree; a declaration.

When present-day societies print paper money or mint coins, they put a number (say N) on it, and decree (or declare) that the printed paper or minted coin is worth N local dollars. With a decree, they create a "token" of the local currency.

In present-day, we use this token money (or token currency) to conduct the one-way money transfer. Broadly speaking, when we make a payment, we are using token money.

Utopian societies have no physical money. Money is a digital record. Hence, Utopian societies have no token money (or token currency).

This is the key difference between Utopian societies and present-day societies. The difference is designed to be this way; it is not a mere coincidence.

Fundamental Problem with Token Money

In this section, when we are discussing "problems", we are discussing systemic problems. We are not discussing problems arising from illegal activities. So, for example, we are not dealing with the problems associated with counterfeiting currencies. By the way, because Utopian societies have no token currency, the problem of counterfeiting utopian money does not exist.

Let us revisit the present-day money transfer mechanism for international money transfer.

When the payer purchases the R-dollars from a local currency exchange organization and sends it to the recipient, the R-dollars (that is the token currency) go back to the R-society.

In order for those R-dollars to be in the P-society, previously, an initiator had to take some effort, provide some value to someone in the R-society, and "earn" those R-dollars. That something of value is either some goods or some services or some commodities. When the R-dollars are in the P-society, within the P-society they are tokens denoting some value; the value of the effort spent in earning them.

When these R-dollars go back to the R-society, the token of that effort vanishes from the P-society. The original effort of the initiator in earning those original R-dollars no longer has a tangible value in the P-society. Whereas, both the original R-dollars and the effects of the initiator's efforts are in the R-society.

It is as though the R-society got the outcome of some work done by someone in P-society without paying any compensation for it. From the R-society's perspective, this represents "free stuff" in the form of the goods or services or commodities provided by some initiator from the P-society.

From the P-society's perspective, someone in their society worked for free for someone in the R-society. Some goods or services or commodities that originated in the P-society ended up in the R-society for no compensation at all. From P-society's perspective, it was a "wasted effort".

Utopian societies do not have this "wastage problem", because such one-way money transfers are accomplished in fiat currency; not through a token of a fiat currency.

In this way, fiat currency is superior to the present-day token currency.

Here is one more perspective.

Earning a token of another society's fiat currency requires effort. Creating some more units of fiat of our own society's currency takes negligible effort. Destroying some units of of our own society's fiat currency takes negligible effort.

When both societies are monetary sovereigns, just because some citizen felt like giving some money to someone in the R-society, why should P-society waste the efforts of some of its citizens in acquiring the token of R-dollars only to send them back to the R-society?

The question is relevant because the desire to send money to the R-citizen can be fulfilled without the wastage. All it requires is that the two societies agree to use their authority as monetary sovereigns.

Here is yet another perspective.

If the currency of the R-society was gold-dollars, then would the P-society allow its citizens to send gold to someone in R-society without getting something equally precious in return? If the P-society were to allow this, then eventually P-society will run out of its gold.

Similarly, R-dollars should be treated at least as precious as gold. They are more precious than gold because P-society cannot produce them, whereas only R-society can. So, when P-society gives away their hard-earned, and hence, precious R-dollars for nothing equivalent in return, there is a problem for the P-society.

Here is a final perspective illustrating the preciousness of token currency.

In current times, there are countries who "sell" to citizens of other countries the right to be a permanent resident or a citizen of their country. They demand payment for the residency or citizenship in terms of some dominant token currency. These token currencies are not backed by gold or anything precious. Tokens of the local currency are printed or minted, and their value is declared by fiat. We will use the term "token dollars" for these tokens of these local fiat currencies. When countries "sell" their residency or citizenship, they require payment in these token dollars.

Why do countries covet these token dollars? What does that tell you about the preciousness of these dominant token dollars?

Currently, for international monetary transactions, we do not use fiat currency, instead we use token currency. Countries all over the world view some of these token currencies as precious. These countries need those token dollars to buy stuff from other countries. Selling residency and citizenship is an easy way of acquiring those token dollars.

In conclusion

For international transactions between Utopian societies, the two acceptable forms of payment are gold and fiat currency. Token dollars are discarded.