INTERNATIONAL TELECOMMUNICATION UNION

TELECOMMUNICATIONSTANDARDIZATION SECTOR

Digital Currency Global InitiativeDCGI-PG-I-064

Original: English

WG(s): Policy & Governance e-meeting, 03 December 2020INPUT DOCUMENT

Source: Alex Nikolov, VisionNg & Clive Menzies, MacroRisk Connect

Title: Taxonomy of Money

Contact:Alex NikolovVisionNgUK

E-mail: alex@878ten.co.uk

Contact:Clive MenziesMacroriskconnectUK

E-mail: clive@macroriskconnect.com

Keywords: Taxonomy, Human Activity, Identifiable Parties, Tokens, Ledger, Money Creation, Exchange, Policy, Architecture, Security

Abstract: Taxonomy allows us to see clearly the basic elements of the “construct of money” and architect valid solutions in the space of specific discourse – e.g. Security, Policy, Implementation etc.

1. Taxonomy - Defnninon1

A scheme that partitions a body of knowledge and defines the relationships among the pieces. It is used for classifying and understanding the body of knowledge.1

2. Iniroducinon

Why is taxonomy so important?

The methodology of the taxonomy of money is analogous to that which underpins the creation ofthe periodic table of chemical elements.

Prior to the creation of the periodic table, Fire, Water, Air and Earth were the four classes used todescribe substances or phenomena. These four classes were based on visible, general propertiesleading to a classification that was too broad and too general to be of value when describing realityin relation to particular compounds or chemical reactions; hence the need for the granularclassification of basic elements in the periodic table.

Common, current perceptions of money fail to accurately describe what money is, being too generalto describe money in its creation and exchange. Hence the need for a taxonomy of money.

1 Revisions and Suggestions: Alexandre Samarin, Jacques Francoeur, Robin Renwick

Figure 1 Money Flower Dollar Bill Origami

- 2 -DCGI-PG-I-064

This paper examines money from a neutral standpoint, i.e. it seeks to avoid ideological valuejudgements or preconceptions, to record and analyse the reality of money past and present, whilecontextualising the possibilities for digital currencies in the future.

The Policy, Security and Architecture working groups need a shared understanding of thefundamental nature of money in order to be able to deliver on the aspirations and promises ofmonetary development, within a framework of robust architecture and governance. Effectivegovernance relies on having sufficient visibility of all the elements and their interactions to be ableto achieve its goals. Taxonomy illustrates the importance of all the elements and the role ofgovernance. Open architecture is solving complex problems in addressing the dynamic evolution ofrequirements; a similar approach will be invaluable for effective governance.

3. Exnsinng Taxonomy Vnews There are many examples of taxonomies. Most of them are based on particular money interactions.

For example, the Money Flower taxonomy by the Bank of International Settlements2 (BIS) isbased on taxonomical elements such as accessibility to money, reference to technology useand the issuers.

BIS Money Flower3

Figure 2 BIS Money Flower taxonomy

Figure 3 Money tree

- 3 -DCGI-PG-I-064

IMF Money Tree4

The International Monetary Fund (IMF) Money Tree taxonomy is based on other interactions such as Claim and categorisations, e.g. unspecified relationships to technology.

Figure 4 IMF Money Tree taxonomy

4. Money as a Human Consiruci

Human symbolism has evolved over millennia.5 Symbols were adopted to represent money, for ex-ample: shells, stones etc. Original conceptions of money were based on a limited understanding of its relationship to human activity. Popular perceptions of money have yet to evolve beyond that ba-sic understanding, even though we've progressed well beyond shells and Rai stones6, to coins, paperand digital representations of money, as well as “sophisticated”7 financial instruments based on money.

- 4 -DCGI-PG-I-064

5. Why We Need Money

5.1 Human activity

Human Activity is a consequence of satisfying human needs and expresses itself in creation and exchange.

Access to money expands the capacity to indulge in human activity

Money provides a measure of common value

Money provides a vehicle and instrument for information (value, data, energy) exchange andinformation propagation (value entropy8, value signalling, etc.)

