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 [White Paper] - The Crystalline Bubble - Prard'aga Rono

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Rennek Cor
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PostSubject: [White Paper] - The Crystalline Bubble - Prard'aga Rono   Tue Nov 18, 2014 9:26 am

Nova Crystals:Crisis and Solutions

The Crystal

Nova Crystals are mined as Raw Nova. Nova deposits are typically 2600 units and carry a rarity rate of 10%(50 Units per 500 Meleenium Discovered). Initial proposals to use raw Nova as currency drew concern from critics, based in larger Governments and Manufacturers that using Nova as a commodity would create an artificial shortage in supply of the material that is crucial in modern explosives. Instead Krath Mints coined Nova Crystals using a secretive process which led to questions of whether the Crystals were even based on actual Nova. Coupled with the fact that nova mined elsewhere would not be accepted by Krath's Mints forced a reevaluation of the Mintng process.

Krath would soon patent a minting process to crack down on counterfeit crystals. The Currency War , started by Eidola would force Krath to engage in multiple projects to avoid the devastation of the Dynasty Bank, and the foiling of Krath's plan to dominate the Outer Rim Economy.

The Minted Crystals are produced in batches of 50, a process which costs 130,000 credits. This multiples the fractional reserve effect currently present in Nova Crystals.  Each Nova Crystal, therefore costs Krath 2600 Credits to manufacture, which they then sell to potential depositors at no lower than a rate of 50,000 credits, meaning that the Dynasty Bank was making an 80% Profit(Cost of Production was 20%) , even before the introduction of the controversial Investment Nova Crystals.

The value of the NC is announced monthly by the Dynsaty Bank, the Central Bank of the Krath Dynasty and also holds all of Krath's Credit Reserves. It was Government Charted Corproation, but is now a department of the Krath Dynasty Government. The variation in prices is determined by the Dynasty Bank's Board of Governors, which meet monthly to determine whether and by what degree the Nova Crystal value should be changed. The Dynasty Bank also uses a valuation algorithm, the details of which are kept from the public.

In the years which followed Krath would combat the problem with an offensive on two fronts:publicity and economic. On the Economic Front, they would encourage an inflationary policy that would link the Nova Crystal  to the Krath Economy. On the Publicity Front, the Krath Dynasty would release Celebration Nova Crystals annually. Krath would accept NC as a legitimate form of payment for all debts, public and private, that involved Krath or Krath citizens in any way.



The First Crisis:Eidola starts a Currency War

The Nova Crystal is the first Commodity Based currency in the modern period and has been subject to challenge. It is issued by the Krath Dynasty Bank in Year 9, which was once a nationalized Corporation known as InterGalactic Banking Clan(IGBC), but now exists as a department of Krath's Government.

The First Challenge came from the  Eidola Pirates , when they announced their new own Commodity Currency:the actual Ears of the dead. The number of murders which resulted from this gruesome policy is unknown, but the effect on Nova Crystal trading was made clear:Eidola had declared war.



What followed was an active campaign to discredit the Nova Crystal by facilitating a Nova Crystal Crash(Eidola would take credit for the earliest major crash of the Nova Crystal Market). Even the Galactic Empire weighed in and discouraged traders from using the currency. The direct association with Krath meant that political reasons alone, many traders and companies could or would not adopt the new currency. Nova Crystals that were not from Krath Dynasty Bank vaults were emptied onto the Open market. The result was Depositors who had Nova Crystals which the Dynasty Bank would not honor. These Depositors did Eidola's work for them and demanded payment for Crystals which they had legally purchased.

Krath's reply was to limit Nova Crystal purchases to 2,000 per month, per trader. The purpose was to prevent currency speculators from stockpiling the Crystal, and then dumping their Crystals onto to Market to facilitate a crash.(which was one of the ways that Eidola was damaging the Nova Crystal).

