A Better Way to Transfer Assets

Traditional Finance

Capital Markets are the traditional way to transfer the ownership of assets. Assets produce goods and services that asset owners sell. Capital is the value of an asset and is the cost to purchase or build it. For example, to acquire a large community asset, people buy shares in the corporation that owns the assets.

Unfortunately, it costs a lot to transfer assets using capital markets. Using less expensive ways to transfer asset ownership frees up capital to build more assets to produce more goods and services.

A way to reduce costs is to incorporate the transfer of assets into existing payment systems for the goods and services generated. For example, the share market is a capital market, and it costs a lot to run. Share markets typically have 100 trades to establish the price of an asset for every trade to transfer an asset. Keeping the asset's original cost and returning the capital with a discount as a payment for the sale of goods and services removes the need to trade shares to establish a price.

The other cost in using shares is the cost of dividends. Dividends are necessary because shares are a derivative of the profit from selling. Profits and new capital come from selling at a higher price than producing the goods and services, so dividends come from profits. Eliminating the dividends and keeping the profits with the original capital remove the cost of dividends.

An Alternative to Ownership to Transfer Capital

Pre Payment Finance

Removing the need for a financial product, like shares, eliminates the cost of operating a share market, including the cost of the derivative.

Instead of using ownership of assets to transfer assets, we can use prepayment of goods and services and collective asset ownership. Instead of buying shares, a person can join an organisation that owns the asset and prepay for the goods produced. If the investor is a consumer, they use their prepayments to pay for the goods. They get back their prepayments when they use them, and the discounts provide a return on investment.

If they do not consume the goods and services, they use their prepayments to pay for another consumer's goods and receive the full payment from the consumer. The consumer pays the profit to the owner of the facility. In return, the consumer gets goods of value prepayment+discount+profit.

Prepayments are not a derivative of payments but come directly from sales. Prepayment capital does not need a separate market, and the return on investment comes from more goods for the same amount of money.

Money Flow Comparison

Assume $10000 of Capital, $2000 of sales, $400 of expenses, and a profit of $600.

With traditional investing investors receive $600 and consumers no benefit.

With prepayments, the consumer/investor pays $1,700 for the goods and services meaning the investor gets a return of $300 as share of the profits and $300 in lower prices.

A non-investor consumer would pay $1,700 and the investor gets $300. The profit is shared between the investor and the consumer. This is the expected result if there was a free market with many buyers and many sellers.

Prepayments with discounts can mean monopoly markets are as economically efficient as a free market. It also means both consumers and investors benefit when profits increase through more efficient use of capital.

Outcomes from a Prepayment System

Compared to buying shares to purchase an asset, purchasing prepayments reduce the cost of buying an asset by the cost of dividends on borrowings plus the cost of transferring ownership. For long-lasting assets, these costs more than double the price of an asset over its life.

Significantly consumers acquire future prepayments each time they pay for goods and services. It produces the same result as buying an asset for cash, but it is superior to money because it requires relatively small payments each year. It means assets — like homes — become available to all by the occupier paying rent to occupy a dwelling.

Constraints with Prepayments

Funding with prepayments requires the group who collectively own the assets to trust each other and be confident members will honour their contracts over many years. Trust increases if the prepayments are for a specific purpose and only that purpose, such as housing or electricity or water. If prepayments cover many purposes, they become an alternative local currency and have difficulties under national currency rules. It means prepayments should be for one product only with separate prepayment systems for different products. The transfer of value continues with the national currency.

The Dunbar number from Evolutionary Biology indicates a limit on the number of people we can "be friends" and trust. While the number varies, it is likely to be in the low hundreds, and the individuals involved will have other non-monetary connections. They may live in the same area, be members of the same church, be alumni of the same school, work for the same company or belong to the same club.

Collective ownership of assets is a Commons. When individuals break the rules within the commons, the group needs a graduated sanctions system to enforce the contracts. Prepayments provide graduated sanctions, and the ultimate sanction is to expel a person from the group. However, alternatives need to exist. An option is to move to another commons, or the person uses the existing financial system. It means prepayments should co-exist with other methods of finance.

However, systems cost less to operate if many people use the same system. To compete with the existing large scale funding systems, prepayment groups need to scale with common platforms and no penalties for people to move between groups.

Deploying Prepayments

The diagram represents an internet of internets where each local internet is a prepayment cooperative of members. Some members generate electricity from solar panels, and the group of cooperatives own a community battery. All consume or have purchased prepayments. Each collection of local internets of consumers and generators of electricity can connect to other local communities with batteries.

