October 22, 2021

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This is a video that I published  over 7 years ago. I find it be quite prescient.

This is an extended appearance that I made on CNBC on the same topic. Remember, this was 7 years ago (click graphic below)... 

 

Fast forward to today, we have built functional product which utilizes the invention, and more importantly, a patent has been granted and registered - with reach into nearly half of the G20. Now, we move forward to implementing what I believe to be one of the most powerful technological inventions of modern time (then again, please realize that I am biased). Let's walk through what it is that I invented, and how it fits into today's world.

 First, a few definitions....

  • Zero Trust” is a situation where there is no or very little trust needed between parties in order for them to safely transact
  • "Value transfer" is a process of transferring rights (e.g., ownership, control, etc.) of objects of economic value among parties (e.g., gold, goods, services, responsibilities, securities, commodities, real assets). 
  • Cryptocurrency”, for the purposes of this discussion, is a cryptographically secured account of value that works in conjunction with a blockchain. Examples are Bitcoin, Ethereum, Chinese Digital yuan and Binance BNB

Overview of the Reggie Middleton ZeroTrust Concept

Market efficiency tends to increase—and therefore transaction costs tend to decrease—in proportion to the degree that transacting parties trust each other. However, rent extraction tends to increase—and therefore trust decreases—in proportion to market size1. Economic rent is any payment to an owner or producer in excess of the costs needed to bring what is being purchased into production. Efficient and productive participation in larger markets therefore requires mitigating trust issues, but that comes at a cost. That cost can often be reduced by economies of scale, but even today, there is substantial overhead from buffering against risks introduced by counterparties, intermediaries, post-delivery payment failures, guarantor failures, escrow, etc. Rose, David C. The Moral Foundation of Economic Behavior. New York: Oxford UP, 2011. Print.

Since the mid 1990s, there has been an explosion of commercial activity where parties previously unknown to each other agree to transact using the internet as the fundamental communication medium, sometimes even across international borders. Establishing and maintaining trust between those parties has played a central role, and various crude solutions based on traditional, but inefficient and high friction methods have been attempted (e.g., electronic exchanges with expensive fees that step in as the counterparty, “online” escrow and dispute resolution using third parties, various reputation systems, third party guarantors, etc.).

Among those markets where unknown and untrusted individuals interact are those which trade financial instruments (e.g., stocks, bonds, options, futures, swaps, currency exposure, etc.). With the advent of financial engineering, individuals and businesses have been able to leverage computing in financial trading, including automating the process of entering and exiting trades based on programmable conditions or algorithms. However, even with the explosion of the use of technology in this space, such technology is overwhelmingly layered on top of legacy centralized markets. Nearly all impose relatively large costs to conduct trades with untrusted counterparties. Some very high-volume exchanges sell the ability for “high value” (i.e., high-paying) customers to cut in line ahead of less savvy or less well equipped investors. Some have questioned the fairness of this practice.

Further, the cost of contract enforcement in international trade can be prohibitive, and success might be very difficult to predict. In addition, a seller may wish to receive one currency, and a buyer may wish to send another. The value of one currency denominated in another can be volatile. Historically, one way that remote parties have mitigated risk is to engage the assistance of trusted intermediaries. One such mechanism is a letter of credit (L/C). L/Cs are appropriate where a seller does not know whether to trust a buyer wishing to place a large order, but does trust a bank where the buyer has established a line of credit. The buyer and bank agree that the bank will release funds from that line of credit to the seller when the seller meets certain conditions (most often transmitting evidence of shipment to the bank before a certain date). The bank provides the promise (L/C) to the seller, and the seller and buyer agree on the remaining terms of the transaction. However, payment often happens at a later date than the agreement, and exchange rates could vary between the time that the agreement was struck and the time payment is received. Only the largest of institutions have the resources necessary to properly hedge against exchange rate volatility. Additionally, the fees charged by banks for L/Cs and currency exchanges are substantial. Perversely, a high degree of trust must also be placed in the intermediary institution(s), who effectively acts as self-interested document examiners who may or may not independently verify the veracity of said documents before releasing the funds, perhaps leaving much of the risk of mistake, forgery, or fraud on the shoulders of the seller. As such, L/Cs are typically not well-suited for consumer transactions, or where transactions involve currencies whose values may vary wildly in relation to each other.