The Second Crisis:Krath Mints defraud depositors

Krath responded in a GNS announcing a new Loan Program, but the Program was merely a cover for a massive buyback of Nova Crystals, so that Krath could shore up its reserves and a avert a "Bank Run". A "Bank Run" is a scenario in which the demands for currency from depositors are greater than the amount of deposits actually held by the Bank. The main thrust of the announcement was to halt trade in counterfeit Nova Crystals,and restrict trade to the Nova Crystal Exchange, which Krath controlled.

In Year 10, Krath announced two new classes of Nova Crystal. The First, was the Mobile Nova Crystal(MNC), or portable Nova Crystals which could be transferred between Sentients with the assistance of IGBC. Only Bank Staff, the buyer, and the Seller would have access to the IGBC. The Second was a new mode of dealing with Nova Crystals:Secure Nova Crystals(SNC). The stated goal was to make Nova Crystals as transferable as Credits, but the response was mixed. Most traders did not hold high regard for an item to which could not moved, given that so much Black Market trade in stolen technology was done this way.

In mid-Year 10, IGBC announced the halting of all trade on the Nova Crystal Exchange. The causes were debatable, but two things were clear:Krath Bankers realized that the Nova Crystal had flaws and that Eidola's campaign to crush the new currency was working.


The Third Crisis:A Crystalline Bubble

IGBC and Dynsaty Bank Chairman Ellias Aubec responded to the new Crisis by announcing new reforms for the Nova Crystal. First, the Nova Crystal would be valued in accordance to a new algorithm. The algorithm would be calculated based on Krath's Monthly Tax Income. Aubec also announced that Nova Crystal's would never fall below 50,000 credits per unit. By tieing the Nova Crystal value to Krath's Tax Revenue and guaranteeing a "Price Floor", IGBC was announcing a debt-based currency policy. The political incentives were clear: Link the success of the Nova Crystal to the Krath Economy, making depositors unofficial(and mostly unaware) bondholdhers of the Krath Dynsaty. The new reforms appeared to work, when a month later, IGBC announced that the new Nova Crystal price was over 54,000 credits.

Another Bubble came year later, he Krath Dynasty annexed the Commonality and Nova Crystal value exploded to over 100,00 credits.Krath had bet its future, like many groups at the time, on an expansionist foreign policy based on exploration and colonization, all directed towards territorial acquisition. New territory was to be acquired, mined, and developed for the purpose of earning more income for the Krath Dynsaty. The acquisition of territory was fulfillment of this policy and caused an explosion of economic development and investment, as speculators rushed to the now highly-valued Nova Crystal.

The Krath Dynasty now had  increased demand and logistics issues. Dynasty Bank officials were unable to get entire crates of Crystals into Bank Vaults plus the need for Nova for Military Production, meant that the amount of Nova Crystals in Krath's vaults was less than amount of crystals that were being demanded by buyers.

The solution was Investment Nova Crystals(INC). INC existed only as notations in the Dynasty Bank's  balance sheet, but were honored for all public and private debts. INC would be equal to standard NC in price. But clever investors saw the ruse, Krath was selling a future promise to pay. The INC were not truly NC, but were in fact Nova Crystal Bonds, backed by the Dynasty Bank.


The Fourth Crisis:The Crystalline Bubble Pops
“The dynasty will restore the value of the NC, but we are still working towards additional FI... Once that happens our fortunes will be much improved and the NC value will jump back up again. “ - Grevendar Togl(Senior Krath Military Officer)


Political forces soon intervened and a galactic movement aimed at reducing taxation took hold on many world. Certain organisations, like the Eidola Pirates, had long since abandoned income taxation entirely, and had already made the shift over to income from commercial trade and facility income(FI). Others were forced to make adjustments in policy to adapt to inflation, and Krath was one of them.

Between its participation in the Galactic Alliance, a growing coalition of allied organisations, and a war with Mandalore, Krath had an Expansionist Foreign Policy. Its Krath Alliance allies needed protection from Pirates and support for their own development projects. Krath continued to conduct operations against the Galactic Empire as part of its commitment to the Galactic Alliance.

