Tag: financial

The art of using all those small financial margins

 

One of those days when ideas flow so quickly that I can almost see smoke rising from my keyboard. So, first things first, that business plan for the EneFin project. I have just passed in review the balance sheets of four FinTech companies – PayPal, Square Inc, Fintech Group AG, and Katipult – in order to make myself an idea of what the balance sheet of EneFin should look like. Surprise! By the look of their balance sheets, there is very little Tech in those FinTech companies, and a s**tload of Fin. How do I know that? Well, when I am reading a balance sheet, I start by paying attention to assets. The account of assets is a financial expression of the economic value present in the proprietary resources of a business. In other words, the structure observable on the active side of a balance sheet informs about what’s really valuable in the given business.

Moreover, when I see a lot of value accumulated in a given category A of assets, and quite little value in category B, I gather that people in that company want to have a lot of A and care a lot less about B. Stands to reason: they have accumulated a lot of A and little B. In any balance sheet, technological assets are to be found mostly under the heading of ‘Property, plant and equipment’. Depending on the accounting practices in use with the given company, intellectual property can be kicked out of this general category, into a separate one, labelled ‘Intangible assets’.

As I dug through the balance sheets of those FinTech companies, the value of those typically technological assets is ridiculously low, way below 10% of the total capital engaged. The lion’s part of said capital is allocated in financial assets. These split into two, functionally distinct categories: customer accounts and investments. This is, by the way, that tiny little detail that I completely overlooked before, as I had been nurturing my enthusiasm for my own idea, i.e. EneFin. In FinTech, you need to process financial transactions, and in order to process them, you need to maintain the corresponding current accounts, commonly called ‘customer accounts’.

The more customers I have in my EneFin project, the more transactions I process, and, consequently, the greater is the aggregate value reported on those customer accounts. Here comes the hard conclusion that I have made as I read those balance sheets: I need to rethink the business process of EneFin under that specific angle, i.e. as the creation of and capitalisation on the customer accounts, which will accompany transactions.

The second thing I need to think about, and which I found in those balance sheets, is hedging. Besides the financial assets that back up customer accounts, FinTech companies hold large amounts of low-risk, low-yield, debt-based financial assets, like sovereign bonds. This is the kind of thing you hold in order to hedge risks that you have in other assets. Those other assets must be those financial ones engaged in customer accounts. It looks as if every $ on customer accounts needed to have at least one sibling in hedging. Once again, something to ponder in the development of my business concept.

Thus, I need to figure out the core process of EneFin, its component customer relations, and the process of starting up the whole business precisely as a process of capital accumulation in customer accounts and in hedging. This is just part of the story I need to rethink. As I read those balance sheets, I am cross-reading the corresponding statements of income. The latter show important, current expenditures on technology, for example on the development of company’s software. Still, those current expenses do not reflect in the value of proprietary assets. In other words, those expenses do not capitalize. This is the money you need to spend in order to stay in the race, but you can hardly expect any durable return on it. It is a typical example of what we, economists, use to designate as ‘sunk costs’: you can hardly live without them, and you can hardly expect to recoup them later.

Right, so I need to figure out them processes. As any living organism, I do with what I have and what I have are those balance sheets. So I go and I am having a look at grandpa PayPal’s annual report. The first thing I do when I am having a stroll at the passive side of the balance sheet is to measure equity. In a balance sheet, equity is what is really yours, out of what you think is yours, i.e. out of your assets. At PayPal, by the end of 2017, shareholders’ equity was equal to $15 994 million. In other words, each dollar earnt in terms of revenues in 2017 ($13 094 mln) needed a puff cousin of $1,22 in equity. From another point of view, that equity of $15 994 million makes 37,5% of the total assets ($40 774 mln). That 37,5% is the coefficient of financial liquidity in PayPal. As financial institutions come, 37,5% is a lot. Banks start moaning when they are legally forced to go over and above 10%; PayPal looks really well-rooted in comparison.

The next thing I do on the passive side of a balance sheet is to look for things that sort of mirror similar things on the active side. On the active side of PayPal’s balance sheet, the biggest category is ‘Funds receivable and customer accounts’: $18 242 mln out of the total $40 774 mln of assets. On the passive side, in the dark forest of liabilities, I am spotting a similar beast. It has ‘Funds payable and amounts due to customers’ written on it, and it makes $19 742 mln. In probabilistic terms, each single $1 paid in on a customer account and held on this account has a mirror in some $0,94 held in assets that PayPal labels ‘Funds receivable and customer accounts’. The remaining $0,06 from that $1 are held in other assets.

Here, I am getting into the business process. A customer opens an account with PayPal. They can do it in two ways, or rather with two distinct purposes: for making payments or for receiving payments. When a customer wants to use the PayPal account mostly to make payments – let’s call them active payers – they will take care of transferring some money to this account from some other one, like from the personal bank account, of from a credit card. This happens frequently with people who buy and pay a lot online, and want their sort of financial crown jewels well protected. They open a PayPal account, and transfer there the amount of money necessary for those payments they think they will be doing like over the month to come. Even if one of those payments is traced back by some malware, the amount at risk is the amount transferred to the PayPal account, not the money on the person’s main bank account or on their credit card. Of course, really nasty malware can also trace back the transfer from my main account to the one I have on PayPal, and can be sort of tempted to attack that main account as well. Still, it makes at least one more firewall to cheat their way through.

Other customers, which I provisionally label as passive receivers, will open and hold a PayPal account mostly for receiving payments. For example, I maintain such an account for the purposes of this blog and as an adjacent functionality to my Patreon profile. The operational distinction between active payers and passive receivers is that the former are more likely than the latter to hold significant monetary balances on their PayPal account.

Let’s see how does PayPal handle those customers. I found an interesting passage on page 132 of their last annual report: ‘We hold all customer balances, both in the U.S. and internationally, as direct claims against us which are reflected on our consolidated balance sheet as a liability classified as amounts due to customers. Certain jurisdictions where PayPal operates require us to hold eligible liquid assets, as defined by the regulators in these jurisdictions, equal to at least 100% of the aggregate amount of all customer balances. Therefore, we use the assets underlying the customer balances to meet these regulatory requirements and separately classify the assets as customer accounts in our consolidated balance sheet. We classify the assets underlying the customer balances as current based on their purpose and availability to fulfill our direct obligation under amounts due to customers’.

OK, so I can see the first choices that a FinTech company can make in that respect. The monetary balances written on customer accounts can be held either directly by the operator of the FinTech platform, or their holding can be underwritten to a third party, a bank, for example. We call it a fiduciary contract. PayPal chooses the first option, i.e. holding customer accounts directly.

