Collateral and non-collateral economy

ICO (Initial Coin Offering) phenomena came to our life and became a new way not just to get investments, but also to do business. Just recently it became possible to get customers and investors and advocates to your idea, not limited with number of people and jurisdictions.

Nothing is important for any business rather than implementing its idea and getting people involved in it.

ICO is the perfect way to do this but there are some problems that crypto businesses face in this way.

We are living in post industrial stage, whereas capital is still important for any idea implementation. More or less we still need resources for it. Of course, in past 20–30 years it became possible to buy a laptop and start your own deal from home without capital. All you need is idea, your hands and passion to perform. But, anyway, people need money for living and even with that it is still actual to have investments for any business.

What drives current Economy?

Basically, all operations in Economy have collateral. You can not get something valuable without putting on table something valuable for your counter party. We are living totally in collateral-based Economy. You can became reacher only if you a good dealer, whereas you get a little bit more then others on each deal. Of course, you also need to pay taxes for your gains and every year submit Tax Return. All those rules are well known for everybody who wants to do business and be successful.

To make collateral economy working we need rules and regulators that guarantee that nobody will get something for nothing. If this happens then we have correction mechanisms in our society.

Crypto-currency economy (or digital currency) based on non-collateral principals. At the time of creation, Bitcoin worth zero and only participants and holders of this crypto-currency added value to it. This value totally based on network effect, that says “the value of a product or service is dependent on the number of others using it”. This approach kicked price of Bitcoin to thousands of US dollars for one BTC and it is growing. And that is with fact that Bitcoin does not have collateral.

Bitcoin opened a “pandora door” for other alt-coins and distributed networks that are built for the same principles. It like a creating a new type of Economy that we can name as “non-collateral”.

What are the differences between “collateral” and “non-collateral” Economies?

Collateral:

  • All participants are working in particular jurisdiction
  • Rules and regulators are always on top of deals
  • All operations must complain with law
  • Possible fines for participants
  • Possible imprisoning for participants
  • All instruments must have collateral
  • Almost all operations are reversible
  • All participants must compline with KYC (know your customer)
  • All participants must compline with AML (anti-money laundering)
  • All emissions are regulated and must have collateral
  • Allowed prepaid emissions (prepaid cards, goods and services)
  • Allowed business-share emissions (IPO)

Non-collateral:

  • Built on algorithmic rules with zero-trust between participants
  • There is no a central point of regulation
  • There is no difference for the system for legal or fraud operations
  • All participants totally anonymous
  • Any kind of emission forms called tokenization (ICO)

Connection between collateral and non-collateral economies are provided by non official currency exchanges that trade fiat currencies to digital currencies and vice versa. This connection is very important for non-collateral economy, because it shows not only a value of the digital currency network, but also the risk of operation.

Formally, each time when somebody converts anonymous digital currency to fiat currency if covers money laundering risk, because it is extremely difficult to recognize the source of funds in fiat currency that were used to purchase digital currency that was transferred to holders wallet. All those risks comes in the path of fiat-digital-fiat, because for non-collateral economy this path is still fiat-fiat exchange or transfer, that must compline KYC and AML.

Finally, we have two types of Economy: collateral and non-collateral based. Both of them could coexists each other, but connection point between them are under the risk of compliance rules and regulations for each country. Some countries like USA are not limiting their law only for territory of USA, therefore this risk is obvious for everybody. The good example of it is BTC-e founder court order.