$20 Amazon Gift Card For Saying Why My Idea Stinks
blueacreblog.blogspot.com
blueacreblog.blogspot.com
You're essentially proposing to open a socially conscious bank that promises to only give loans to socially conscious organizations (and presumably gives them a lower than market interest rate, at the expense of either lower interest rates to depositors, or charging depositors higher fees.) That part's reasonable. I used to keep my money in a bank that worked sort of like that. They tend to be a hard sell because they don't have a lot of ATMs, they don't pay good interest rates, they don't have super slick online banking.. all the forces that have caused consolidation in retail banking work against them. Eventually I decided that I'd use the bank that best served my banking needs, and separately donate to whatever organizations I personally wanted to support, rather than trying to couple the two and thus do both of them inefficiently.
You also propose to charge people a punitive fee if they ever withdraw their money from your bank, for example to do business with someone that doesn't have an account at your bank (which will be most people, to start with.) I don't think anyone wants to deposit their money at a bank like that. I sure don't.
If you want to get people to use your bank, I think that at the end of the day, you're going to have to actually make your bank an attractive place to keep deposits. I think it's really going to be an uphill battle to get people to opt in to these anticompetitive/protectionist provisions that keep money in your bank, because the instant they do it, their dollars become less valuable. They'd do better to donate to a charity directly.
So, your idea stinks because if you want to do this, you should just open a bank and focus on lending to organizations you like, and do everything you can to attract depositors (and imposing a tax when they give money to someone not at your bank is probably going to hurt you more than it helps, in terms of attracting depositors.) And, it turns out a lot of people have already had this idea, and they're called credit unions. There is a clean regulatory framework around them, you will have deposit insurance (the credit union equivalent of the FDIC), and you might be surprised how easy they are to start (not trivial, but easier than banks for sure.)
My understanding of your idea is that instead of using cash as a medium of exchange people can convert their cash into shares of some type of environmental fund and then exchange those for goods and services. (If you haven't yet read http://en.wikipedia.org/wiki/Credit_theory_of_money)
In order for this whole concept to work first some sort of new legal/regulatory structure will have to be invented, then someone will have to create an exchange where people can convert their money to these new shares, then someone has to create mobile apps for exchanging the currency. Finally once this is all in place you have to get the word out and get lots of consumers and businesses to all start using this currency.
This is my thoughts as a potential user:
Positives: This is in some vague way able to improve the environment. I'm a lot less confused and there is far less risk if I just give some money to a well established charity.
Negatives: - The chance of any new currency being used 5 years from now is close to zero. Bitcoin is pretty much the only case I've seen so far. - Regulatory risk: The government could shut down all the new currency exchanges. It costs $10+ million to be compliant with all money transmitter laws in the states. - I have to trust that this whole ETF thing is not a scam. If I wanted to do my due diligence I'd probably want to make sure the whole thing is audited by a respectable company. That probably won't be the case. - I have to trust that the exchange won't get hacked. I have to trust that my client won't get hacked. Is this a distributed cryptocurrency or is it centralized? - What are the tax implications of this? Do these ETF shares distribute dividends? If so how? If not, then there is no value in the asset. Remember the present value of the asset is equal to the sum of all the discounted cash flows.
By comparing the positives vs negatives for using this currency, there would be no reason I would use it.
I think you need an idea that is far simpler and requires about 20 less moving parts for it to have a chance.
Thanks so much for your feedback.
The post was meant to put as much information on the table as possible to solicit as much criticism as possible. Definitely not trying to sell someone on the idea right here / right now. More of enticing people to collaborate.
If I had to do an elevator pitch it would probably be along the lines of "A mobile app that allows people to trade securities for goods & services instead of cash. This lets people without disposable income for investment have a chance to participate in the market, it helps isolate people's money from risky parts of the market they dislike, it helps shift investment towards areas traditional investors may discredit but consumers advocate for, and puts something tangible behind the currency your exchanging."
Thanks for posting the Credit Theory of Money Article. I definitely agree with parts of this theory & that money is just a way to account for debts owed & credit extended. Another way I envision it is similar to PG's discussion of wealth and believe that money is just a ledger to facilitate the exchange of the wealth.