What’s the difference? If you hold directly the customer balances, they are your liability vis a vis your customers. You need to figure out, then, how to allocate those balances into some assets. Once you underwrite the holding of those balances to that fiduciary institution, you have a claim on that institution. Your customers have a claim on you, and this is your liability, and you have a claim on your underwriter, and this is your asset. The balance sheet balances itself.

Another choice that I can see kind of underneath that passage is the choice of jurisdiction. See there? ‘Certain jurisdictions […] require...’. Your choice is between the jurisdictions that require, and those which just don’t. It is about flexibility in your assets. In jurisdictions, which require to mirror the balances on customer accounts with ‘eligible assets’, the ‘eligible’ part is bound to be narrowed down somehow, either in the legal rules strictly spoken, or in some guidelines, or even in adjudication. It all tells you, how you should structure your financial assets.

Now, something that is not exactly a choice, but more of an imperative: liquidity of assets as functionally connected to the liquidity of liabilities. I am referring to the last sentence in that passage above. When a customer keeps money on a payment account – such as those at PayPal – the customer can withdraw their money any minute. Hence, if you want to mirror that on the asset side of the balance sheet, you need to place that money from customer accounts, waiting in full gear all the time, in placements that allow just as swift a withdrawal.

All that makes me think about the business process of the EneFin project. The supplier of energy issues the simple contracts that make the base for the complex EneFin contract, i.e. the futures on the supply of energy, and the participatory deed, e.g. shares. Now, those simple contracts have to be combined into the complex contract, EneFin way: whoever buys the futures on energy, buys the participatory deeds attached.

Question: how is that complex contract written into the balance sheet of EneFin? Option (I): all the rights attached to the complex contract remain with the supplier of energy and EneFin just provides a digital token to be put in circulation. EneFin acts on behalf and in the name of the supplier of energy. Financially, in such case, EneFin has a bundle of conditional claims on the supplier of energy, and this is an asset endowed with conditional value.

Those claims are conditional on the behaviour of buyers (consumers of energy). As long as nobody acquires the digital token registered with EneFin, there is no claim with EneFin on the supplier of energy. Once somebody buys the thing, EneFin has a claim on the supplier of energy to transfer the rights from simple contracts (future claim on energy at fixed price + claim on the supplier’s capital) onto the buyer of the token.

This option raises a secondary question: if the complex contract is an asset with EneFin, and it has a conditionally determined value, what sort of capital should mirror that asset on the passive side of the balance sheet? A liability? A share in equity?

Option (II): all the rights attached to the complex contract are entrusted with EneFin, i.e. EneFin becomes the fiduciary (not just the agent) of the primary issuer, i.e. of the supplier of energy. In this case, the contract becomes a liability with EneFin, and we need some assets to mirror its value.

The value, this time, is not as conditional as in Option (I). As a matter of fact, it is not conditional at all. There is the plain value defined as the quantity of energy (QE) encompassed by the contract multiplied by the price of that energy in the households-oriented pricing PHE. It is like V = QE[kWh]*PHE[kWh] and this value turns up in EneFin’s balance sheet as a liability. It needs being mirrored with assets of similar liquidity.

What’s similar liquidity? In general, liquidity of capital is measured with a coefficient of turnover divided by nominal value of the deeds being traded. Logically, the lower the turnover in a given nominal value V = QE[kWh]*PHE[kWh] of contracts entrusted with EneFin, the less liquid those mirroring assets have to be. As the transactional platform warms up and as trade spirals up, liquidity should increase on the asset side. Something to ponder carefully.

how is the complex contract written into the balance sheet of EneFin

Now, I switch to the buyer side, i.e. to relations with the consumers of energy. A buyer of energy – supposedly a household – needs to open an account with EneFin in order to be able to buy complex contracts on energy. They can: a) put money on that account and use it to pay for complex contracts b) not to put money on the account and buy complex contracts with a short-term loan offered by EneFin. In case (a) they create a liability in EneFin’s balance sheet, whilst (b) creates an asset with EneFin.

In case (a), EneFin has the choice between (a)(i) directly holding the monetary balance, and (a)(ii) commission an external financial institution as fiduciary, who will hold that balance. In case (a)(i), this is a liability, with a mirroring asset to be figured out on EneFin’s own. When in (a)(ii), that asset figures itself out, as the EneFin’s liability vis a vis the owner of the account is automatically mirrored by EneFin’s claim on the underwriter who holds the corresponding monetary balance on the base of the fiduciary contract.

Kind of a similar choice appears in case (b): EneFin can (b)(i) lay out that credit from its own balance sheet, or (b)(ii) just resell a loan financed by an external institution.

How does EneFin hold the balances on customers’ accounts

These are loose thoughts, for the moment. Sort of a brainstorm with myself. I hope the storm will rain with some good ideas, soon, but now, it makes me aware of some subtle distinctions I have not been noticing so far. ‘Cause so far, I thought that EneFin would just earn money on transactional fees, and on periodical subscription fees. Now, a different landscape appears under those brainstorm clouds. There are fees for the possible fiduciary services, to be paid to EneFin by the suppliers of energy, and the fiduciary fees to be possibly paid by EneFin to the underwriting financial institution who holds the balances from customers’ accounts. There is a commission that EneFin could have on reselling credit offered by an external agent. There are all the particular rates of return on financial assets of different kinds. After all, you can have an interest even on an overnight deposit.

Intuitively, I guess that the difference between sort of profitable and really profitable, and thus between just possibly sustainable and really sustainable, in that EneFin projects, lies very much in the art of using all those small financial margins.

I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund  (and you can access the French version as well). You can also get a free e-copy of my book ‘Capitalism and Political Power’ You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon page and become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?

 

Support this blog

€10.00

Crossbreeds, once they survive the crossbreeding process

 

As a bit of a surprise, I presently have two business plans on the board, instead of just one. A former student of mine asked me to mentor a business project he is starting up with his friend. The basic concept is that of an online platform for managing medical visits, and the innovation consists in using the Blockchain technology to create, for each patient using that functionality, a digital, trusted ledger of all their medical documentation, i.e. their medical visits, diagnoses, treatments received etc. all in one set of data, properly secured and available from any place on Earth.