Convenience (portability)

Functional benefits such as the ability to Create, Capture and Transfer Count of value inSpace and Time

Troublesome abstract concepts such as ‘worth’ were simplified, through obfuscation of thecomplexity and subjective perceptions of value, using common language symbols (e.g.dollars, euros, pounds)

5.2 Basic Human needs

Access to Food

Access to Shelter

Expression of free will

Freedom to Learn

Freedom to Create

Freedom to Form relationships

Freedom to Nurture future generations

Access to the Commons (land, natural resources, knowledge etc.)

Providing access to these is broadly in line with the aspirations of the Millennium Development Goals (MDGs)9.

It is important to keep in mind the basic functions of money as part of our activities to satisfy our human needs.

Deconstruction of all the elements that comprise a fully functional money system is fundamental, i.e. humans, human activities, tokens and ledgers. Based on these fundamental elements, it is pos-sible to create a taxonomy that describes the property of each fundamental element and the interac-tions between them.

Taxonomy must withstand the test of time; one must be able to use taxonomy to categorise money from the past, the present and the future.

Figure 5 Draft of money taxonomy fundamental elements

- 5 -DCGI-PG-I-064

6. Fundamenial Elemenis of Money Taxonomy

The fundamental elements are:

Identifiable Party(ies)

Human Activity

Tokens

Ledger

and their interactions and relationships. See Figure 6

E x c h a n g e

C r e a t o n

I d e n t fa b l ep a r t y ( i e s )

T o k e n s

L e d g e r

A c tv i t y

G r o u p O b j e c t

I n t e r a c t o n

Figure 6 Fundamental Elements of Money Taxonomy

- 6 -DCGI-PG-I-064

6.1 Identifiable party(ies)

Human activity necessarily involves humans and we humans are the reason money exists

6.2 Activity

Humans are driven by will or necessity and their activities involve:

a) Creation - if it needs to be accounted for, unconditional* creation is only possible (withoutacquiring tokens for further exchange, for example) with endogenous money e.g. tokenscreated at the point of activity such as Bitcoin mining

b) Exchange

*Crucial understanding: The lack of the ability to create endogenous money has skewed thebalance of production and services because exogenous money (money created externally, by a thirdparty) incentivises the maximisation of exchange value at the expense of satisfying human needs.The short-side principle10 tends to limit creation in order to maximise the exchange value.

Exogenous money, i.e. money that must be obtained from an external source, is only available forhuman activities that can demonstrate a clear, future exchange value. All investment, into projectsand enterprises, is subject to evaluation by criteria such as return on investment (RoI) anddiscounted cash flow (DCF). The projected returns need to exceed the cost of capital, in addition toproviding sufficient profit to remunerate those involved in the activity(ies).

The time value ascribed to exogenous money exacerbates the plight of those wanting to create andexchange because the cost of capital is increased by the rate of interest charged in proportion to thetime for which the capital is needed. There is often criticism of “short term thinking” which is aninevitable consequence of interest on money.

Empirical evidence shows the distortions that arise from interest on money, creating inequality11

(see Figure 7) while discounting our future12 (see Figure 8).

Figure 7 Interest on money, creating inequality Figure 8 Discounting our future

6.3 Money Tokens

Tokens are symbolic representations. We call “tokens of exchange” money, but these tokens are symbols of count value rather than having inherent value themselves.

6.4 Ledger

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The ledger can be either implicit or explicit. The implicit ledger refers to the mental record an individual makes when conducting transactions, whereas an explicit ledger is a physical entry on a medium of record, e.g. stone tablet, tally stick, paper or digital record.

6.5 Notes

The properties of these fundamental elements can be considered individually or in a group.

It is essential to consider all these elements when exploring money because if one removes anyindividual element, then money no longer satisfies the necessary conditions for money to servehuman needs.

The taxonomy of money must include all of these.