This system kind of branches off from the Credit Theory though in that the currency would not be just a representation of credits and debits, it would be backed by securities/investments in companies that have actual value. (Of course, these instruments are all just other forms of credit/debt, but at least in this case there is some form of physical / intellectual property/value at the end of the chain as opposed to fiat money).
The thinking behind the Credit Theory does seem to help explain my line of thought behind the flexibility & subjectivity of money.
For the legal/regulatory aspects, I've been researching the compliance issues. Like I said in the original post though, there are many ways to do this, but each brings with a separate set of regulatory burdens though. For example, one way that I've thought about doing it would be through a Mutual Fund where you simply exchange shares of the mutual fund. This likely creates too many tax issues for potential users. Another option would be making a company and then doing a direct public offering. This would let the company sell and advertise its own stock plus put restrictions on how it could be sold. However, there's caps on how much money you can raise, plus there's SEC guidance on what exchanges run by the company itself can actually do (pretty much all you can do is put up a buy bulletin board & a sell bulletin board). So the DPO method would require a separate company to operate the exchange, along with a separate company to act as a clearing house, plus the DPO idea would ring the bells of fraud agency in the country.
The best way I see how to do it would be to try and divorce the currency from the assets so that they are not easily classified as securities. This has the unfortunate benefit of decreasing the "this currency is backed by X asset" claim, but if done in the ways I'm working could potentially only require the company to operate according to banking / FinCen laws among other regulations but not necessarily a lot of the SEC requirements & some tax issues.
On thoughts as a potential user:
Yea, it is a way to improve the environment, by giving more leverage to consumers who do not have the ability to exercise power in financial markets. It can also attempt to right other discrepancies between them such as the general shortsightedness, or how much of the investing does not go to thinks that actually improve the "real economy."
As for donating to charity, I consider this as part of the shift to more entrepreneurial philanthropies that encourage changing environments and lives so that they become more self sustaining & can help themselves, rather than just giving them supplies. Also, in the context of climate change, donations are not going to accumulate the wealth necessary to finance what the world needs.
Finally, part of the point of this is that you are not financing a charity with money you never get back, you're financing projects while maintaining spending power. Imagine if you decided to hold your money in an endowment for the Rockefeller Foundation, and they let you withdraw it to spend whenever you want. But, this comes with the condition that whoever receives the money immediately redeposit it with the foundation. It's a way to support your causes w/o hampering your wallet.
Now, onto the negatives.
No new currency being used 5 years from now: Possible. At the same time even Alan Greenspan has said he expects private currency markets to develop in the 21st century. http://p2pfoundation.net/Complementary_Currencies_in_Japan?t...
Also, complementary currencies are already being used in various areas. Check out LETS, Berkshares, Ithaca dollars among other examples. However, these are generally defined by geography, not ideology.
Now, I believe you meant a global or national "new currency" in your statement. So, my previous point may be irrelevant in establishing precedent for that, but I'll just say the role of new currencies in the future is something that we can disagree on as a matter of opinion.
Regulatory Risk: Yeah, it's possible the government could shut it down, especially if rent seekers in various markets see it as a threat. Some people may even feel the government is a rent seeker in the current world of fiat currency, so they may even want to shut it down.
Transmitter laws. Yeah, this is a problem, but may just have to do a break it & ask for forgiveness approach like paypal.
For the ETF problem, we would not create a new Exchange Traded Fund. There are already ones that exist on the market that suit the currency's needs. The fact that there is a price set by the market would reduce the chance of fraud in this regard. The way it could be a scam is if the company claimed to be buying these ETFs & was spending the money on something else, which would be blatant securities fraud and would take about 1 for an investigator to prove.
The auditing idea is a really good idea. An effective and credible audit may be too expensive for the company in the beginning, but this could be balanced out by strictly trading in one ETF which means that it would be easy to determine the Net Asset Value based on the market price for shares of the ETF.
Hacking is a concern. I am not going to pretend that I am the one that can explain solutions to this end, and this may be a silver bullet argument. However, any bank / paypal / payment service runs the same risk.
It would be a centralized currency. If you look at the FinCEN regulations on virtual currencies, this would be a case in which the company was both the administrator and exchange for the currency. Kinda like Lindenlabs is for their in game currency.