Additionally, an educational project – a book on the FinTech industry accompanied by an educational toolkit – which I am running with a friend of mine, has gained in maturity and we will be giving it a definitive form. All in all, ideas and projects abound, and I decided to use my blog for conveying as accurate an account of my intellectual journey into all of these three realms. From now on, I am doing my best to weave an interesting story of scientific research out of three distinct stories, namely: a) my EneFinproject b) that medical ledger project, which I provisionally name MedUs, and c) the FinTech educationalpackage.

As for the EneFinproject, in my last update in French, namely in Les séquences, ça me pousse à poser cette sorte des questions, I came to the conclusion that the best way of starting with the EneFin concept is to create or to join an existing generalist trading platform, possibly using a cryptocurrency, such as Katipult, and include in its general features some options, which, in turn, are likely to spur the emergence of new suppliers in renewable energies.

A little pill of update for those who didn’t follow that update in French: I used a technique that data scientists frequently use, and which consists in expressing something we want as a sequence of events, actions and decisions. When I did this with the general concept, to be found in Traps and loopholes, I discovered that at least some potential users of the EneFinfunctionality are likely to have and want a bit more choice and freedom of movement in their financial decisions. I came to the (provisional) conclusion that the strictly spoken EneFinscheme, i.e. promoting the development of new suppliers in renewable energies, will sell better when expressed as a set of financial incentives, placed in the environment of an otherwise general, well-running platform of exchange, rather than as a closed system.

Right now, I am working through the issue of contracts and the legal rules that accompany them. I am deconstructing the typical contracts signed for the supply of energy, in order to have a very precise idea of what should the smart, crypto-coined contracts at EneFinlook like. Contracts are about securing a precise pattern of behaviour from the part of the other contracting party. I want to understand thoroughly the patterns of behaviour, those wanted as well as those unwanted ones, in the relation between a supplier of energy and his customers.

The business plan I am preparing form the MedUsconcept, I am at the phase of evaluating the size and the value of the market, together with defining, progressively, the core business process. Let me present a bit of the initial idea, and a few openings that it creates. The idea has its roots in the observation of the Polish healthcare market, which is a maze of mutually interweaving public funding and private schemes. An average Polish patient seldom can rely exclusively on the public provision of medical care. Frequent blood diagnostics, dental care, post-surgery rehabilitation – sooner or later, you just need to stop waiting for the public funding of these, and pay privately, either in the out-of-pocket formula, or in some kind of pooled funding scheme.

Those entangled, disparate funding patterns results in the dissipation of the patients’ medical records. The initial ides of MedUsis to take the already known functionality of online arrangement of medical appointments, and combine it with the aggregation and proper handling of digitalized medical records. You make an appointment with one doctor via MedUs, you are being diagnosed and treated, then you make an appointment with another doctor, another diagnosis and treatment ensue, and the record of all that is being stored with MedUs.

This is where the Blockchain technology becomes interesting. Blockchain is basically a ledger, and in handling medical records we need, precisely, a ledger. Medical records contain legally sensitive data, and improper handling can lead to a lot of legal trouble. Every single action taken regarding that data has to be properly documented, and secured against fraud. The basic digital architecture of medical records is that of a database, with the identity of the patient as the leading variable.

In those databases, well, s**t happens, let’s face it. I had a good example of that in my own recent experience. As some of you could have read in ‘The dashing drip of Ketonal, or my fundamental questions for the New Year’, due to a complicated chain of events, involving me, some herrings, and the New Year’s party, I spent the New Year’s night in an emergency ward of the district hospital, with the symptoms of acute food poisoning. As I was being released, on the New Year’s day, I had my official discharging documents. In those documents, space and time warped a little. It started with my data, and then I could read that I had been taken in charge three days earlier, in Berlin, with acute cardiac symptoms, and subsequently transferred to the very same hospital, and then, all of a sudden, my own (real) description followed.

As for me, I wouldn’t care, but my wife said: ‘Look, if you have any complications, or if you need any follow up in treatment, that official discharge will matter. Go to that hospital and make them get your records straight’. So I did, and you would really like to see the faces of people, in the hospital’s administration, when I showed them what I am coming with and for. It was that specific ‘Oh, f**k, not again!’ look. They got it straight, and so I stopped being that cardiac patient hospitalized in Berlin, but as far as I know, it all required a little bit of IT acrobatics.

As I described the situation to a friend of mine, an IT engineer, he explained me that this sort of things happen all the time. Our sensitive data is being stored in a lot of databases, and errors happen recurrently. Technically, once they happen, they should be bound to stay happened. Still, what do we have those IT engineers for? What you do, in such a case, is either to run ‘a minor reloading of the database, just to remove some holes in the security systems’, or you deliberately put the system to failure, and reboot it. Both manoeuvres allow miraculous disappearance of embarrassing data. A lot of institutions do it, like hospitals, banks, even ministries, apparently on a recurrent basis. This is, for example, the way that banks hush up the traces of hacking attacks on their customers’ accounts.

Databases with medical records are basically proprietary, i.e. each database has to have a moral entity clearly owning it and being responsible for it. That’s the law. If I use the services of many different medical providers, each of them runs their own database of medical records, and each such database is proprietary, which, in turn, means that my personal medical data is being owned by many entities in the same time. Each of these entities holds one piece of the puzzle, and the law prohibits any sharing between them, basically, unless a chain of official requests for information is being put in motion. As strange as it seems, such a request cannot be issued by the patient, whose medical records are in question. Only doctors can put my dispersed medical records into one whole, and I have no leverage upon that process.

Strange? Absurd? Well, yes, still no more than the promises, which some politicians make during elections. Anyway, that student of mine came up with the idea of using Blockchain to revolutionize the system. There is that digital platform, MedUs, which starts innocently, as a simple device to make appointments for private medical care. Now, revolution begins: each action taken by the patient, and about the patient, via MedUs, is considered as a transaction, to be stored in a ledger powered by the Blockchain technology. The system allows the patient to be effectively in charge of his own medical record, pertaining to all the medical visits, tests, diagnoses and treatments arranged via MedUs.

A sequence comes to my mind. A patient joins the MedUsplatform, and buys a certain number of tokens in its internal cryptocurrency. Let’s call them ‘Celz’. Each Celzcan buy medical services from providers who have joined MedUs. As it is a token of cryptocurrency, each Celzis being followed closely in all its visits and acquaintances: the medical history of the patient is being written in the hash codes of the Celzeshe or she is using in the MedUsplatform.