7. Taxonomy Siruciure of ihe Fundamenial Elemenis

7.1 Identifiable party(ies)

CountOne (minimum) or two

Identifier Implicit – Party is recognisable by non-specific means and it is self-governed

ExplicitStandard – Part of defined Standard such as email, E164, HashNon-Standard - for example: number on a passport, driving licenceSelf-Sovereign – One has ultimate control of the Identifier and its associations and the identifier may not need to be associated with any service Self-controlled – one has control of identifiers but it’s a partially controlled or embedded within a service e.g. <user_id>@<domain_name>.<TLD>

Trust associationYes – identifier is linked to trust provider such as: passport authority, BrightID13, Social LinkingNo – identifier with no association – Bitcoin14 address

Type of identity holder:Wallet – the wallet can be integrated with a service or separate and may use different technologies such as Trusted Execution Environment (TEE)15 on Hardware or Subscriber Identity Modules (SIMs)16 or may be less secure, e.g.mobile apps that also require smart phones.

7.2 Activity

Create - it is important to show the suitability of a particular money system for capturing the value at the point of the act of creation

- 8 -DCGI-PG-I-064

Exchange – Account for exchange

Money Interaction with activity (Taxonomical)

Human Use: Conditional Use – Use of money to account for activity

Indirect - Acquire – To be able to use the taxonomised money, one may need to purchase it or acquire it by exchange Direct - Create – Ability to create tokens e.g. Simple Ledger Protocol (SLP)17 tokens

TrustLevel of trustZero trustHybrid

Capacity – Access to technology, wallet Subjectivity issues –Legality, Morality, Religious, Gender related or other prejudices

Unconditional

At this level one can consider applying a regulatory framework and policies, i.e. Governance

7.3 Tokens

Type: Activity specificActivity agnosticStandardised - e.g. ERC-2018

Non-Standardised

Technology Used – If not specified as part of the ledger

Create

Amount

Flexible

Fixed

Process - Single action or specific activity, such as stimulating a process e.g. main-taining the ledger or creating the tokens

Governance – external party ability to control the money supply – e.g. political de-cision or stake holder

Stake holders

Open

Closed

Human Access to tokens:

- 9 -DCGI-PG-I-064

Implicit – Memory Explicit - vie specific technology such as “wallet”

Wallet Storage – Just Storage of tokensStorage / Control - Allows also control functionality

Integrated – the wallet can be integrated with a service Independent – design allows external party to provide wallets

The wallets (as per identity holder in 7.1) may use different technologies such as Trusted Execution Environment (TEE) on Hardware or Subscriber Identity Modules (SIMs) or may be less secure, e.g.mobile apps that also require smart phones.

Governance or policy work can be done on this fundamental element to create substrates, with para-meters such as:

Claim – Implied promise, that in most cases is hard to value or guarantee and therefore is little more than a marketing tool, rather than “fixed value redemption” as per Figure 4. Infla-tion erodes value (see Figure 9) and value fluctuates between currencies (see Figure 10)

These are important points to consider in the context of consumer protection.

Figure 11 USD Parity to Gold Figure 12 Current cup of coffee price globally

Smart Contracts or Automation can be used for creating relationships with other tokens to reference its associated value, e.g. as in the case of Stablecoins

Stablecoins - “stablecoin” is something of a misnomer. Stablecoins that are backed by a single currency will be no more stable than the currency itself, e.g. US Dollar – see Figure 7. A basket of currencies will provide relative stability, only insulating such coins from the instability of a particular currency. However, global macroeconomic shocks create instability extra-territorially.

Some token elements (listed below) can be included within a Group object that also contains the Ledger

Issuer

- 10 -DCGI-PG-I-064

Lex Monetae (LM)19 – National CurrencyNecessity or will based - in the case where LM doesn’t satisfy needs or op-

portunities for human activity

Technology Used – Digital

7.4 Ledger

Implicit - mental recordExplicit - a physical entry on a medium of record

GovernanceActivity specificActivity agnostic

FulfilmentSingle entity – such as Bank of England Multiple entities – Such as The Federal Reserve Banks (Fed)20, Bitcoin

Nodes

The 12 private, regional Fed banks formulate monetary policy, supervise financial institutions, facilitate government policy, and provide payment services.

