Dr.Kartik H, Dr.Yatish S.G
Authors’
Email: dr.kartik.h@gmail.com ; dryatish.blr@gmail.com
Abstract- Crypto currencies like Bitcoin are gaining prominence as a
medium of exchange. They have several benefits like very low transaction cost, fungibility
etc. But Crypto currencies are also identified with their use in crimes,
illegal activities and speculation. Part of the reason for their prominence as
well as notoriety is the fact that they have no Sovereign Backing whatsoever
and also because they are decentralized. To make Crypto currencies acceptable
by the people and also curb their misuse, the authors have proposed a protocol
containing a set of standards and procedures. By using this procedure, any
nation can create its own Sovereign Backed crypto currency called NationCoin. A
commission will be established which will hold a certain quantum of money
loaned by the Government. This loaned money will provide the Sovereign backing
to the Crypto Currency. A Controlled Block Chain Protocol is used. The Genesis
Block of several NationCoins is then provided to the banks in the country to
use them for interbank settlements. These Interbank transactions will lead to
the mining (generation) of additional NationCoins by the commission which will
hold it without releasing it to the public. Once there are sufficient numbers
of NationCoins so as to be equal to the loaned amount unit-for-unit, it shall
be released to the public for use.
INTRODUCTION
A Crypto currency is a storage of
some value and a medium of exchange. It uses cryptographic techniques to protect
transactions and also manage the generation of money.
Crypto currencies are decentralized,
meaning that it is outside the control of central banks. Crypto currencies also
have a decentralized ledger system which makes it possible to verify and
confirm transactions over the entire network. It also makes possible for each
unit of crypto currency to be tracked right from creation to the most recent
transaction. They are outside the control of central Banks, and are explicitly
NOT RECOGNISED. As such, they are outside the ambit of regulation. The absence
of regulation no doubt makes the system free from the supervision of Governments
and appears to give more freedom and rights to the people using Crypto
currencies. The privacy, anonymity and personal space appear to be "enhanced"
in the absence of regulation. But since they are unregulated, Crypto currencies
have been misused for money laundering and criminal activities by various
antisocial elements. The personal freedom and rights that were “enhanced” due
to the absence of regulation will be usurped by powerful antisocial elements
that do not respect any law or have any ethical considerations.
To protect
people’s rights and also optimize economic activity, it is necessary to
regulate Crypto currencies. But we need to do it in a way that it eliminates
all (or a majority) of the shortcomings of Crypto currencies. At the same time
we need to enhance its benefits. People tend to think of decentralization as an
inherent, inseparable character of Crypto currencies. They are led to believe
that the Crypto currency concept will fail if regulation and sovereign backing
is introduced. But debates around Crypto currencies tend to discount the fact that
it is possible and feasible to regulate Crypto currencies.
Bitcoin is
the first and most famous Crypto currency. It has recently gained widespread
usage. But it is not regulated or backed by any sovereign authority and is thus
susceptible to misuse.
Advantages
of a Regulated and Sovereign Backed (RSB) Crypto currency-
1) Minimal or
no transaction cost to the public- The people can use the RSB Crypto currency without
any trepidation as it will be guaranteed by the Government. Nil transaction
cost is the basic feature of a crypto currency. Lack of transaction cost will allow
seamless and unhindered exchange of money leading to increased economic
activity. It will also leave more money in the hands of the public.
2) Money
Accountability- It will be possible for Governments to account for all the
money in the system. This way, the counterfeit and parallel economy can be
curbed, Money laundering can be detected and flow of money to possible illegal
activities can be monitored.
3) No need of
Bank Accounts- Banks need to be paid to maintain bank accounts. Bank accounts
also need to have a minimum balance so as to be viable. But Crypto currencies
do not need accounts. Having only a digital wallet is enough.RSB crypto
currencies can be maintained in digital wallets at no cost to the owners.
4) Easy
transfer of funds-Governments can transfer funds or social security benefits to
citizens’ wallets in an instant, free of cost. Citizens’ digital wallets can be
linked to their social security number or other Government mandated IDs.
5) Easy
Taxation- A person’s money holding can be inferred by the Government when
necessary. The Government can automatically deduct taxes without the need for
people to file tax returns. It can wind up its tax collecting infrastructure
and invest those resources somewhere else.
