Records and Accounting

This chapter introduces the basic kinds of records and database structures of the Utopian Financial Infrastructure. It introduces the ideas of Entity Registry, Product Registry, Account Books and End-Of-Day Processing.

We will start with the core idea introduced in the Introduction chapter and identify each of the components in that idea that needs to have a record in the Utopian Financial Infrastructure. The Utopian Financial Infrastructure will deal with all these records.

The section Entities and Entity Registry introduces the three kinds of entities and Entity Registry is the database where information about these entities is stored.

The section Assets discusses the general idea of an "asset".

The section Products and Product Registry generalizes the idea of an "asset" to be a "product". Information about these products are stored in the Product Registry.

The section Services discusses that "services" can be modeled as "products" and hence can be stored in the product registry.

The section Contracts and Liabilities discusses that liabilities arise out of contracts and that contracts can also be modeled as "products" and hence can be stored in the product registry.

The section Rights, Privileges and Certificates discusses that rights, privileges and certificates all can be modeled as products and hence stored in the product registry.

This makes everything that we may consider as an asset an entry in a single database.

The section Transferable Assets discusses that some assets are transferable while others are not.

The section Ownership and Account Book discusses that everything that we own can be listed and that becomes our "inventory". This kind of inventory is stored in an "account book". Conceptually, every entity has one such account book. Knowing all that makes it easy to know the current value of everything owned by an entity.

The section Transactions discusses that, generally speaking, a transaction causes a transfer of ownership of something from one entity to another. It elaborates on the idea of transaction and mentions that transactions are recorded in the account books of the transacting parties.

The section Who Owns What summarizes how financial infrastructure can answer the question of "who owns what?"

Finally, the section End-of-Day Processing mentions the activities that occur at the end of each day that actually implement various financial tasks of a Utopian society. These include wealth redistribution, wealth-based taxes and many more things.

Entities and Entity Registry

The following are the broad categories of legal entities in any society:

• Citizens
• Self Owning Entities
• Organizations

Only humans can be citizens. No one owns citizens; specifically a citizen does not own oneself. It is not a good idea to consider anyone other than humans as citizens.

Self-Owning entities, as their name suggests, own themselves. They cannot be owned by any other entity. They are created by some citizens to fulfill some purpose and they are given some resources to fulfill that purpose. Some examples of Self-Owning entities are: Charities, Trusts and Foundations.

Self-owning entities are similar to citizens in the sense that no other entity owns them and hence they have the liability to pay taxes just as citizens have to. Self-owning entities differ from citizens in the sense that they do not receive any money related to wealth redistribution or monetary policy adjustments; only citizens can receive such money.

Organizations are entities that can be owned by other entities. Organizations are classified by the type of their ownership as follows:

• Proprietary organizations are owned by a single citizen.
• Privately owned organizations are owned by a small number of entities and these entities restrict the ownership of such organizations to a small number of owners.
• Publicly Owned organizations can be owned by anyone and there are no restrictions on such ownership.

Self-Owning entities are similar to organizations in the sense that they require some individuals to manage and operate them.

Throughout this book, when discussing legal entities, we will use the word entity to mean a legal entity.

Entities will be recorded in the Entity Registry. Entity Registry is a database that holds the necessary information about all entities.

We create a record in the Entity Registry when a person is born. Creating an organization or self-owning entity means creating a record for it in the Entity Registry. When we are originally setting up the Entity Registry, we will register all existing entities in it.

In order to assign ownership, we need an ability to identify all legal entities. Since entities are recorded in Entity Registry, they need to have a unique identification number in that database.

Identification usually implies that there is a name or a serial number associated with the person or the thing being identified. Of these, a name is a natural and convenient way to refer to a person, but since many people could have the same name, a name is not suitable for uniquely identifying individuals. Some sort of serial number would do the job much better, but then the individual would need to remember the serial number to identify oneself. This requires individuals to remember a meaningless number and that is not ideal.

Individuals have several personal characteristics that can together uniquely identify the individual. These personal characteristics, these biometrics, are gathered and stored in the Entity Registry and are the basis of identifying individuals and retrieving the identification number associated with the individual. An individual may do things on their own volition and at that time, we will use technology to take a snapshot of the individual's biometrics and match them to the ones we have stored in the entity registry and determine "who" is doing it. The chapter Logins and Transactions discusses this in detail.

Organizations could be uniquely identified by their name since we can mandate that no two organizations can have the same name. But we can just as easily assign unique serial numbers to organizations.

Since self-owning entities are created, they too can have both a unique name and a unique serial number.