In comparison, Bitcoin’s reachable, private nodes as of Mon Nov 23 2020 numbered 11,152.21

Governance type:

Description

Permissionless – all entities may govern

Permissioned – only some entities may govern

Access to ledger:Permissionless – has public access

Permissioned – no public access

Also, there can be split rights for read and write

Private – transaction information known by transacting parties only, based onPrivacy Enhancing Technology (PET)22

Type of records

Obfuscated – obfuscated based on identity or other elements

Consistent – consistent records of the elements

- 11 -DCGI-PG-I-064

Structural Risk – refers to embedded structural elements and the implications of theirfailure, such as with stablecoins that rely on external collateral held with custodian(s)- see Claim above.

Single point of failure

Yes/No

Single entity failure

7.5 Notes

How the elements are ordered will depend on the objective of one’s exploration using the taxonomyof money from a particular viewpoint e.g. policy, security

Complex properties (Risk of theft, Anti-money laundering, parity of particular implementations of Central Bank Digital Currencies (CBDCs)23, for example, to concepts such as M0/M1/M224 etc.) can be derived from combinations of the fundamental taxonomy elements. In addition, particular features, e.g. real-time gross settlement (RTGS)25, can be seen if applicable for a set of specific cur-rencies.

Similarly, views can be created, such as the BIS Money Flower (see Figure 2) - that shows interre-lationships and features and the IMF Money Tree (see Figure 4) which is an hierarchical view of subsets of particular types.

There is an accompanying Excel spreadsheet, based on the current version of this document, includ-ing some cryptocurrencies to illustrate different features and characteristics. Others can be added as required. By using filters from the drop-down in the column headings, different views can be pro-duced to explore similarities and differences from a variety of perspectives. This should be invalu-able for the Digital Currency Global Initiative in its approaches to optimise the design of digital cur-rencies.

- 12 -DCGI-PG-I-064

8. Example based on ihe Fundamenial Elemenis of Taxonomy of Money

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- 13 -DCGI-PG-I-064

9. Conclusnon

The Digital Currency Global Initiative (DCGI) arises from the need to respond to structuralchanges, currently underway, driven by clear indicators that existing global money systems arestraining to achieve economic stability and fairness, while technological innovation is creating newforms of money which offer the potential to both address stability issues and aspirations expressedin the Millennium Development Goals (MDGs).

“The seventeen Sustainable Development Goals are our shared vision of humanity and a socialcontract between the world's leaders and the people,” said UN Secretary-General Ban Ki-moon.“They are a to - do list for people and planet, and a blueprint for success.”26

Despite these aspirations, current money systems have given rise to the Human Paradox -“Humanity versus the Few”, i.e. current money systems are effective in satisfying the ambitions ofthe MDGs only for the few. Today’s political economy is a game of relatively few winners andmany losers. For example, Oxfam reported in January 2019 that just 26 individuals own as muchwealth as half the world’s population, i.e. 3.6 billion individuals27.

The Sun doesn’t orbit the Earth…

Section 5 (Why we need money) refers to the obfuscation of the complexity of value creation,capture, storage and particularly exchange that led to humans focusing on the value of money itself,rather than on real value of human activity. Money is supposed to serve us, we shouldn’t be theservants of money. Other means to create, capture, store and transfer value, that avoid the negativeincentives created by the obfuscation of “the real value exchange issue” paradigm, should beconsidered.

To date, inadequate, expensive capture/transfer value mechanisms have evolved, resulting in theprimacy of exchange value maximisation which marginalises the use value of human activity.

This is of significance to the concept of stablecoins. Rather than relating these to currencies or othercommodities, their relationship to human activities should be considered.

The Policy, Security and Architecture working groups need a shared understanding of thefundamental nature of money in order to be able to deliver on the aspirations and promises ofmonetary development, within a framework of robust architecture and governance. Effectivegovernance relies on having sufficient visibility of all the elements and their interactions to be ableto achieve its goals. Taxonomy illustrates the importance of all the elements and the role ofgovernance. Open architecture is solving complex problems in addressing the dynamic evolution ofrequirements; a similar approach will be invaluable for effective governance.