6) Certification-
Assets can be certified, recorded and maintained using the same protocols that
a RSB crypto currency will use. The protocol for RSB crypto currency will be called
as Controlled Block Chain.
(A Controlled Block chain is
different from a Block Chain per se [1]. A Block Chain is a permissionless
Distributed Database, whereas a Controlled Block Chain will be Permission
Based. The Permission here being provided by the Sovereign Authority.)
7) Price
stability-Presently, crypto currencies like Bitcoin are highly volatile. This
is because a lack of backing has led to rampant speculation. Consequently,
Bitcoin has undergone many Boom-and-bust cycles. RSB crypto currencies will
provide stability in value so as to be a reliable medium of exchange.
8) Manageable
Deflationary and Inflationary indices- Because RSB crypto currency will be backed
by Government; it will have a manageable inflation and deflation index.
9) Environmental
advantage- Printing currency notes and maintaining them in circulation is
costly both for the economy as well as the environment. In the long run, RSB crypto
currencies will replace paper currency. It will thus save a lot of trees from
being cut and used for paper.
10) Easy
convertibility- People from one country will be able to invest more freely in
other countries. This will lead to the emergence of a loan market which is
highly competitive. This will make cheap and safe credit available to the
neediest. This is presently not possible due to existing monetary, fiscal and
distance barriers.
THE K-Y PROTOCOL
The K-Y Protocol aims to make
Regulated and Sovereign Backed (RSB) Crypto currencies a practical reality. The
authors have designed this protocol carrying their initials in abbreviated form
as the name of the protocol. The Protocol consists of a set of rules and procedures.
(*)NationCoin- abbreviated as NC,
it is a generalized designation for any RSB Crypto currency (RSBC). For example
USA's RSB Crypto currency can be called USCoin, India’s as IndiaCoin, China’s
as ChinaCoin etc. Each nation can have only one NationCoin i.e. RSB Crypto
currency.
Since various countries have
currencies of their own with differing Exchange rates, we have defined a NationCoin Unit as-
One NationCoin Unit=One NationCoin X Exchange rate of the currency with the US
Dollar.
For example, in case of Rupee IndiaCoin unit
One IndiaCoinUnit = 1 IndiaCoin X 68 = 68 IndiaCoins.
One ChinaCoinUnit =
6.5 ChinaCoins
One EuroCoinUnit = 0.88
EuroCoins
One JapanCoinUnit = 112 JapanCoins
One BritishCoinUnit = 0.69 BritishCoins
(1 USD=0.88 Euros= 0.69 Pounds= 112 Yen= 6.5 Chinese Yuan= 68
Indian Rupees; as on 12/02/2016)
Note that
NationCoin Unit is different from NationCoin. A NationCoin Unit is generic in
nature. One NationCoin Unit is always equal to one US Dollar. Whereas One
NationCoin is equal to one unit of native currency in that particular nation.
The K-Y Protocol is as follows
1. The Government of the
country wanting to introduce the NationCoin will first setup the “DIGITAL ASSETS RESERVE” (DAR) by
passing a law or amending existing laws as need be. It will also setup the “DIGITAL ASSETS REGULATION & EXCHANGE
COMMISSION” (DAREC) which initially will have no role to play. Later on,
when NationCoin becomes established as a primary mode of transaction, DAREC
will play the role of an impartial regulator. The NATIONAL LEDGER DATABASE (NLD) is also created. It will be closely
linked with the DAR. It will keep track of the transactions in its Block Chain
Ledger whose copies will be distributed throughout the Network Nodes.
2. By a separate funding from
the Government, DAR will setup “Grid Computing Clusters” with several nodes
throughout the country. These networks will not be open to the public. These
are the nodes that will mine the NationCoins. This will be done by “DATA – DIGITAL ASSETS TRACKING &
ADMINISTRATION” which will be the technical wing and technical assistance
arm of the DAR.
3. The Government will provide
the DAR $10 million worth of loans. This will form The Corpus- to be used to
back NationCoins.
4. DATA will also help the
banks in the country to setup NationCoin compatible with softwares. DATA will
create block chain protocols for NationCoin.