While an individual may do things on their own volition, organizations are operated by individuals. Those individuals who are hired to work on behalf of an organization and operate the workings of the organization are authorized to do so. When individuals "operate" the organization that they are authorized to operate, their identification and authorization information is used to validate their intended operations.

Self-owning entities are similar to organizations in the sense that they cannot "operate" on their own; they need some individual to operate them.

For organizations and self-owning entities, for some citizens who operate them, for some specific operation functions, the Entity Registry will store the related authorization information.

Regardless, every entity has an identification number, abbreviated as ID, and that ID is the most convenient way to uniquely identify and mention the entity that takes some action.

Assets

Generally speaking, asset is the term we use to refer to the things that we own and there are three categories of assets:

• Money.
• Part ownership of organizations and other financial instruments.
• Personal belongings.

The first of these categories, that is "money", is the simplest category. If all our money was in a single account, then knowing the amount of money that an individual possesses is as simple as knowing one number.

The second category can be intuitively described as containing all those things that we frequently consider as "investments". A very restrictive description of this category would only consider part ownership of organizations as belonging to this category. A non-restrictive and broadly accurate description would consider every kind of "financial instrument" as belonging to this category.

The third category can be intuitively thought of as containing all our personal belongings. These are the things that are neither money nor a financial instrument. Essentially it contains everything that is not in the other two categories.

Bear in mind that this categorization, while helpful, is still just a loose categorization. Note that whether something is classified as an "investment" is purely a matter of perspective and intent. For example, some people buy old furniture and classify it as an investment because they want to own that furniture till it gets a status of "antique" and then sell it for a very large profit or very large capital gains. Thus what one person considers as a personal belonging could be considered as an investment by another individual. Similarly, calling our home a personal belonging may be stretching the meaning of the word "belonging" to a significant extent.

Intuitively, financial instruments are those things that we can own and which are usually traded on a financial market and hence its most recent value is knowable based on its most recent value in the financial market. Usually, financial instruments are agnostic of who is the owner. That is, the current value of the financial instrument is independent of who owns it.

Ownership shares in some organization is the most basic kind of financial instrument. It represents part ownership of some organization.

If the organization is publicly traded, then knowing the value of our ownership shares is as easy as looking up the current value of the stock price and multiplying it by the number of shares that we own.

If the organization is not publicly traded, then knowing the value of our ownership shares is not as easy as in the case of a publicly traded organization. It is still possible to consider that they are worth the same as what we paid for them. It is also possible to find their current worth based on the accounting book value of each of the ownership shares of the organization. The book value is the better way of valuing such organizations as long as we can have a steady frequency of updates to the book value.

Regardless of whether the organization is publicly traded or not, the current value of ownership shares in that organization can be determined.

Most of our personal belongings or personal possessions are the products that we buy in retail stores. Everything that has a physical existence and that we can physically possess can be regarded as a product.

We buy products for some price and we use the products. Using a product reduces the value of the product and over time the product becomes almost worthless and we toss it in garbage or give it away for recycling. Thus, the value of the various products that we own is always decreasing. This is called depreciation and we need to model this depreciation to accurately compute the value of our belongings.

Some products, like houses, have a very long depreciation time-frame. Some products, like gold, do not intrinsically depreciate, but their "current" value at all times is determined by the "market". All kinds of grocery items are also products but with a very short shelf-life and hence depreciate very quickly; some depreciate fully in a day or a week (like fresh vegetables) and some become worthless in a few months (like canned food and grains).

Using depreciation and an accurate inventory of our personal belongings, we can accurately compute the value of our personal belongings.

Thus the monetary value of all financial instruments and personal belongings can be computed on any day as long as we have a list of such things that an individual owns along with some essential information about each one of these things. For each thing/item, the essential pieces of information are original purchase price, purchase date and the life-span of the item. That gives us the fixed amount by which the item depreciates per day. That allows us to calculate the value of the item today if we know the value when it was purchased.

Combine this with the money that a person owns, one can compute the value of all assets that an entity owns. This idea is at the core of our ability to accurately determine the wealth of each entity on any given day.

Products and Product Registry

Most of the things that we can own are in the form of our personal belongings and the financial instruments that represent our investments. We will need to store information about financial instruments and personal belongings. There will be plenty of information for each one of these.

All this information will be stored in a single storage model. This model is based on what are commonly known as "products". Information about these Products is stored in a database called Product Registry.

Any item that is intended to be uniquely identified will have a unique identification number and a separate record in the Product Registry. Items with high monetary value or items whose ownership needs to be concretely established must have a unique identification number. For example, each car and each house has a high monetary value and we are highly motivated in knowing exactly who owns a specific car or a specific house. Hence these kinds of items must have a unique identification number for each item and hence each such item must have a unique record in the Product Registry.

