Virtual Money

With every new age has come a new form of money.  As we enter the Information Age money will change from the fiat currency of the Industrial Age into a new form.  To a degree, this has already happened in that most transactions are recorded as electronic notations representing currency rather than being an actual exchange of currency.  However, these electronic notations are still treated as if they actually are currency.

The current excitement over cryptocurrency is not warranted.  It is essentially just a new way to electronically record currency-like transactions and, in truth, is an Information Age atavism, reprising the private currencies of the 19th Century.  The 21st Century will see the emergence of a completely new method of economic exchange.  I call it Virtual Currency.  It is best understood by example, beginning with a simple one and with each new example adding a new level of complexity.

Suppose Enterprise A (A) buys something from Enterprise B (B) for $200.  A will debit (Dr) Inventory (for example) for $200 and credit (Cr) Accounts Payable for $200.  B will Dr Accounts Receivable for $200 and Cr Sales for $200.  Later A will Dr Accounts Payable and Cr Cash.  When the payment is received, whether as currency, check or electronic transfer,  B will Dr Cash and Cr Accounts Receivable.

Now suppose that B buys something from C for $200 and C buys something from A for $200.  Now A, B & C can all cancel their $200 AR and AP against the AR and AP residing on each other's ledgers and dispense with currency or their Cash Accounts entirely. 

This is why I refer to it as 'virtual currency'.  Like the virtual particles in Physics, virtual currency comes into existence, essentially out of nothing, when the sale and purchase are transacted and then disappears when the offset entry is recorded.

There is no definite limit to the number of enterprises that can be involved in an elimination entry.  In fact, as the number of enterprises in the system increase, the number of AR and AP balances that will be eliminated rather than paid will increase.

There is also the matter of the time value of money.  This, however, is not a significant deviation from the current situation where there are typically discounts for early payments and accrued interest for late payment.  The existing convention will be elaborated in order to suit the expanded needs of the offset system.

As is often discussed with regard to cryptocurrency, there is the matter of secure payment processing.  This will be done through contract offset processors.  A duplicate detail of your AP and AR will reside on their secure servers.  Web spiders will search all offset processors' DUPE lists.  They will verify that AP and AR balances agree.  They will then create a list of all possible offsets.

Each party then will receive their offset entry which they will apply to their set of books.  Once completed, they will  transmit their new AR and AP balances and the process repeats.  The system is secure because AR and AP balances are matched and reconciled before offsets are made.

If an enterprise is profitable its AR will be greater than its aggregate AP, with the offset residing as a credit in the Owners' Equity account.  This may be retained or it may be distributed as dividends to the equity holders.

If it is dividended, the enterprise will Dr Equity and Cr a due to shareholders liability.  Because individuals use single entry bookkeeping, generally, they will simply record the Dr.  

Because most individuals will not retain an offset service, most will purchase a Dr card whose issuer will take the Dr into the offset system.  Enterprises will enter their retained earnings into the offset system through capital or other non-P&L purchases.  If they do not wish to discharge the excess AR immediately, they will purchase enterprise equivalents to Dr cards.

The Dr system will be financed in several ways.  In the case of enterprise debits, the balances will carry an interest rate somewhat less what the debit earns from the carried credit.  In this way the service will function as an Information Age equivalent of a factor.  

In the case of consumer debit cards, they will charge a transaction fee to the merchant.  They also will earn interest on carried balances.

While the offset system will begin as an augmentation to currency, it has the capacity to replace currency entirely.  While the offset system can replace nearly all functions of currency, one will remain.  That is denominating transactions.  In other words, if a deal is to be struck, a mutually understood unit of measurement of economic value must exist.

It might be something as simple as a very stable valued commodity.  In the past, that has been gold.  In the future, it might be something like DRAM.  It is also probable that an international unit of exchange will be established based upon a 'bushel basket of commodities' as currently done to measure the PPP currency values.  This would most likely be undertaken by a consortium of governments.

This system actually exists already to a degree within large corporations in that intercompany transactions are eliminated in consolidation.  The difference is that they are eliminated against the sales and expense entries, while in virtual money, only AR and AP balances are eliminated.  While substantially different, the similarities demonstrate that the technology that needs to exist is well within the current state of the art.

The offset system will begin within Enterprise Networks such as the one we are building for Polymathica.  By instituting an offset system within the Enterprise Network, the member enterprises will improve their liquidity, lower their working capital requirements and, thereby, improve their return on equity.  

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