Decentralized digital currencies (or so-called “cryptocurrencies”)—technologies that promise tightly-controlled asset creation coupled with the ability to transfer control or ownership of those assets computationally when rigorously-defined criteria are met, with little-or-no dependency on third party intermediaries, and with very low transaction costs compared to traditional mechanisms—are relatively new creatures. The Bitcoin protocol and progeny (Ethereum, Litecoin, etc.) are one such class of technologies that have recently enjoyed meteoric rises in popularity (and valuation).

SUMMARY OF THE INVENTION

The invention pertains to systems and methods enabling parties with little trust or no trust in each other to enter into and enforce agreements conditioned on input from or participation of a third party, over arbitrary distances, without special technical knowledge of the underlying transfer mechanism(s), optionally affording participation of third-party mediators, substitution of transferors and transferees, term substitution, revision, or reformation, etc. Such exchanges can occur reliably without involving costly third-party intermediaries who traditionally may otherwise be required, and without traditional exposure to counterparty risk.

This patented invention description explores example embodiments enabling two forms of value transfer: arbitrary swaps and L/Cs. Arbitrary swaps and L/Cs are useful as illustrative examples because traditionally the two are very different animals. However, the invention allows for their expression and enforcement in remarkably similar terms. As one skilled in the art will appreciate, the invention can be applied to many other forms of value transfer as well.

  • In one example, Party A believes that bitcoins (BTC) will rise in notional terms when valued in New Zealand dollars (NZD) over the next few weeks. Party B believes the opposite is true, that BTC will fall when valued in NZD over a similar timeframe. Neither parties are aware of each other, but each wants to place a small bet in accordance with their respective beliefs. One embodiment of the invention allows those parties to discover each other, collaborate with each other to agree on concrete terms, propose transactions reflecting their agreement, and finally enforce that agreement without traditional, costly measures.
  • In another example, Party A is a merchant who wishes to allow her customers to trade their BTC for her services. However, she would rather receive US dollars (USD) because she is concerned about the volatility of BTC. Party A is not concerned about whether BTC will rise or fall when valued in USD. Periodically (e.g., once per day, hour, etc., or even once per transaction where she receives BTC), she can offer to sell exposure to BTC valued in USD in proportion to the BTC she receives from her customers. In other words, she swaps her exposure to BTC in exchange for exposure to USD. Party B has fewer BTC and more USD than he wants, and desires increased exposure to BTC valued in USD. One embodiment of the invention allows Party B to find and exchange—or “swap”—exposures with Party A, allowing Party A to accept BTC in exchange for her goods or services knowing that she will be compensated by Party B if her BTC lose value against USD, in exchange for Party B being able to keep any upside if BTC gains in value against USD. Another embodiment seeks out these swaps automatically upon detection of Party A's ownership of additional BTC.
  • Combinations are possible. For example, Party A accepts Australian dollars (AUD), but prefers USD, and wants to hedge against volatility of AUD in USD. One embodiment of the invention allows Party A to swap exposure to USD in BTC with Party B, and simultaneously swap exposure to BTC in AUD with Party C over a similar time period, thereby synthesizing a hedge against AUD in USD. The invention is not limited such that Party B and Party C are distinct parties (they could be the same), nor is it limited such that such that Party A must conduct two separate trades. In addition, various embodiments of the invention allow the parties to perform these types of transactions without maintaining currency deposits or making currency purchases or exchanges.
  • In yet another example, Party A wishes to purchase goods from Party B. The parties do not know each other well. Party B wants assurances of availability of funds from Party A, but Party A does not want to release those funds to Party B (or an assignee) until Party B has demonstrated proof of shipment (or met some other condition).
  • In one embodiment comprising a swap, a first device called a “client” and a second client participate in a series of transactions where assets from a first party and assets from a second party are committed until a combination of two (of a total of three) of the first party, the second party, and an facilitator release them in accordance with a calculation by the facilitator based on observation of external state, such as the relative value of certain financial, commodity or real property instruments, at a specific time.
    • This is basically a swap without a middleman or credit risk/counterparty risk exposure since the participants (clients) hold the assets in their possession at all times unless committed to the blockchain where the blockchain itself then becomes the counterparty. Until the blockchain has been hacked or in some fashion critically malfunctions, the credit/counterparty risk has been drastically reduced and approaches that of zero, hence the need for due diligence and vetting of your counterparty approaches zero as well as the need to vet and trust the authoritative third party who may hold and escrow funds, i.e. exchanges, brokers, banks. Thus, we now have Zero Trust Contracts and agreements. Swaps can take many forms and themselves can become many things.
  • In another embodiment comprising a L/C, a first client and a second client participate in a series of transactions where assets from a first party are committed until either the first client or a facilitator releases them based on observation of external state, such as verification of delivery to a shipper or an address. The L/C as implemented by the invention, remedies multiple maladies in the traditional application of the L/C.
  • In a further embodiment, the assets may be refunded if no such observation can be made by an expiration timestamp.
  • In yet another embodiment, the commitment of assets may be extended pending a settlement facilitated by a mediator.