Then there are items of low monetary value or items whose exact ownership is not very important. For example, when we buy a can of soup or a bunch of spinach from a grocery store, we are not interested in identifying each one of these uniquely; we are interested in knowing the number of cans of soup that we purchased. Such items have information about them, but many individual items share the same information. This is represented by having a single entry in the Product Registry for each kind of such item. All items of each kind share the same information entry. When two different people own multiple such soup cans, they both are owning something that has the same product identification number that references the specific kind of soup can; not an individual soup can. Usually commodities and consumables will use this kind of product identification. Even durables of low monetary value will use this kind of product identification. For example, when we buy a hammer we are buying something that is extremely durable, but does each hammer need a unique identification number?

Services

Every day we may avail plenty of services (like food take-out, haircuts, public transit, etc.) and every day we may be availing ongoing services (like mobile-phone service, video subscriptions, news subscriptions, etc.) and all those services provide us with something that we need or want, but they leave no residual monetary value.

Thus we may have availed services or we may be availing services (which can be called as "owning" them in some sense) and yet, from a monetary value perspective, they can be considered as having zero value on any given day.

Services can be viewed as "products that provide us with conveniences but leave no residual monetary value". Hence, we will model services the same way we model products. Each service will have a record in the product registry.

Thus we can maintain an inventory of all the services that we have availed or are availing (that is possessing or owning) and still value them accurately.

Contracts and Liabilities

When we think of something that we own and has a monetary value, we call it an asset. When we think of something that we owe to someone else, we call it a liability. A liability is like a negative asset. Both assets and liabilities need to be considered in computing the "current wealth" of an individual.

When we buy goods or services, there are implicit liabilities on both the provider and customer, even though we don't think about them much. For example, when we buy a device that has a warranty of some number of months, the manufacturer takes on the liability to replace a defective device and the customer is responsible for using the device within its specified parameters. If the customer misuses the device causing it to malfunction, then that technically voids the warranty and then the customer is liable for their loss of the use of the malfunctioning device; not the manufacturer.

Liabilities explicitly arise out of contracts. Contracts, in short, are structured and explicit promises to do something in return for something. Contracts usually create liabilities for the parties involved in the contract; they also imply some transfer of money.

For example, when we buy an extended warranty for some device, we are buying a service, we pay for the service and the provider of the service takes on some obligations (or liabilities).

For example, when we borrow some amount of money, we agree to the terms of repayment and those terms are the contract. Borrowing money allows us access to money that we did not possess and at the same time obliges us to repay the money to the lender. The money that we get as a result of borrowing becomes our asset and the obligation to repay becomes our liability.

For example, when we buy a life insurance policy, we are entering into a contract with the issuer of the policy and this contract places certain obligations on us and the policy issuer; these obligations are liabilities and those result in a transfer of some money from one party to another at some periodicity.

All such contracts that have components of liabilities are in some sense a product which ties two parties together. The description of the product specifies how the two parties are mutually obliged.

When two parties enter into a contract, they both become "owners" to their side of the contract and hence the assets and liabilities associated with their side. These assets and liabilities need to be accounted for when computing the net wealth of individuals (in fact any entity that "owns" such contracts).

Thus we need to also maintain an inventory of all the contracts that entities are engaged in to determine their net wealth. These contracts need to be described in the Product Registry and recorded as "owned" in the participating entities' Financial Database. Thus, just like we maintain an inventory of all personal belongings, we also maintain an inventory of all contracts that the entity has entered into.

Rights, Privileges and Certificates

Loosely speaking, we can call our possessions as our assets.

There may be things that we may possess but are not yet recorded as something that we own. For example, painters, in their free time using their own resources, may have created many paintings. Based on our idea of ownership, such painters will be the owner of these paintings. At the moment that such a painting is complete, it exists but it is not yet in the Product Registry. In this situation, we have a pre-existing asset (even though it was just created). If the painter wishes to sell the painting to someone, then the buyer would like to officially own the painting. For that, the painting must first be registered in the Product Registry. Only after that the painter can sell it and transfer its ownership to someone else.

In fact everything that is created with the intention of selling it, is created at some point in time and it is naturally owned by the entity that created it. After that, it must be first registered in the Product Registry and only thereafter can it be sold to someone else. When it is sold, its ownership record gets transferred over from the current owner to the new owner.

As a natural consequence, if anything has to have a monetary value, it needs to be registered in the Product Registry and this initial registration establishes some entity as the initial owner with some initial value.