5. The RESERVE will be the entity which will Sovereign stamp the Crypto
Currencies and give it the RSB (Regulated and Sovereign Backed) certification.
It will be an integral part of the DAR.
6. The networks so formed will
be tested in trial runs involving NationCoin transactions, interest payments
and exchange procedures. This is the System Configuration Stage.
7. The Government will provide
a soft loan of $10 million worth of assets in any form (either in $ or National
currency) to the DAR. This $10 million will be called “THE CORPUS”.
8. When the corpus is in place
it will be securely locked up physically in vaults and the “GENESIS BLOCK” (the
First Block in the Block chain) of 50,000 NationCoin Units (NCUs) will be
generated.
9. The 50,000 NationCoins
will be provided to the banks for their daily interbank clearances. These
50,000 NationCoins will be pegged to $10 million in the Corpus giving each NationCoin
a value of $200. This Backing will be certified by the Governor of DAR.
10.Banks will be mandated to use
these NationCoins in their Intra-day and Inter-day settlements and
clearances.
For this purpose, Banks will be provided their own NationCoin wallets
maintained by DATA.
11.Each Bank
is mandated to use at least 25 cents worth of NationCoins per $100 in
settlements and
interbank transactions.
12.These transactions will be verified by DATAs Network nodes. Once verified, these will
be categorized
into blocks of between 45 kb to 85 kb and “Mined”. The Mining
will be done by DATA system only and
will not be open to public. Once mined,
190 NationCoins will be generated every 10 minutes. Therefore
the Block time
for each block will be 10 minutes. Reward per block will be 190 NationCoin units.
13. The NationCoins
so mined will go into HOLDING. HOLDING is a Digital vault of DAR which is not
connected to the public Network and will not to be released to the banks either.
The NationCoins in HOLDING are not yet sovereign backed.
14. The DAR
will hold the NationCoins in HOLDING until it accumulates 9.95 Million NationCoins.
Along with the 50,000 NationCoins used by banks, there are now a total of 10
million NationCoins altogether.
15. When there
are 10 Million NationCoins in Toto, it reaches the next crucial stage called
the Equation.
16. Equation: When there
are 9.95 Million NationCoins, DAR will start pegging its Corpus to the 9.95
Million NationCoins that it holds. Once sovereign stamped and certified, these
10 Million NationCoins will be exactly equal to $10 Million in the Corpus. When
one NationCoin Unit= One Dollar in the Corpus, then Equation is said to have
been achieved.
[*As mentioned earlier, since various countries have
currencies of their own with differing Exchange rates, we have defined a
NationCoin Unit.
One NationCoin Unit=One NationCoin X Exchange rate of the
currency with the US Dollar.
For
example, in case of Rupee IndiaCoin unit
One IndiaCoin Unit = 1 X 68 IndiaCoins =68 IndiaCoins.
10 Million Dollars=10 Million IndiaCoin Units=680 Million IndiaCoins=680
Million Rupees
Therefore, when there are 680 Million IndiaCoins, each IndiaCoin
will be equal to One Indian Rupee and Equation is said to have reached. In case
of Yen, Equation will be attained at 1,120 Million JapanCoins, for Euro it will
be 8.8 Million EuroCoins, For Chinese Yuan it will be 65 Million ChinaCoins and
so on.]
17.Once Equation
is reached, two things will happen in parallel.
1. First
Parallel: - DAR will release this 10 Million NationCoin Units to the
Banking System in 4 phases over a period of 4 weeks. 2.5 Million NationCoin
Units will be released every week. This is necessary so as to release NationCoins
Units in a controlled manner without overloading or harming the Computing
Systems.
2. Second
Parallel: This is the most important step. A process called Scaling
is initiated. The number of NationCoin Units mined per Block is increased to
more than 15 times the mining rate per block before Equation. The block size
will also dramatically increase due to the large number of inter-bank
transactions that will be taking place (as more and more NCUs are pumped into
the system).The block size will increase to around 5 MB. The Block time will
reduce from 10 minutes to 1 minute and number of NationCoin Units mined per
block will be 2,850 NCUs. Thus the total rate of NationCoin generation will increase
by 150 times the rate it was before Equation.