A quick Google search for letters of credit and swaps yields…

Note: The net economic exposure of swaps is roughly 1/10th or less of this figure, but for the purposes of this invention’s discussion, fees would be charged on notional amounts, not netted amounts.

 

$6.6 trillion daily times a 360 day year is approximately $2,376,000,000,000,000, to view this as an annualized number.

These are but two of what is possibly hundreds of permutations to be achieved by those skilled in the art, who can take the invention and use it to replicate nearly any transaction of value in a fashion that eliminates counterparty and credit risk, to wit (as per simple Google searches):

With the advent of faster block and settlement times and more efficient consensus systems, the speed and usability of this invention combined with the simplicity of user-friendly interfaces that allow those unskilled and unfamiliar in the art can transform finance, commerce and any transaction of value to an extent that far exceeds the transformation witnessed by the popularization of the Internet pre-ecommerce days.

This invention seeks to claim that transformation as its addressable space, and this space is monumental and set to grow exponentially larger, to wit:

Op-ed: A new global arms race in digital finance is heating up

www.cnbc.com › 2021/01/21 › op-ed-a-new-global-arms...

4 days ago — Much like the space race, development of central bank digital currencies will influence ... Specifically, this latest phase of progress has its sights set on a massive ...

What Are the Main Goals for Central Banks in 2021?

internationalbanker.com › Banking

Jan 4, 2021 — It has been an unusually eventful year for central banks all over the world in ... see the introduction of the first major central bank digital currency (CBDC) in 2021. ... pushing collectively for the development of the international monetary system

2021 the year for central bank issued digital currencies ...

www.cityam.com › 2021-the-year-for-central-bank-issu...

Jan 4, 2021 — 2021 the year for central bank issued digital currencies? ... China is well ahead in this journey, having planned for a Central Bank Digital Currency (“CBDC”) ... to a blockchain that is controlled by the rules built into the algorithm that powers it.

Turkish central bank announces surprise digital currency pilot ...

coingeek.com › turkish-central-bank-announces-surpris...

Jan 2, 2021 — ... new digital currency in 2021, after the country's central bank announced it had ... Turkey is now at a more advanced stage of development than other countries ...

Bank of France settles $2.4M fund in central bank digital ...

cointelegraph.com › news › bank-of-france-settles-2-4...

6 days ago — The Bank of France has successfully wrapped up a $2.4 million CBDC pilot, which saw ... The Bank of France successfully piloted a central bank digital currency — or ... “From a technological point of view, the experiment required the development ... underway at the Bank of France, with some expected to run until mid-2021.

China's CBDC 'Dress Rehearsal' Sets Stage for Other Central ...

www.pymnts.com › B2B

Jan 4, 2021 — Notably, the digital currency offered by China's central bank does not carry ... Fed and seven central banks have put forth a framework for CBDC development ... the central banks' approaches may differ, but 2021 may show marked progress ...

Swedish Bankers Face Identity Crisis Over Digital Currency ...

www.usnews.com › News › Technology News

Jan 5, 2021 — For a graphic on Central bank digital currencies across the world: ... advisor for the Swedish Bankers Association is concerned that the Riksbank has not made it ...

Venezuela to have 100% digital monetary system - FXStreet

www.fxstreet.com › analysis › venezuela-to-have-100-...

Jan 4, 2021 — To facilitate the entry of the digital currency, the country began demanding Petro in the form of payment in the country's oil-related transactions, which turned ...

 

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 depicts a typical embodiment for practicing the invention, especially for use with or comprising a transfer mechanism such as a decentralized digital currency, where the clients, transfer mechanism, facilitator, and data source are distinct participants connected by a computer network.

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