Groups of Local Batteries can create a new node and connect with another node of Local Batteries. The information system of payments can scale to include all the local cooperatives throughout a country. As electricity moves, so do payments. Each node on the internet has capital, and the capital reflects the value of assets within the nodes.

Most members will pay a fixed amount each month. Others may pay for their monthly consumption, or whenever they receive income, or in yearly amounts, or a once in a lifetime payment. The value of consumption of members is known, and the cooperative matches the income with expenditures to ensure the cooperative remains solvent. The network of cooperatives works with members to move excess prepayments in a cooperative to other cooperatives. Old cooperatives are likely to generate extra capital, while new ones will need prepayments to invest. This is the opposite of what happens today, where the wealthier invest to reduce their long-term cost while the poorer pay higher prices due to the lack of money-saving investment.

Because the system is fractal up to the country level, prepayments mean investment flows from wealthier areas to poorer areas in a non-exploitive way. Investments reduce the cost to the less affluent and increase their wealth.

Prepayments instead of Loans

This section outlines the complexity of taking out loans to pay for batteries and coordinating the flow of funds. It then compares the complexity of loans with community ownership to illustrate the cost savings of prepayments and community ownership.

If individuals take out loans to buy batteries and then allow a group of households to operate the batteries, there are at least four different systems required. Each consumer takes out a loan with a bank to buy a battery — or part of a battery. A second system is for the consumer to match their income with their consumption and loan repayment. A third system is a bank ensuring their loan is repaid, and the final system is the consumer working with others in the cooperative to share the use of the batteries. There is also the cost of interest on the loan.

If the cooperative buys and owns the batteries, the four systems become low-cost and flexible. The consumer can pay early or late, and the payments can match their income and consumption. The system automatically adjusts to changes in battery prices, electricity prices, and each member's income and consumption changes.

The Internet of Dwellings

The previous discussion has been about payments. This section describes the movement of electricity and charges using eBRIM to reduce the cost of electricity.

eBRIM measures electricity consumption from appliances in a dwelling. It has information on the likely behaviour of people who occupy the house, the weather conditions, and the likely cost of electricity at five-minute intervals. It takes this information and creates a schedule of appliance use that minimises the cost of operation. The occupiers of the dwelling can use the plan, or they can override it. For example, eBRIM might assume that occupants leave home regularly at 8 am each weekday. If they don't, then eBRIM looks over the history and finds the likely behaviour of the occupant and the impact it will have on electricity consumption.

eBRIM builds a model of expected consumption and finds the minimum cost of electricity given the likely external costs. Every time an external input changes from the expected value (e.g. the five-minute cost of electricity) changes, eBRIM calculates if the future schedule can change and if the changes will decrease cost. It looks at each change, picks the one that reduces costs the most, and makes the scheduled changes. Most of these changes are automatic and invisible to the consumer.

If the high-cost time moved a little to the right, no change would be necessary to the anticipated schedule. If the High Cost moved too far right, the only difference — invisible to the occupants — would be to move the Food Cooling to the left of the red zone.

Using prepayments allows the schedule of payments to move automatically in without the consumer investor or the cooperative owner having to do anything.

An Internet of Individuals

An individual will appear in many prepayment cooperatives. The individual will have autonomy and can arrange their finances to smooth their income and expenditures over many years. How they do this and change their expenses are private as they have a personal internet of income and payment. Budgeting and control of money are largely automated, and individuals can take control of their lives. The system can include existing fixed costs and income. The prepayment cooperatives will offer the financial flexibility to cater for changes to both incomes and expenditures. Each cooperative for different commodities will operate independently.

Building the system requires no change to the existing physical infrastructure. It is a reorganisation of the current electricity payments and investment systems and is "soft".

The Cost of Electricity with Prepayments and eBRIM

In Australia, I estimate the price of renewable energy with Prepayment capital and eBRIM measurements to be 50% of the current costs. Australia's savings are high because of the regulated energy market, and inefficient metering has made electricity prices higher than they need to be. If local communities move to prepayment cooperatives, the existing capital will pay for the infrastructure to turn the energy generation network into 100% renewables and accelerate carbon capture and storage. 100% net zero emissions by 2030 are well within our grasp.



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Kevin Cox

Kevin works on giving individuals control over their online information - particularly their financial information with local communities.