18. All the
NCUs mined will flow into the HOLDING and is not backed in any manner. It will
not be released to the public. But Banks can buy them by paying requisite
currency which will go into the Corpus and an equivalent number of NCUs are
released.
Equation is
important for several reasons.
1.For the sake of public convenience, One Dollar has to
be equal to One NationCoin Unit. The public may get confused with any other
value and this may cause chaos and panic leading to adverse economic outcomes.
By Equation, we ensure that people still identify One Dollar with One NationCoin
Unit.
[Incase of Euro, 1 Euro =1 EuroCoin
Yen, 1 Yen =1 JapanCoin
Rupee, 1
Rupee=1 IndianCoin
Pound, 1 Pound
=1 BritishCoin and so on]
2.Say, for instance 1 NationCoin Unit is equal to 2 Dollars,
then speculators may see 1 NationCoin Unit as more valuable and may begin to
hoard it, this will cause many problems for the society both in long and short
term.
3.In case, One Dollar is equal to 2 NationCoin Units,
people may see NationCoins as less valuable and may not prefer to use it for
transaction. Then the whole idea of RSB Crypto currency will become
impractical.
Freshly Mined NationCoin Units will
not be backed by anything and as such will have no value. They are put into Holding.
HOLDING will always contain non-backed NationCoin Units. These non-backed NationCoin
Units will have a unique identity that sets them apart from RSB NCUs. The
non-backed NCUs, when backed, will be certified as Backed NCUs by the DAR.
These Backed NCUs, after Sovereign Stamping and Certification will be known as
RSB NCUs. As soon as they are backed, they will undergo a change in their
identity which will make them recognisable by the DAR and other Network nodes
as RSB NCUs, fit for use in transactions.
This change in identity and
certification will happen electronically in the Reserve.
19. Equation will happen one year
after the Genesis Block. Scaling will start immediately after Equation.
20. From the end of first year to
the end of second year around 1.5 Billion NCUs (NationCoin Units) will be generated which will be put in HOLDING.
21. From the beginning of the third
year the Government can start paying a small part (around 1%) of the Government
salaries through RSB NCUs. Say, the Government decides to pay 1million NCUs as
salary. It will provide $1 million to the DAR. DAR will then provide 1million
RSB NCUs to the Government to pay salaries.
22. The National Coin Wallets (NCW)
of employees will be created and maintained by DATA free of cost. This NCW will
be linked to the social security number or any ID system depending on the
country (In case of the US it will be linked to the Social Security Number. In
case of India it will be linked to PAN number).
23. Joe is a Government employee
drawing $10,000 per month as salary. The Government decides to pay 1% of
salaries in NCUs i.e. $ 9,900 will be in Dollar form and $100 worth in NCUs.
Now Joe decides that he does not want NCUs. All that he has to do is access his
bank account via internet and give back NCUs to the DAR (There will be a
facility provided for this purpose). The DAR will credit $100 into Joe’s
account in lieu of 100NCUs.
24.Say Joe wants to transfer $1000
to Alice; he can do it in Dollars by paying around 25 cents as transaction cost.
But if he transfers 1000 NCUs to Alice, he can do it freely without any
transaction cost. International transaction costs of money transfers in native
currencies will be even higher. But for RSB NCUs it will be minimal or zero.
25. The Bitcoin Protocol follows
the practice of halving, every 4 hours the number of bitcoins mined per block
will halve. This will go on till there are 21million Bitcoins in the system. But
for RSB NCUs, this is not the case. The RSB NCUs' primary objective is to make
it widely utilized among the public. As such we need a large supply of RSB NCUs
so as to replace a proportion of paper currency in circulation. For this reason,
the RSB NCUs will undergo a process called Doubling.
26. Doubling: One year after Scaling
has taken place, the process of Doubling will occur. Block time will remain 1
minute only. Number of NCUs mined per block will now be 5,700 NCUs (it was
2,850 NCUs after Scaling). The block size may (or may not be depending on
number of transaction) double to 10MB.
27.All the NCUs mined will follow
the process of flowing into the Holding, to be backed and certified in the Reserve
when funds flow into the CORPUS or as and when mandated by the Government(on
being provided equivalent backing in currency).