The tax implications vary depending on how the company is structured. If the currency gets classified as a security, then there will be more tax issue for the users. Likely, the company would have to measure the gain / loss in value of units traded each time someone makes a trade so that the company can provide the users with a statement to include in their tax returns. This is definitely too complicated which is why making sure the currency is structured as a currency and acts more like a currency / social contract than a security is important.
As for dividends, there are dividend ETFs & regular ETFs. For simplicity's sake we'd probably go with regular ETFs. This would mean that the value you gain is from the rise in the price of the stocks within the ETF between your buy and sell times.
If we went for a dividend ETF, the company would probably just reinvest the money in more ETF shares. Since the # of units of currency in circulation would not rise as a result of this, each unit would become more valuable and that's how the user would benefit. Also, not receiving the dividend may differentiate the currency from securities.
Finally, I agree there are many moving parts. The side I would show to consumers would be much simpler, but right now I'm trying to flesh out all the answers to questions I may not think of on my own. If there weren't 20 moving parts behind the scenes of every startup and company you see then everyone would have already done these ideas or would be jumping on the bandwagon with copycats.
Thanks again for reading the post and putting in your very thoughtful feedback.
I'll keep you updated about the giftcard come 8/1.
Will you currency support chargebacks? If so it will invite fraud, if not there will be big sob stories on how people spent their money and ended up not getting what they wanted from a merchant and having no recourse (assuming it gets popular enough that average people use it).
Right now PayPal charges merchants a 2.9% fee. I'd imagine your service would need to charge as high or higher fees since they benefit from economies of scale and experience.
If I use the service a couple times a month, the high fees are going to add up. I would be better off just taking the money I save and investing in the pro-environment ETF directly.
Apparently the break the law and ask for forgiveness approach is no longer viable due to increasing regulation and criminal penalties. See this for a very good resource: https://news.ycombinator.com/item?id=5306988
You haven't mentioned how this project would be funded and the company organized.
Assuming you decide to try to play by the rules: Would it be a non-for-profit? If so where will the requisite funding come from?
Would you plan on getting fund from VC? I'm not sure there is the possibility of big profits and growth to interest them.
Although you could build a cheap prototype/demo, it doesn't seem like you could make a cheap minimal viable product.
I don't see how the company would be able to establish credibility without having some sort of chargeback policy, but right now I haven't done enough research to discuss a coherent and effective anti-fraud policy. I think it would definitely be a large upfront cost or burden. A shitty way to handle it off the top of my head would be to just issue more currency to reimburse people, but this makes the system as a whole look less credible and would also gradually weaken the currency. It may just be a way of spreading the cost of a warranty over the population of users just like insurance, but at least doing it according to that method would be terrible PR / image.
For the merchant fee, I think it could actually be less. Paypal/square etc. are just conduits to transmit standard currency from one institution to another. In this case, since the currency is always transmitted via the same institution I believe the compan could charge less. It wouldn't have to make as much from an individual transaction because the company has a monopoly over all future transaction. The exit fee on currency can also be though of as a deferred transaction fee - ie, if a company is breaking the currency out of it's self contained loop, then they suffer a penalty fee.
The fees may add up, but hopefully less so than using something like paypal. That being said it would probably be less than cash.
However, this is still more effective than directly investing in a pro-environment ETF because your committing your disposable income to the ETF & securing commitments from sellers etc. that they will continue committing the money to the ETF. It's utilizing a resource that you could not previously invest because you needed the liquidity/actual purchasing power to buy goods. I think the bigger threat of high fees adding up is that if it trades at a discount then you aren't using your money effectively. But then again if a company does vary its price based on what currency you use & doesn't accept it at face value then they are also expressing that they do not care about your values / participation in the system the currency is trying to fund. -- Compare to Berkshare, a complementary currency in the US -- if a company required Berkshare customers to pay more than they would signal that they don't really care about keeping wealth in the local economy.
Thanks for the resources, the legal issues are the area that I'm spending most of my time on, but nothing is simple in this area as that post says. I looked through the posts but haven't clicked on any of the links within the post you referenced. It'd definitely on my to do list. Now, I never planned on flagrantly ignoring laws, but sometimes because of the adversarial nature in this country you have to actually do something and cause a conflict before you get any interpretation on whether something is legal. Regulatory agencies are supposed to be more proactive with guidance etc. but that's not always the case.