The visibility provided by taxonomy will facilitate greater user control and confidence in theirability to detect deception.

Most of all, taxonomy suggests that endogenous money has a role to play in the delivery of adurable monetary environment that serves the needs of everyone, not just the few.

- 14 -DCGI-PG-I-064

Conienis

1. Taxonomy - Defniton..............................................................................................................................1

2. Introducton..............................................................................................................................................1

3. Existng Taxonomy Views..........................................................................................................................2

4. Money as a Human Construct..................................................................................................................3

5. Why We Need Money..............................................................................................................................4

5.1 Human actvity..................................................................................................................................4

5.2 Basic Human needs...........................................................................................................................4

6. Fundamental Elements of Money Taxonomy...........................................................................................5

6.1 Identfable party(ies)........................................................................................................................6

6.2 Actvity..............................................................................................................................................6

6.3 Money Tokens..................................................................................................................................6

6.4 Ledger...............................................................................................................................................7

6.5 Notes................................................................................................................................................7

7. Taxonomy Structure of the Fundamental Elements.................................................................................7

7.1 Identfable party(ies)........................................................................................................................7

7.2 Actvity..............................................................................................................................................8

7.3 Tokens..............................................................................................................................................8

7.4 Ledger.............................................................................................................................................10

7.5 Notes..............................................................................................................................................11

8. Example based on the Fundamental Elements of Taxonomy of Money.................................................12

9. Conclusion..............................................................................................................................................13

Contents.........................................................................................................................................................14

- 15 -DCGI-PG-I-064

Quiz?

1 ISO https://www.iso.org/obp/ui#iso:std:iso-iec-ieee:21841:dis:ed-1:v1:en

2 BIS https://www.bis.org/about/shareswd.htm

3 BIS https://www.bis.org/publ/qtrpdf/r_qt1709z.htm

4 IMF https://cointelegraph.com/news/imf-network-effects-could-spark-blaze-of-digital-money-adoption

5 Why We Became Humans - https://whywebecamehuman.com/the-evolution-of-symbolism/

6 Rai Stones - https://en.wikipedia.org/wiki/Rai_stones

7 Dictionary - https://www.google.com/search?q=sophisticated&oq=sophisticated

8 Smulders, S. (1995). Entropy, environment, and endogenous economic growth. International Tax and public finance, 2(2), 319-340.

9 United Nations - https://www.un.org/millenniumgoals/

10 Richard A. Werner - Shifting from Central Planning to a Decentralised Economy https://professorwerner.org/category/articles-essays/

11 Interest and Inflation Free Money – Margrit Kennedy http://userpage.fu-berlin.de/~roehrigw/kennedy/english/

12 Money - Sustainability: The Missing Link by Bernard Lietaer and others https://www.researchgate.net/publication/271215493_Money_and_Sustainability

13 BrightID - https://www.brightid.org/

14 Bitcoin - https://en.wikipedia.org/wiki/Bitcoin

15 Trusted Execution |Environment (TEE) - https://ieeexplore.ieee.org/document/7345265

16 Subscriber Identity Module SIM - https://ieeexplore.ieee.org/document/9219504

17 Simple Ledger Protocol (SLP) - https://simpleledger.cash/

18 ERC-20 https://erc20.tech/erc20token-whitepaper

19 LEX MONETAE - https://en.wikipedia.org/wiki/Lex_monetae

20 Federal Reserve System - https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm

21 Bitnodes - https://bitnodes.io/

22 Privacy-enhancing technologies https://en.wikipedia.org/wiki/Privacy-enhancing_technologies

23 CBDC - https://en.wikipedia.org/wiki/Central_bank_digital_currency

24 Money Supply Types - https://www.investopedia.com/terms/m/moneysupply.asp

25 RTGS - https://www.investopedia.com/terms/r/rtgs.asp

26 United Nations - https://www.un.org/millenniumgoals/

27 Newsweek - https://www.newsweek.com/26-rich-wealth-poorest-50-percent-report-1299345