Copernicus Gold, a fintech platform, has allowed to solve the problem raised in Copernicus-Gresham’s law which has been known for already 500 years.
The gist of the law
About 500 years ago, Nicolaus Copernicus, a Polish astronomer, economist and mathematician, and Thomas Gresham, an English financier, formulated a law of economics: “Bad money drives out good”. The “good” money is such whose “inner” value is not lower than its nominal one or the one of the circulating “bad” money with the same nominal value.
Let’s transfer this law to the reality of nowadays. For example, a country introduces a gold standard (the “good” money). Let’s say there are 100 tons of gold backing the issuance of that money. The issuance is thus restricted by the size of the gold reserve – the amount of grams in the hundred tons equals to the number of the currency units issued. “Bad” unbacked money is also circulating in the market. Its emission is unrestricted.
In this case, the states that issue fiat money carry out the emission aimed at buying out of the gold currency, buy it out to later present to the issuer and acquire the gold reserve of the hundred tons. Thus, the gold-backed money disappears from the market which is left with unbacked fiat currencies only. “Bad money drives out good”. This is Copernicus-Gresham’s law (modern edition).
The main idea
To any expert aware of this problem, those who would like to introduce a gold-backed currency are marginals. The reference such an expert will provide is to the failed Genoa and Bretton Woods currency systems. The failure happened not only because of Copernicus-Gresham’s law. However, the law has played a significant role in the disappearance of the mentioned currency systems. In particular, Bretton Woods system disappeared after France returned gold-backed dollars to the US and shipped 3000 tons of the gold reserve to France.
It is only possible to seriously discuss the gold-backed currency problem when the problem raised in Copernicus-Gresham’s law is solved. CPN Gold platform’s team of developers suggested an innovative approach to solving the problem, not only allowing “good” money to circulate but also avoiding the risk of its being bought out for “bad” money. The main idea is: implementation of a dynamic system for management of the gold reserve.
To ensure effective work of a system based on a gold-backed currency, we need an adequate mathematical model of management of a dynamically changing gold reserve, taking into account the market’s restrictions and requirements. The amount of the issued electronic currency must not exceed its gold backing.
An important requirement is maintenance of gold circulation at a level sufficient for incessant operation of the system. In case the system’s clients purchase the gold-backed currency for fiat money, the system’s gold reserve increases synchronously. The other way round, when the gold-backed currency is sold by clients, the correspondent part of the system’s gold reserve is sold as well. The system’s users may purchase any amount of the electronic currency - even less than a gram. However, in the external market, gold may be purchased at a nearly optimal price only if one purchases an amount divisible by the measurement unit’s value which is a kilogram or more.
The mathematical model must cover all the particularities of working in the market: the terms of physical gold supplies (as well, at weekends and on holidays), the flow of orders for purchasing and selling of gold, the market price of gold, the bullions’ weight and other conditions of operational control of gold reserves for ensuring of the online work mode. As a result of the researches conducted by CPN Gold’s team, we formulated the optimality criteria for the backing purchased and sold in the external market. They are based on a strict mathematical statement of the necessary size of the company’s gold reserve.
The algorithm based on the model allows to maintain the reserve at an optimal level, ensures fulfillment of all incoming orders, manages the issuance and the reserves (of gold and currencies) on the basis of the following general requirements:
- Full backing of the electronic gold by physical gold at any moment.
- All the conversions performed both for management of the company’s own reserves (capital) and fulfillment of its clients’ orders are carried out at nearly optimal rates.
- Maintenance of the share of operations (conversions) carried out in the online mode at the level set and not lower.
- Maintenance of the terms of operations (conversions) carried out offline at the level set and not longer.
- Guaranteeing of a (nearly) zero level of rate-related risks in connection with currencies and gold.
- Ensuring of protection of the clients’ fund and the company’s capital from speculative attacks (including those of robots) and sudden changes at stock exchanges.
- Ensuring of compliance with the abovementioned requirements with minimum expenses and the company’s “frozen” capital.
The main result of the suggested mathematical model of liquidity balance management is the ability to maintain the system’s operation, avoiding unreasonably large or insufficient amounts of electronic gold emitted. Having a strictly limited reserve of own gold, the system is able to maintain the issuance and the circulation of the gold-backed currency for any term, without a risk of it being bought out for “bad” money.
The ideological basis and the formalization of the system are published by CPN Gold and registered by the US Patent Office as a “System and method for issuance of electronic currency substantiated by a reserve of assets”. The invention is classified as an electronic currency and, in particular, a system and the means of gold currency issuance and circulation, with the value of the currency backed by a material reserve (for example, gold).
The mathematical model and its implementation as a program are a perfect technological basis for implementation of projects of issuance and circulation of an electronic currency backed by gold. Such a solution allows to resurrect the idea of currencies with a gold backing, both for corporate entities and entire states.
One more crucially important thing is - the faster the circulation of funds, the less gold is needed for the financial system’s operation. Transferring payments to the physical offline mode decreases the need in circulating funds, which means less gold is needed for that. Besides, any risks of payments’ failures are avoided. This fact is crucial because it relaxes the gold reserve size requirements for ensuing of global payment systems’ operation. In other words, the physical online requires a times less amount of gold for carrying out payments than the existing payment system does.
A significant achievement is the development of the technology of simple, mass, cheap and reliable global system for gold trade. Not only gold may be used but any other asset. For example, platinum, palladium and quite a wide range of other means of backing. The system with lowest risks possible is one of the main advantages today because of the regular turbulence occurring in financial markets. In the course of building the system, its authors imposed the strictest operation reliability and stability requirements.
We believe that the suggested solution of the problem raised in Copernicus-Gresham’s law may be found revolutionary for the payment systems operating with gold circulation.
The patent was granted to CPN Gold in the USA – “System and method for issuance of electronic currency substantiated by a reserve of assets” - number 9,747,586. More information on the patent may be found on the website of the United States Patent and Trademark Office (PTO or USPTO): www.uspto.gov
The agency of the United States Department of Commerce grants patents to inventors and companies for their products and inventions, as well registering trademarks and intellectual property objects.