Note that things can exist and can be owned with their existence and ownership being legally recognized even when it is not registered in the Products Registry. Why? Because ownership is inherent in everything that we do. Registration is required for two purposes:

• To place a monetary value on something. Zero monetary value is just a special case.
• To make explicit the ownership of the thing so that this ownership can be transferred.

There is also the concept of possession of something that is not exactly the same as owning a product or owning part of some organization. There are three categories: rights, privileges and certificates.

An example of a right is the copyright associated with anything that we create.

An example of a privilege is a driving license.

There are many examples of certificates. Certificates are merely a statement of some fact or some event in which we participated. We personally have many such certificates. Our birth certificate is the first in the long list of certificates. We have certificates appreciating our participation in various activities during our schooling, vaccination certificates, educational test scores, educational degree certificates, etc.

These conceptual categories of possession have characteristics similar to the concept of a product because someone can possess it. This possession is very similar to the intent of ownership. Those who possess it are allowed to do something or are entitled to something. Similar to services, these concepts have zero intrinsic monetary value.

We will model these conceptual categories of possession and every instance of the concept as products and that means that they will be in the Product Registry.

Having modeled these as products, we can associate the specific items with a specific entity in the entity's financial database as an inventory item. They can be looked up from here when the need arises.

There are many instances where some authority needs to check if an individual possesses one of these to avail some facility. Having these on record makes these checks very efficient and we don't need to carry around documents attesting that we indeed possess these rights, privileges or certificates.

Transferable Assets

An asset is transferable if we can give someone else its ownership. Most assets are transferable and a few are not.

Some examples of transferable assets are: ownership shares in an organization, personal belongings like our computer, cars, houses, etc.

Some examples of non-transferable assets are: driver's license, vaccination certificates, educational certificates, life insurance policy, etc.

Whether an asset can be transferred or not is an important characteristic of the asset. When we model assets as products, this characteristic needs to be recorded along with all other product information.

Assets can have many more characteristics and when we model assets as products in the product registry, all these characteristics need to be modeled.

Ownership and Account Book

Regarding "who owns what", for each Entity we will maintain a separate database and in this database we will record everything that the entity owns (that is the assets) or possesses (like rights, privileges and certificates) or is obligated (like contracts that imply assets and liabilities). This per-entity database is called the entity's Financial Database.

Within the Financial Database, we will store the list of all owned items and obligations. This is the Inventory of all owned items. The data in the Financial Database will record these items based on their product's identification numbers so that all information pertaining to those products can be looked up from the Product Registry when needed.

The idea of maintaining a list of everything that we own (that is an inventory) is conceptually simple to understand. However, to accurately account for the monetary value of everything, one needs to maintain this database as a Financial Book of Accounts (or Account Book for short) and the inventory is a part of this Account Book.

This association is recorded in the Account Book of the entity.

The Account Book, as the name suggests, is the standard accounting book for the entity and all the standard accounting principles and practices apply when it is maintained. The Account Book has many different accounts and each one of these accounts records entries of transactions or of ownership association as and when these accounting events occur.

We will use the full rigor of our current ideas of standard accounting principles and practices in maintaining the Account Books for all entities; we may also enhance these ideas. Thus we will need to record all changes to all assets (and liabilities) that entities own (or owe). These changes are called Transactions. Depending on what changes are being recorded, the information gets stored in different Accounts within the Account Book.

One of the accounts in the Account Book is the Money Account. It contains a record of all changes to it and a single number that represents the result of all these changes which is the money the entity (individual or organization) owns. For example, when an individual earns a salary, it gets deposited in this account which increases the amount in it. Another example: when an individual buys something, it reduces the amount in the money account.

The Money Account can be considered to be somewhat similar to our present day bank account. The Money account is much better than our accounts with banks, because the money in this money account is 100% safe. Financial infrastructure is owned by the society and much like its government, it cannot fail. Since the financial infrastructure is not intended to generate profit, it does not take risks with our money and hence it is safe.

To represent the fact that "person1 owns asset1", there will be a record in Entity Registry for person1, there will be a record in the Asset Registry for asset1 and there will be a record in the Account Book of person1 that mentions the asset1 in an inventory kind of account and its current monetary value in a financial kind of account.

Thus for personal belongings, there will be a Personal Belongings Inventory Account and Personal Belongings Monetary Account. Personal belongings will be recorded in the inventory account and their monetary value is recorded in the monetary account. Periodically, the monetary value of the items in inventory will be evaluated and any changes to it will be reflected in the monetary account (along with appropriate entries in either a depreciation account or a mark-to-market account)

Similarly, there will be inventory and monetary accounts for various kinds of investments. Similarly there will be accounts for various kinds of services (like fully availed, ongoing, etc.).