28. All this time, the NLD (National
Ledger Database) whose copy is present in all the nodes of the DAR network is
promptly updated from time-to-time duly following the Controlled Block Chain
protocol. The NLD keeps track of all RSB NCUs through its NCU ledger.
29. The DAR shall aim for
replacement portion of around 50% of all total currency in circulation over a
period of 10 years.
30. For the US Dollar, at present
rates it will take about 8-10 years to replace half the currency in circulation
by USCoin.
31. Linkage: Linkage here means
that the NationCoin is allowed to be freely traded in the International Market.
When around 50%of circulating currency is RSB NCUs, then Linkage with
international markets can be allowed.50% replacement is necessary so as to have
a robust amount of NCUs which will not be affected by minor speculation. For
the purpose of Linkage, NLD copies will be uploaded into satellites, so that
they will act as a network node. For example take JapanCoin, if Joe sends a
JapanCoin from Argentina to Alice who is in South Africa, the transaction is
recorded and beamed to a Network Node in space (Japanese satellite). This will
in turn update all other nodes in Japan, thus upgrading the Ledger.
31. Later on, every national
capital can host at least one network node of every other nation as part of a
diplomatic treaty.
32. Once Linkage occurs, the Government
(through the DAR of the country) can decide if it allows a “Free float” of its
NCU or a “Managed Float”.
33. In case of free float, market
forces will determine the value of NCUs whereas in case of Managed float, DAR
will allow the rates to float up to a particular range. Beyond that range it
will manage NCU rates as it presently manages its native paper currency.
34. After a certain level is
reached, say 50% of total circulating currency, Doubling can be stopped and NationCoins
generated at a steady rate every year, accounting for inflation if necessary.
Eventually RSB NCUs will replace paper currencies to a large extent.
35. RSB Crypto Currencies can also
be introduced at the International Level. A WorldCoin can be created based on
the K-Y Protocol. Only, the WorldCoin will be backed by SDRs (Special Drawing
Rights) of the IMF. Exchange rates of various NationCoins vis-Ã -vis the
WorldCoin will decide the inter-relations between the several RSB Crypto
Currencies.
CONCLUSION
We have
proposed a system for the creation of Regulated and Sovereign Backed (RSB)
Crypto currencies. They will eventually replace, to a large extent, paper
currencies of their respective nations. We began with the setting up of the
Digital Assets Reserve which will be a sovereign authority. The first cache of
NationCoins generated in the Genesis Block will be given to banks for their
internal settlements. This will ensure that the system continues to generate
NationCoins subsequent to transaction verification as per the Controlled Block
Chain Protocol. It will also test the robustness of the system before the
NationCoins are released to the public.
Equation
defines the unit-for-unit equivalency of NationCoin Units with the native
currency. Scaling after Equation is used to cater to the huge demand that the
Crypto currency will face. Doubling is aimed at replacement of the currency
with NationCoins. Linkage will enable the NationCoin to be used across borders.
The unique
feature of The K-Y Protocol is that it can be used by any sovereign authority
to create a credible RSB Crypto Currency. The people stand to benefit from all
the advantages accruing from such a currency. Nations with a larger and more
diverse economy will take longer to shift to NationCoins from paper currencies
as the common medium of exchange. Smaller Economies can shift faster.
To make the
NationCoin secure, several security features at various stages have been
incorporated. Holding, Corpus Backing, Sovereign Stamping, Certification and National
Ledger Database are some of the built-in security features. Hence it has a
Multi-tiered security structure. The introduction of RSB NationCoins will usher
in an era of Cashless Liquidity. The
National Ledger Database can also be used for Non-Financial Block Chain uses
where object ownership is decoupled from functional Utility.
ABBREVIATIONS
DAR-Digital Assets Reserve
DAREC-Digital Assets Regulation and
Exchange Commission
DATA- Digital Assets Tracking and
Administration
K-Y Protocol- Kartik-Yatish Protocol
NCU- NationCoin Units
NCW-National Coin Wallet
NLD-National Ledger Database
RSB-Regulated and Sovereign Backed
References
[1] Bitcoin: A Peer-to-Peer Electronic Cash
System-Satoshi Nakamoto
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