Crossbreeds, once they survive the crossbreeding process strictly spoken, are the strongest, the meanest, and the toughest players in the game of existence, and so I am crossbreeding my business concepts. The genes (memes?) of EneFingently make their way inside MedUs, and the latter sends small parcels of its intellectual substance into EneFin. Yes, I know, the process of crossbreeding could be a shade more fun, but I am running a respectable scientific blog here. Anyway, strange, cross-bred ideas are burgeoning in my mind. Each subscriber of the EneFinplatform could have all the history of their transactions written into the hash codes of the cryptocurrency used there, and thus the EneFinutility could become something like a CRM system (Customer Relationship Management), where each token held is informative about the past transactions it changed hands in. How would the reading of such data, out of the hash code, work in the (legal) light of General Data Protection Regulation (GDPR)?

On the other hand, why couldn’t patients, who join the MedUsplatform, use their Celzesto buy participation in the balance sheet of those medical providers who wish such a complex deal? Celzes used to buy equity in medical providers could generate extra purchasing power – more Celzes – to pay for medical services.

In both projects, which I am currently preparing business plans for, namely in EneFin, and in MedUs, the Blockchain technology comes as a simplifying solution, for transforming complex sets of transactions, functionally interconnected, into a smooth flow of financial deeds. When I find a common denominator, I tend to look for common patterns. I am asking myself, what do these two ideas have in common. What jumps to my eye is that both pertain to that special zone of social interactions, when an otherwise infrastructural sector of the social system gently turns into something more incidental and mercantile. It is about giving some spin to those portions of the essential energy and healthcare systems, which can tolerate, or even welcome, some movement and liquidity, without compromising social stability.

As I see that similarity, my mind wanders towards that third project I am working on, the book about FinTech. One of the essential questions I have been turning and returning in my head spells: ‘What is FinTech, at the bottom line? What part of FinTech is just digital technology, versus financial innovation in general?’. Those fundamental questions popped in my head some time ago, after some apparently unconnected readings: the Fernand Braudel’s masterpiece book: ‘Civilisation and Capitalism’, ‘The Expression of The Emotions in Man and Animals’ by Charles Darwin, and finally ‘Traité de la circulation et du crédit’ by Isaac da Pinto. It all pushed me towards perceiving financial deeds, and especially money, as some kind of hormones, i.e. systemic conveyors of information about what is currently the best opportunity to jump on.

A hormone is information in solid form, basically, just obtrusive enough to provoke into action, and light enough to be conveyed a long way from the gland it originates from. OK, here I come: gently and quietly, I have drifted towards thinking about the nature and origins of money. Apparently, you cannot be a serious social thinker if you don’t think about it. Mind you, if you just think about the local (i.e. your own) lack of money, you are but a loser. It is only when you ascend beyond your own, personal balance sheet that you become a respectable economist. Karmic economics, sort of.

Being a respectable social thinker does not preclude practical thinking, I hope, and so I am drifting back to business planning, and to the MedUsconcept. My idea is that whatever will be the final span of customers with that online platform, it is going to start in the market of private healthcare, or, as I think about it, peri-healthcare as well (beauty clinics, spa centres, detox facilities etc.). Whatever the exact transactional concept will be finally developed, any payment made by the customers of MedUswill be one of these: a) a margin, paid by the patient over the strictly spoken price of the healthcare purchased b) a margin, paid by the provider of healthcare out of the price they receive from the patient, or, finally, c) a capital expense of the healthcare provider, to be reflected in some assets in their balance sheet. Hence, I need to evaluate the aggregate value of payments made by patients, the distribution of the corresponding expenditure per capita, and the capital investments in the sector. Studying a few cases of healthcare businesses, just to get the hang of their strategies, would do no harm either.

As I browsed through the website of the World Health Organization, I selected 17 indicators which seem relevant to studying the market for MedUs. I list them in Table 1, below. They are given either as straight aggregates (indicators #11 – 17), as per capita coefficients, or as shares in the GDP. When something is per capita, I need to find out about the number of capita, for example with the World Bankand from then on, it is easy: I multiply that thing per capita by the amount of capita in the given country, and I fall on the aggregate. When, on the other hand, I have data in percentages of the GDP, I need the GDP in absolute numbers, and the World Economic Outlook database, by the International Monetary Fund, comes handy in such instances. Once again, simple multiplication follows: % of GDP times GDP equals aggregate.

Table 1 – Selected indicators about national healthcare systems, as provided by the World Health Organization

Indicator #1 Current Health Expenditure (CHE) as % Gross Domestic Product (GDP)
Indicator #2 Health Capital Expenditure (HK) % Gross Domestic Product (GDP)
Indicator #3 Current Health Expenditure (CHE) per Capita in US$
Indicator #4 Domestic Private Health Expenditure (PVT-D) as % Current Health Expenditure (CHE)
Indicator #5 Domestic Private Health Expenditure (PVT-D) per Capita in US$
Indicator #6 Voluntary Financing Arrangements (VFA) as % of Current Health Expenditure (CHE)
Indicator #7 Voluntary Health Insurance (VHI) as % of Current Health Expenditure (CHE)
Indicator #8 Out-of-pocket (OOPS) as % of Current Health Expenditure (CHE)
Indicator #9 Voluntary Financing Arrangements (VFA) per Capita in US$
Indicator #10 Out-of-Pocket Expenditure (OOPS) per Capita in US$
Indicator #11 Voluntary prepayment, in million current US$
Indicator #12 Other domestic revenues n.e.c., in million current US$
Indicator #13 Voluntary health insurance schemes, in million current US$
Indicator #14 NPISH financing schemes (including development agencies), in million current US$
Indicator #15 Enterprise financing schemes, in million current US$
Indicator #16 Household out-of-pocket payment, in million current US$
Indicator #17 Capital health expenditure, in million current US$

 I am wrapping up writing, for today. I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund  (and you can access the French versionas well). You can also get a free e-copy of my book ‘Capitalism and Political Power’ You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon pageand become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?

Traps and loopholes

 

My editorial via You Tube

I am focusing on one particular aspect of my EneFinconcept, namely on what exactly will the consumers of electricity acquire under the label of ‘participatory deeds in the supplier of energy’. For those, who have not followed my blog so far, or just haven’t followed along this particular path of my research, I am summing the thing up. In practically all the European countries I have studied, the retail sales of energy, i.e. to its final users, take place at two, very different prices. There is the retail price for households PH, much higher than the retail price for PIpracticed with big institutional consumers. The basic EneFinconcept aims at making energy accessible to households at a price just as low as or close to the PIlevel, and, in the same time, at promoting small, local suppliers of renewable energy. The basic concept is that of complex contracts, which combine a futures contract on the supplies of electricity with the acquisition of participatory deeds in the supplier of that electricity. For a given, small user who consumes QHkilowatt hours, we have QH(t+z)*PH= QH(t+z)*PI+ K(t)and K(t) = QH(t+z)*(PH– PI), where ‘t’ is the present moment in time, ‘t+z’ is a moment in the future, distant from the present by ‘z’ periods, and K(t)is investment capital supplied today, to the provider of electricity, by the means of this complex contract.