The financial infrastructure has the ultimate responsibility of accurately maintaining all aspects of this Financial Database.

All entities have to cooperate with the financial infrastructure in the maintenance of their Financial Database (which includes the Account Book). For individuals, the features and functions provided by the financial infrastructure will be all that they need from this "accounting and record keeping system". Organizations may need to have a separate record book for their work-in-progress inventory and they will have to periodically sync-up their information with the information maintained by financial infrastructure.

Transactions

Intuitively, a transaction occurs when two parties exchange something. But, is it really a transaction if it never was recorded and there is no proof of that exchange. A person may give something that they do not use to their neighbor. Thus in this interaction between neighbors, physical possession of the thing has changed, but ownership does not change until and unless that change in ownership is recorded. The record of the change of ownership is a transaction.

Since we are interested in maintaining accurate ownership information at all times, conceptually, a transaction is a record of some change to ownership of something or a change in the monetary value of something.

When an entity transfers the ownership of an asset to another entity, the record of this transfer is a transaction.

Here are some examples of transactions:

When we go to a retailer (an online store or a physical store) and buy some products, we are involved in a transaction that transfers some assets from the retailer to us and at the same time we transfer some money (from the Money Account) to the retailer. This is a two way transfer of assets. Thus the number of individual records that get created within this transaction depend on the number of things we buy. The records are placed in the Account Books of both the transacting parties.

When we avail some service from some service provider, like a haircut, we are involved in a transaction in which we transfer some money to the service provider in return for providing us the service. This is also a two way transfer; but not a two way transfer of assets. We are transferring money, an asset, and in return we obtain a service; and both those aspects need to be recorded.

When we give a gift to someone, like when we buy a toy and give it to a child on their birthday, we are involved in a transaction. We are transferring the ownership of the asset, like the toy in our example, to someone else. If we give some money as a gift, then we are still involved in a transaction where the asset being transferred is money.

It is convenient to think about a transaction as occurring between two parties (that is entities). However, some transactions can involve just a single entity and some transactions can involve more than two entities.

A transaction is initiated by one of the parties. The initiating party mentions the other party and specifies all the details of various assets being transferred. This implies that the initiating party must somehow know the identity of the other party. This is where identification of entities and assets is necessary.

In a transaction, it is implicit that the initiating party agrees to the transaction that they initiate. The other party must agree to the transaction before the transaction can complete successfully. This is authorization of the proposed transaction.

A transaction can be completed only after the participating entities are identified, all changes to assets are detailed and all parties agree to it (that is authorize it). Thus before and after every transaction the question: "who owns what", is always answered.

A transaction is recorded in the Account Books of both the transacting entities. A transaction is never partially recorded. So either it is recorded fully or it is not recorded at all. Thus at any time, an asset will be owned by some entity and assets will not get lost in the transfer due to some failure. This "all or nothing" nature of a transaction is the fundamental concept in maintaining a database.

Currently, related to transactions, there are concepts like identifying the other party, wallet, payment cards, payments, authorizing payments, payment processing, asset transfer, credit, loans, etc. Utopian Financial Infrastructure will have equivalents or replacements of these and we will encounter these in the remaining chapters.

Who Owns What

The financial infrastructure manages to answer the question: "who owns what", by doing the following:

• Keeping a record of all the entities.
• Keeping a record of all the assets, which are modeled as products.
• Keeping a record of the ownership of various assets by various entities.
• Keeping a record of the changes in ownership of assets and changes in monetary value of all assets. These are the transactions.
• Eliminating physical cash. All money transactions are digital transactions.

With all that in place, the financial infrastructure has the ability to know, at every point in time, everything that is owned by each and every entity and its most recently known monetary value. This monetary value needs to be kept up-to-date with each passing day.

End-of-Day Processing

The financial infrastructure runs an End-of-Day Process near the end of every day. This process is responsible for the following activities:

• Implementing a daily wealth redistribution based on the previous day's wealth. This is giving every citizen their share of the privately owned wealth of the nation.
• Determining the value of possessions and hence the most up-to-date value of the net wealth of entities.
• Implementing tax collection on behalf of the society. This includes collecting for wealth redistribution, spending needs of society and monetary policy.
• Implementing scheduled payments on behalf of entities.

Thus, by knowing everything that everyone owns, we know all their assets and liabilities, and thus we know the net wealth of every entity at the end of each day, and with that information we can implement wealth redistribution, wealth-based taxes and taxes or payouts that implement the monetary policy during the End-of-Day processing.

End-of-Day processing converts taxes from being a responsibility of citizens to being a responsibility of the system.