Also, despite my own research I have not taken any bar exams yet and may even delay taking one based on where this idea is come November/December. Thus I will definitely need to talk to some lawyers before advancing the idea. Further, even if I was a licensed attorney already I would still likely seek outside advice.
Oddly, I'm actually working literally next to some financial crimes enforcement attorneys this summer but haven't brought up any issues with them yet. Didn't occur to me until recently to talk to them about this idea. Probably because I'm pretty confident they mostly focus on counterfitting.
By funding do you mean intitial funding or how the company is going to make money / sustain itself?
Originally I thought it would be possible to run the company based off a share of the gains from the investments, like a mutual fund management fee. For various legal reasons this turned out to be fairly complex, but I've gone back to the drawing board and this idea may work.
In reality though the company would be funded primarily by the transaction fees although there is the potential for other sources of income but those are slightly farther down the road before they become viable & need at least some circulation of the currency to work.
For organization of the company I'm trying to figure out how the currency is supposed to function before I figure out how to structure the company to facilitate it. Slightly chicken before the egg dillemma, but I think figuring out what the currency is supposed to accomplish and how it is supposed to function comes first.
I think one of the biggest concerns is that there may have to be a subsidiary in the company to split the finances. Ie. there is one part of the company that handles all the money that can be recalled by the users -- the money that is invested in the ETF etcs. The second part of the company would be the company that actually manages the exchanges & facilitation of everything. This is similar to how Kiva is structured - they have a separate subsidiary that manages all the finances for their operations & keep all the money they manage for the loans compeletely separate, even if the money isn't currently invested in the loan. This dichotomy would likely be necessary for the company/currency to have any credibility.
If it goes the route of being something like just swapping equity in kiva-like microloans, then yeah, I see it as a nonprofit. But realistically, if the company is going to develop products consumers actually want to use as a payment mechanism then the company will likely have to be a for profit company to keep up with other competitors in the bitcoin / traditional payment / traditional money transmitter space.
Unfortunately because of the regulatory issues it would likely need some funding from VCs in order to scale. That in addition to actually setting up the trading account / system etc may need some funding just for other financial actors to take it seriously. That being said a way to scale this idea without a lot of funding may be to just start it as a "amazon coins" type deal for a small group of participating environmentally friendly / socially responsible companies. Meanwhile instead of any of the pariticpating companies holding onto the deposits in the "coins"/gift card the desposits just remain with an environmentally friendly bank. I assume the regulatory path in addition to the expected costs could be estimated by looking at the initial steps Greendot went through when establishing there payment systems, but have a restriction on parcipating merchants. Of course at some point the company would diverge from this path as it starts to switch from a closed circuit glorified credit card into a currency that any merchant can opt to accept.
Also, I think there is room for profits to pitch to VCs. The payment space has tons of competitors and is a huge market. However in the financial world there's a lot of protest / disatisfaction but few real world alternatives (it's just a matter of how/who you pitch it to - ie. an environmentalist, someone who hates fiat currency, someone who hates the idea that their purchasing power is tied to the economy as a whole & wants to opt out & have his money tied to a specific sector that thinks long term... & so on). The potential market for this is anyone that bitches about the economy or politics but still wants to spend money.
As for the demo/prototype I agree. Over the next 6 months with my limited coding skills I could probably built a crappy mock app that really just looks a little like a starbucks payment app, but wouldn't survive a second in the real world. It would absolutely suck in comparison to every other app on the market & wouldn't really sell the idea because the whole idea is how the money is managed on the other side of the app.
There are API's from Ameritrade & other brokers that could facilitate all the trading the company needs to do, but chances are they wouldn't sign off on letting someone work off their system just to build a mvp to pitch to investors. They'd probably want more credibility / financie behind it. Could also just lie about what I want to use the account / API for, but that's just something I'm not willing to do & burns too many important bridges & is just plain stupid. Plus with credibility / trust being such an important element to this it would be an even more moronic way to start.
Thanks again for continuing this discussion.