EneFin Concept

Now, the issue of those participatory deeds purchased together with the futures contracts on electricity. I am advancing step by step, just to keep an eye on details. So, I need something freely tradable, endowed with high liquidity. EneFinis supposed to be a FinTech business, and FinTech means finance, and finance means giving liquidity, i.e. movement, to the otherwise lazy and stationary capital goods. The imperative of liquid, unimpeded tradability almost automatically kicks out of the concept the non-securitized participatory deeds: cooperative shares in equity, and corporate shares in partnerships. These are tradable, indeed, but at a very slow pace. If you have cooperative shares or those in a partnership, selling them requires a whole procedure of formally expressed consent from the part of other members (in a cooperative) or partners (in a partnership). Can take months, believe me. Problems with selling those types of participatory deeds find their mirroring image in problems with buying them.

Securitized shares in a joint stock company give some hope regarding my concept: they are freely tradable and can be highly liquid if we only want them to. As the aim of the EneFinproject is to promote new suppliers of renewable energies, or the creation of new capacity in the existing suppliers, the first issuance of those complex contracts (futures on energy + capital participation) would be like an Initial Offering of corporate stock. I see an opening here, yet with some limitations. As soon as I offer my stock to a sufficiently large number of prospective buyers, my initial offering becomes an Initial Public Offering, and my stock falls under the regulations pertaining to the public exchange of corporate stock. The ‘sufficiently large number’ depends on the exact legal regime we are talking about, but is does not need to be that large. The relevant regulations of my home country, Poland, assume a public offering as soon as more than 300 buyers are being addressed. The targeted size of the customer population in the EneFinproject depends on the country of operations, but even for a really small, 1 MW local power installation, it takes certainly more than 300 (see This is how I got the first numerical column).

The thing is that in the legally understood public exchange of corporate stock I can trade only that stock. A complex contract in my line of thinking – futures on energy plus participatory deeds – would require, in such a case, to carry out two separate transactions in two separate markets: one transaction in the market of futures contracts, and another one in the public stock exchange. Maybe it is feasible, but looks sort of clumsy. Mind you, what looks clumsy when handled simultaneously can gain in gracefulness when turned into a sequence. First, I buy futures on energy, and then I present them to my provider, and they give me their corporate stock. Or another way round: first, I buy the stock of that provider, in an IPO, and then, with that stock in hand, I claim my futures on energy. That looks better. I’ll keep that avenue in mind.

Another caveat that comes together with the public exchange of corporate stock is that only licensed brokerage houses can do it. In the EneFinproject, that would mean the necessity of signing a contract with such a licensed entity. Right, if I have professional stock brokers in the game, I can entertain another option, that of offering that stock in secondary exchange, not in an IPO. A provider of energy does an ordinary IPO in the stock market, their stock comes into the system. Then, they offer the following deal: they buy their stock back and they redeem it, and they pay for it with those futures on energy. With good pricing, could be worth some further thinking.

Everything I have passed in review so far pertains to the equity of the energy provider. I might venture myself into the realm of debt, now. Customers can participate in the balance sheet of their provider via what the French call ‘the bottom part’, namely via liabilities. Along with the futures on energy, customers can acquire bonds or bills of exchange of some kind. Fixed interest rate, no headache about future profits in that energy provider, only some headache left about future liquidity. Debt has the reputation of being more disciplining for the corporate executives than equity.

F**k (spell ‘f-asterisk-asterisk-k’), my mind starts racing. I imagine a transactional platform, where customers buy futures contracts on energy, accompanied by a capital deed of their choice. I buy some kilowatt hours for my future Christmas cooking (serious business over here, in Poland, trust me), and the platform offers me choice. ‘Maybe sir would dare to have a look at those wonderful corporate shares, quite fresh, issued only two months ago, or maybe sir wants to consider choosing that basket with half corporate bonds, half government bonds inside, very solid, sir. Holds money well, sir. If sir is in a genuinely adventurous mood, sir could contemplate to mix Bitcoins with some corporate stock, peppered with a pinch of corporate options, and some futures on gold’.

Right, now I understand the deep logic of the business concept introduced by that Canadian company: Katipult. They have created a financial structure made of an investment fund, whose participatory shares are being converted into a cryptocurrency traded at their internal transactional platform. I understand, too, why they pride themselves with the number of distinct legal regimes they have adapted their scheme to. I see that I should follow the legal regime of my market very closely, in order to find traps and loopholes.

My mind keeps racing. There are three, internally structured and mutually connected sets of financial deeds: a) A set of futures contracts on energy, priced at the retail, non-household rate b) A set of capital deeds issued by the providers of energy, and c) A set of tokens, in some cryptocurrency, which can be purchased for the price of energy at the retail, household rate, and give a claim on both the energy futures and the capital deeds.

A new customer enters that transactional platform and buys a certain number of tokens. Each token can be converted, at a given exchange rate, against the futures on energy and/or the capital deeds. The customer can present the basket of tokens they are holding to any provider of energy registered with that platform, and make a choice of futures on energy and capital deeds.

I think I am progressively coming up with the core process for the EneFin project. Here, below, I am giving its first graphical representation.

EneFin Core Process First Approach

I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund  (and you can access the French versionas well). You can also get a free e-copy of my book ‘Capitalism and Political Power’ You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon pageand become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?

Lean and adaptable

My editorial

Things of life make me circle around the core of my present work, namely around that business plan for the EneFinproject. Last Monday, a friend of mine, with whom I am doing a lot of work on FinTech things, asked me a general question: ‘If you had like to explain your students what is a financial innovation and how it is being done, what would you tell them?’. The question fits my current interests, so I will try to kill two birds with one stone. I will try to develop an intellectually satisfactory answer to that general question, and, in the same time, I will try to move one step forward in the writing of my business plan.

