October 14, 2003

The Value of Issuance

Issuance has been at the core of FC since the time dot. It's either the entire 6th layer - which I called Value - or it is an application in its own right.

Finance - the 7th layer, of applications that have financial intentions - includes as pure issuance plays currencies like the gold community, self-issuance by companies of internal monies and shares in operation, and various gift or voucher style issues. That is, the application of the company is primarily its issuance, opposed to other things like trading.

How much is this worth?

A question oft asked! And there are few definitive answers, as there are few enough Issuers with a wide variety of models. So comparisons are hard.

For example, e-gold have a sustainable issue with a 1% storage fee per annum, and a 0.5% transaction fee that is capped at USD 50 cents. Is this sufficient to calculate its worth? No, as they are joined at the hip with their primary exchange maker, and not only do they have to deal with weakened governance because of it, they also have to soil their balance sheet with the filthy lucre of exchange: average of 2-4% per transaction!

Other DGCs are less well-heeled, as they are the challengers, so let's skip them for now.

For comparison, the Visa/Mastercard empire charges about 2% to all its merchants for every transaction. It goes up and down, depending, but it's a lot of money in anyone's mathematics. And it skyrockets when you get into the societal arbitrage industries like Adult and Gaming... With chargeback ratios of 50%, you just know that the credit card companies are taking a serious slice.

I've heard that the US Mint estimates the cost of coinage at about 1%. That sounds high to me, but they get to keep the other 99 cents on every dollar, so we can tell why they're smiling. But, national currency issuance is a special case of monopoly, so it's not a viable comparison.

Still, national currencies do compete! And, in the great competition of this decade, the dollar v. the euro, here's a very interesting fact:

Over on El Zorro Plata Bob diligently scans the markets for silver news, and reports this article:

Russia to price oil in euros in snub to US

which talks about the Ruskies switching their oil trading to Euros. It aslo quotes this:

If the dollar were ever displaced by the euro, it would lose the enormous freedom it now enjoys in running macro-economic policy. Washington would also forfeit the privilege of exchanging dollar notes for imports, worth an estimated 0.5pc of GDP.

That's astounding! 0.5% of the GDP for an export called having the international unit of account. Talk about a windfall. Talk about an embarressment if it all comes flooding back!

But, leaving aside the amazing shift that will occur when or if the dollar loses its international unit of account status, consider this: a nation-state is more or less simply modelled as a company with its citizens as employees. Its product is its exports. The GDP is the internal market to produce that product.

So, if one were to use the above figure as a guide - and bear in mind, this is a very loose single point of data - one could postulate that a self-issuance of your own corporate currency may be worth 0.5% of everything you do. Depending on how similar you are to the US economy, of course.

It's a number, like any number. Only time will tell how optimistic or pessimistic it is.

Posted by iang at October 14, 2003 02:26 PM | TrackBack

What the heck is "societal arbitrage"?

Posted by: Lurker at October 15, 2003 10:40 AM

Societal Arbitrage - noun/adj:
1. The finding of loopholes and serving of value propositions in a society that deliberately attempts to forego same.
2. The extraction of benefit from differences between distinct and opposing features in multiple societies.

Posted by: Ian Grigg at October 15, 2003 11:55 AM