‘Financial’ means something about money. It is about money moving in transactions, or about money staying calmly and nicely in one place, in some cosy balance sheet. Innovating about money means figuring out some new ways of paying with money, or some new manner of piling money up. The essential job that money does for people is to assure liquidity, i.e. money makes it possible to move economic utilities in space and over time, with a minimum of transaction costs. If you have to move a mountain, like in one go, from spot A to spot B, you need either a small particle of really solid faith or a really big piece of civil engineering. Still, if you can move the mountain in question piece by piece, e.g. bucket by bucket, things become easier. You can move those buckets around with a lot less of civil engineering, and your faith is being put to significantly lesser a strain, as well. This is what ‘financial’ means in the first place: transforming a mountain of economic utility into a set of small buckets of financial equivalence, and moving those buckets around smoothly and efficiently.

Any movement happens with a given velocity, along a given vector, and our control over that movement is observable as the capacity to modify both the vector and the velocity. Inventing something new about money and its use, thus making a financial innovation, is equivalent to finding out how to give more velocity in and/or more control over the movement of money. This little elaboration in the lines of Newtonian physics serves me to introduce a secondary effect to the primary financial function. When you create financial instruments, i.e. standardized legal deeds representing small parcels of economic utility, those instruments, although being technically something derivative from something else, start having an economic life of their own. Having an economic life means being tradable, and actually traded, and thus having a market price.

Sounds nice, so far. I am trying to apply those fancy generalities to my EneFinconcept. The mountain of economic utility comes, logically, in the first place. I can distinguish three big masses in the geography around me: the capital immobilised in power generation (power installations), accompanied by the capital immobilised in power grids (systems of distribution), and finally the population of users. They all move, and so, logically, they are not mountains, but rather the tectonic plates that mountains rest on. The mountains per se are made of long-term contracts between power plants and power grids, for one, as well as contracts between power grids (distributors) and their end-users. Ah, there are, in some places, the contracts between power plants (those rather small, local ones, like solar farms) and the end users, directly.

Now, it looks weird. I have mountains rising sort of at the junction of tectonic plates they are supposed to stand on. These are intercontinental mountains. See? I was sure I can invent something unparalleled. That’s the thing with metaphors: you push too far and they become meaningless. Anyway, I have those big masses of long-term contracts, moving very slowly, or hardly at all. Those long-term contracts have economic utility in them. Anything financial one could possibly do about them would consist in creating a complex set of financial instruments, i.e. tradable legal deeds equipped with intrinsic value expressed in the units of currency. I have come up with a few ideas as for those financial instruments, and I am listing them below.

Idea #1are standardized coupons for purchasing electricity, like for 1 kWh each, tradable either like coupons strictly spoken, or, in a technologically fancier manner, as tokens of a cryptocurrency. Those coupons are financialized commitments from the long-term contracts between the consumers of electricity and their direct suppliers, this the distributors who operate power grids. In such a contract, the consumer commits to purchase electricity from a distributor, like for 2 years in a row, and said distributor commits to supply electricity, in a given amount. This type of tradable, standardized deeds for purchasing electricity have been used for decades in the wholesale market of electricity, i.e. between power plants and distributors. I am thinking about developing the same concept in the retail market. It would allow the distributors to cash today their future expected deliveries of power to consumers, and consumers could have a more diversified portfolio of suppliers.

As I think about it now, that type of financial instrument, as conceptualized in my Idea #1, would be workable mostly for new suppliers in the market, for example for new solar farms or new, local hydraulic turbines of moderate size. They could sell to the neighbouring consumers their future output of electricity, in the form of those coupons, instead of signing long-term contracts. Lower and more liquid a commitment from the part of consumers could convince the latter to try and buy that new, fancy power from the new solar farm, sort of.

The more I think about that Idea #1, the more I am convinced that it would require to operate power grids similarly to railways. In the railway business, at least in Europe, you frequently have a separation between the operator of the physical, actual railway (infrastructure), and the operators of trains, on the other hand.

Idea #2is based on the same contracts, and consists in making the consumers’ financial commitments into tradable deeds, like into bills of exchange. In a long-term contract I sign with a supplier of electricity, I am supposed to pay standardized amounts of money every month, and those monthly instalments are based on a smoothed prediction of my future consumption of power. Idea #2 sums up to singling each such future, promised instalment out of the long term contract and trading it as a security, or, once again, as a token of value in a cryptocurrency. As a financial utility, it gives, once again, more liquidity to the distributors. Of course, those financial claims on consumers would be conditional on supplying them a given amount of electricity. As I look at it now, it would essentially amount to have something like options or future contracts, i.e. financial instruments that guarantee a fixed future price of 1 kWh.

As for Ideas #1 and #2, you can look up Les marchés possibles à développer à partir d’une facture d’électricité, A first approach on the financial sideor Une plantation des clients qui portent fruit.

Idea #3is an app coupled with the network of electric sockets, in a smart city. You use the app to pay for electricity as you actually use it, sort of smoothly. Initially, I developed that idea for a network of publicly available electric sockets, made for sort of causal charging of smartphones (see Je recalcule ça en épisodes de chargement des smartphones), but, as I think of it, the idea could extend to all the usage of electricity in a smart city. I could, for example, use the app to drive the usage of electricity in my apartment to a strict minimum when I leave for the weekend, and I would pay just for that minimum. On the other hand, when I use a lot of electric tools in my garage, e.g. when I build a DIY intercontinental ballistic missile, I would pay on the spot for that extra juice.

In legal and financial terms, Idea #3 would amount, once again, to turn the long-term financial commitments on the part of consumers into short-term, spot payments. As I think of it, it wouldn’t even require much change in the distribution system. Large populations, and in the case of a typical, European project of smart city, we are talking like 1,5 million people or more, have a predictable consumption of energy. I managed to provide some scientific proof of that in my article: Settlement by energy. The amount, and, I dare say, the structure of final consumption in energy, remain fairly predictable in such a large human settlement. What is being financialized, i.e. made more liquid, is just the payment for energy.

Good, I have listed my so-far ideas. Now, I keep inventing. We are in a smart city, and there are many local projects of setting local power sources from renewable energies. They are competing for accessing the market of energy in that smart city. They are selling futures contracts on their future, expected output of power. Normally, when you sell your future expected output in the form of futures contracts, you need to give a substantial discount on the present price. If you buy futures on coffee, for example, and you agree to pay today for the coffee beans from the next harvest, like in 6 months, you can negotiate even 40% lower a price, as compared to the coffee beans actually available in the warehouse. Here, the same, future expected power, sold today, is bound to be noticeably cheaper than the presently available juice. Still, we can add to the fun. I imagine a financial instrument which embodies a compound contract: a futures contract on future expected supply of electricity paired with a participation in the equity of the supplier.

That would be my Idea #4, in the framework of the EneFinproject, and here comes a little calculation. In my home country, Poland, 1 kilowatt hour, in the retail market, costs like €0,15. In the semi-retail market, i.e. power for institutional consumers, costs about €0,09 per kWh. I want to start a local station of hydraulic turbines. Nothing big, let’s say two turbines of 1 megawatt each, thus 2 MW in total. That makes an annual output of 2000 kW times 8760 hours in a year, and equals 17 520 000 kWh in a year. In standard retail prices it would make a revenue of 17 520 000 * €0,15 = €2 628 000 a year. I am offering futures on my output, paired with shares in my equity. The buyer pays €0,09 per 1 kWh of future power supply, and €0,06 of small participation in the equity of my power plant, so €0,15 in total, which is just the same as the price of presently available, retailed power. That makes, from the point of view of the supplier, an annual revenue of 17 520 000 * €0,09 =  €1 576 800, plus 17 520 000 * €0,06 =  €1 051 200 in equity.

As business structures come, what comes out of my Idea $4 is an actual cooperative structure. Even if I make it into the legal vehicle of a company, the basic concept is cooperative: the buyers of my output become my shareholders. We can go even further down this path and create a FinTech platform for any market, where barriers to entry, in terms of physical investment, are relatively low, and there is a big fork between retail prices, and the wholesale ones. I think about transportation services, food supply, maybe construction services as well. A start-up sells futures on its future expected output, paired with small shares in its equity. This could make an excellent financial tool for building local cooperative structures.

I used to belong to a few cooperatives in the past. They were housing cooperatives. The thing about those structures is that they are functional as long as membership remains limited to a small number of people. A classical cooperative with 15 members is just fine, with 150 it becomes really clumsy as for decision making, and with 1500 it turns into a feral bureaucracy. My idea – for the moment I name it Coop EneFin– offers all the advantages of the cooperative scheme, whilst giving the whole thing the smooth liquidity of a corporate structure. If I do it the FinTech way, with some smart app facilitating the buying and selling, as well as reselling, of those cooperative futures contracts, it looks the way a good financial innovation should look: lean and adaptable.

There are two levels of testing that business concept. Firstly, the financial soundness: the transactional FinTech platform for trading those cooperative contracts should generate profits sufficient to give a good return on the equity invested in its creation. As a wannabe mad scientist (I don’t have any old castle in the mountains, so I have to wait a bit before graduating into a full mad scientist), I can use the same cooperative scheme to raise money for that technological platform. Anyway, the FinTech utility needs to earn its living somehow. There are three essential ways (look up Plus ou moins les facteurs associés). At the most basic level, Coop EneFin can be just a transactional platform, collecting a commission on each transaction in those ‘futures + equity’ contracts. Secondly, it can be a closed club, with an entry lump fee to pay for the corresponding software package, and then a monthly membership. Thirdly, and finally, the Coop EneFinproject can specialize just in the development of the technology, which, in turn, allows the creation of local cooperative networks around local suppliers of energy.

The realistically appraised cost of technological development, regarding that FinTech utility, comes as the key factor in the business planning. I already had that intuition after browsing the financials of Square Inc., one of the big players in the FinTech business (look up The smaller more and more in FinTech). I can intuitively, and provisionally, nail down the cost of product development at some 15% of revenues in the maturity phase of the business. Liaising with the preliminary calculations I presented a few paragraphs ago, that would make like €236 520 for maintaining and developing the FinTech technology for supporting the Coop Enefin scheme for one local power plant of 2 megawatts. The trick is to minimize the cost of current upgrading in that technology, or, in other words, to minimize its pace of moral obsolescence.

I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund (and you can access the French versionas well). You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon pageand become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?

Complicated? Certainly, and this is not all

My editorial

I need to shake off a bit, regarding the business plan I am currently preparing for the EneFin project. The thing is supposed to be FinTech in the market of energy, with a special focus of promoting renewable energies and fitting into the technological and socio-economic environment of smart cities. As I was preparing my last update in French (see Une plantation des clients qui portent fruit), I became aware that I am entrenching myself in a frame of mind that one of my friends calls ‘the ferocious bulldog’. Those among you, my dear readers, who have been following my blogging for a while, know that I frequently use a metaphor about myself, namely that I am a combination of a happy bulldog, a curious ape, and an austere monk. The important thing about the bulldog, in that internal trinity of mine, is to keep it happy, and now, precisely, my internal bulldog is progressively getting unhappy, and this is when it becomes visible to my friends. My unhappy bulldog has just bitten so strongly in something (or someone) that it can hardly let go. ‘Hardly’ differs from ‘not at all’, and it means it is still possible to unclench my jaws and to get some distance. It is that or a crowbar forcing my mouth open. Distance is better. Crowbars taste iron. Disgusting.

This is the moment of getting some fresh perspective, whilst maintaining a gentle, possibly a graceful drift in the general direction I want to follow. One of the ways I can make my internal bulldog happy is talking to dead people. I mean, not to all of them, just to some. There is a guy I like talking to about the things of life, the name’s Jacques Savary. He used to be French, before he died, by the end of the 17thcentury. He used to be French in the fullness of what I like in the French: he did a bit of everything, probably could wield a dagger and a quill with equal dexterity, and he wrote an interesting book, “The Perfect Merchant”, published on the same year that d’Artagnan died. You can find the French original of the book with Gallica.fr. I documented a few conversations of mine with Master Savary on this blog (see Comes the time, comes the calm duke, Judges and Consuls, or  Quite abundant a walk of life). Now, I am reading, and translating on the go in English, what he wrote about the securitisation of contracts by the means of the so-called bills of exchange, or promissory notes.

He starts discussing the issue when I would start, i.e. at the origins. ‘It is one thousand years since we learnt what bills of exchange and promissory notes are, an invention which came from the Jews, who, chased away from France, during the reigns of Dagobert the 1st, Philippe Augustus, and Philippe the Long, in the years 640, 1181, and 1316, took refuge in Lombardy, and in order to retrieve money and other possessions that they left in France in their friends’ hands, necessity taught them to use letters and bills written in few words and containing little substance, as it is the case with letters and bills of exchange today addressed to their friends; and to that purpose they used the intermediary of travellers, pilgrims, and foreign merchants. This means allowed them to retrieve all their assets, but, as these people have mind infinitely what regards gain and profit, they paid attention to make themselves intelligent in the knowledge of the pure and the tarnish in currencies, so as not to mistake themselves at the evaluation and reduction of different alloys in coins, which was strongly variable at the time’.

The turn of phrase you could have just read is my personal translation. I made my best so as to keep the original spirit of the text, and, in the same time, make it intelligible. The linguistic niceties properly introduced, I can give that loaf of information to my internal bulldog, for economic analysis, just to see it happy. The passage mentions two distinct economic functions, somehow coinciding with the use of the bills of exchange: controlling distant assets, and setting the market price of capital goods.

Let’s move forward with Master Savary. A few paragraphs later, he writes: ‘The etymology of the word “letter of exchange” is easy to understand, for it means no other thing than changing the money that a Merchant has in one town, and giving it to another [Merchant], who has use for it, and who has no such sum in the town of his residence, where the letter has been drawn from. This exchange is equally advantageous to them both, for the one who will have money in a town without this commodity would have to have his money transported by messengers and carters, and the one who would have need it in the same town, for doing business, would have to have it carted from the place of his residence. Again, the word “change” comes from the fact that the interest, or profit, offered when drawing or offering letters of exchange is never the same: sometimes it is high, sometimes it is low, sometimes you lose on it, sometimes you gain, and sometimes it is just at par; it means that there is nothing to lose or to gain between the Changers: and so it is perpetual change, which is being encountered in the Commerce [done with] the letters of exchange’.

Language is intriguing. When we deconstruct the etymology of a word, we can find the function that it corresponds, too. Here, Master Savary explains us the etymology of ‘letter of exchange’, and, by the same occasion, unveils the social function behind. When some capital good, coined money in the case of Master Savary’s explanation, is pretty clumsy and costly to transport, homo sapiens invents ways to use just the information about said capital good. Information travels faster, cheaper, and less riskily than coined metal, so let’s use information as payment. Information has its price, too, and, in this case, the price of letters of exchange – thus their exchange value – was made as the local (i.e. in the given transaction) evaluation of how much exchangeable value I can acquire when accepting, as payment, a letter of exchange allowing to draw on that other gentleman’s metal money stored somewhere far (too far for transporting the money physically).

Thus, as soon as an acceptably stable legal system with acceptable reliable property rights emerged, that little idea emerged as well: what has the most bulk value are big things, hard to move around, like real estate, big stocks of metals, big stocks of food etc. They have value, those big things, but they have little velocity, so let’s give them a kick into more velocity by drawing more or less standardized legal deeds, embodying claims on parts of those big things.

If you read carefully Master Savary’s explanation, you will see that letters of exchange, which, centuries after their invention, turned into paper money, were initially options on the value of coined metal. I had money stored somewhere far from the place where I was currently doing business. I offered to other business people to pay them with letters of exchange, giving them claim on some amount of my far-stored money. Those business people weighed the practical value that having a claim on that money had, from their point of view, and proposed a price for those letters. It went (probably, more or less) like: ‘Good, so you want that cart of silk, and you want me to pay with a letter of exchange that gives me unconditional claim on your silver money, and let’s say – for the sake of convenience in those folks who will read it like in four hundred years from now – that silver money is 200 ducats. That money is stored 100 miles from here. I am pondering two things now. Firstly, I am going through the idea of going and physically claiming that money of yours. Secondly, I am thinking about, instead of doing the trip, to hand that letter of exchange over to another business person, who might be willing to go and claim the money, or to make the letter circulate further. I am anticipating both the for and against of claiming physically your money, and the odds that you letter of exchange will have any exchangeable value in itself. All in all, I propose you to buy this letter of exchange from you for the equivalent, in that silk you want to buy from me, of 200 ducats minus one fifth, thus 160 ducats’.

Complicated? Yes, certainly, and this is not all. There was another factor in the game of pricing the letters of exchange: the properties of the metal money they allowed claiming. Here, a little remark is due about the origins of coined money, and, by the same means, another deceased gentleman joins the conversation. Welcome Adam Smith. What Master Smith explained, in a book published 90 years after that by Master Savary, is that coined money emerged out of the necessity to evaluate the true value of metals used in exchanges. Copper, silver, and, less frequently, gold, were the main metal exchangeable, back in the days (many days). Somehow, people came to the idea that the purer is the metal offered in exchange, the more it is worth. The presence of other substances than silver, in your average pound of silver, decreased the exchange value of that pound of silver. I know, I know, from the today’s point of view it is not one hundred percent logical, yet it was what it was. People used small, portable scales to weigh the metal in exchange (this is where the scales held by Themis, the goddess of justice, comes from), but it was a bit slow to use. Besides, once the metal graded by weighing, the question of how precise was the weighing naturally came to the fore, possibly together with skilled labour force, equipped with tools proper for violence.

What the sovereigns (kings, princes, and whoever efficiently claimed to rule the land) came up with was the idea of minting. The local sovereign proposed the following deal to business people: ‘See, here I have that little facility, which I have just named “mint”. The people I employ at the mint will weigh your metal and grade it, and, in order to streamline the subsequent exchanges, will make into small pieces of standard weight each, with my royal/ducal/whatever-I-am-currently stamp on them. My minting stamp will guarantee the exchangeable value of your metal. Isn’t it a tremendous improvement? Oh, there is that tiny little detail: as minting will take off your shoulders the burden of (some) transaction costs, you pay me a fraction of the exchangeable value in the metal being minted. Deal?’.

In the Europe of the past, which, fault of a better word, we call ‘feudal’, there were many sovereigns, living in really complicated, hierarchical combinations. Most of them used to run their mints, whence the presence of many minting stamps in the market. Ducats were metal stamped with ducal minting stamps, for example. A duke was the highest in rank in the feudal hierarchy, regarding the control over precise territories. Kings and their royal families were technically above that hierarchy, but, as regards the claim on territories, kings made themselves into dukes, frequently. You can find a trace of that legal trick in the today’s royal families, whose members, whilst being kings, queens, princes or princesses, are dukes or duchesses of something as well.

That little conversation with two dead gentlemen, Master Savary and Master Smith, helps me to kind of ground my thoughts regarding EneFin, that FinTech project I am business planning. First of all, find something big, valuable and pretty fixed in one place. Big power plants, for one. Populations of consumers of energy, thus the geographical structures of human settlement, for two. Power grids, for three. Now, determine countable claims on those big fixtures. Next, figure out a legal way (a contractual pattern) to derive tradable deeds on the base of those claims. Once this done, think about the pattern(s) of pricing those deeds, and about making profits out of organizing exchange in them. Intuitively, the best FinTech business is to be found where uncertainty as for the market value is the greatest, and where a proper FinTech functionality can contribute to reduce uncertainty.

I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund (and you can access the French versionas well). You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon pageand become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?