The massive financial crunch which resulted from this policy and the deflation of the Galactic Economy forced IGBC to devalue the NC to its "Floor" of 50,000 credits. The direct result was that all existing holders of NC found that their deposits lost value. NC might be a useful barometer of the Galactic Economy, but doubts were building, even among longtime supporters, of its usefulness as a commodity of Exchange.

In early Year 15, a public poll by Veritas Press declared Nova Crystals as a Nominee for "Heist of the Year"(Year 14), competing with the Investment Scam of Sven Wan, An accusation that Corey Vildras has also Scammed Investors, and the ransom of Executor Seele (which netted the Eidola Pirates a Super Star Destroyer). The fact that Nova Crystals have been considered a Scam by many traders has not been good press for the Commodity Currency.





The Next Crisis?:Crystalline Bubble Squared

The expansion of Krath in Year 14 and early Year 15 created an economic expansion that restored some value for the Nova Crystal. By the Third Fiscal Quarter of Year 15, the Nova Crystal had settled onto a rate of 80,000 credits per NC. The success of the Nova Crystal is tied to Krath's Economy, which is tied to the success of the Expansionist Policy that the Dynasty has adopted.

In its current form, the Nova Crystal will only ebb and flow through currency bubbles, facilitated by speculators. These speculators, some of whom hope to profit of the collapse of the Nova Crystal and therefore the Krath Dynasty Economy, will use every trick in the Scammer's handbook, like the infamous “First Nova Crystal” Scammer. Krath's enemies may use the Nova Crystal as a means to take down Krath.

Centrepoint Marketplace, the largest trading in the galaxy has given some support to the Nova Crystal by allowing users to view the price of goods and services in Nova Crystals and indicating whether a merchant accepts Nova Crystals. The conflict in really the Economic Dimension to the Outer Rim War between Pirates like Eidola and established Governments like Krath. However, the Galactic Empire rejects the Nova Crystal currency and sees it as a Krath plot to control the Outer Rim Economy. Eidola also sees a plot by Krath to steal credits from hard working independent traders to fill Krath's coffers. Even officials within allied Governments allied to Krath have voiced concern about the economic stability of NC.

Eidola has, for the most part, declared victory in what can be called the First Currency War. But the Currency Wars are far from over, with Eidola's stated goal being the widespread rejection of the Nova Crystal by the galactic trading community not entirely complete. The Government of Krath still pays its senior employees in Nova Crystals and facilitates trade in Nova Crystals. Should the Eidola Pirates and the other enemies of Krath use the Nova Crystal as an avenue to destroy Krath, or destroy Krath directly through war or revolution, then the Nova Crystal is dead.

The Crystal itself, barring the destruction of the Krath State, can be destroyed or damaged by a Speculation Bubble, where a frenzy of trades would overwhelm the staff of the Dynasty Banks. The problem in this case would not be the volume of new purchases, but tracking who owns what Crystal at any point in time. A clever cabal of speculators could, as Eidola's agents and simple profiteers did before, expand and contract the market at will to defraud investors on a constant basis. Krath would be forced to suspend payment of NCs until all owners could be identified and would be forced to issue more INC. The same speculators would then just explode the market for INC by offer an apparent premium for trades. Criminals would get involved by offering counterfeits. Honest traders would flee Nova Crystals and leave only Krath Citizens and a small circle of wealthy speculators as the holders of NC(of all types).

The Nova Crystal would die a death of economic imprisonment, not used outside of Krath Territory, which becomes a problem when Krath is no longer able to afford expansion.

Solutions:Winning the Currency Wars

What could be called the Second Currency War is upon us. Whether it has actually begun or is set to begin is unknown, what is clear is that is must happen. Krath cannot declare victory until the Nova Crystal is accepted by Governments outside its territory and Eidola cannot truly have victory as long as Non Krath Citizens use Nova Crystals in their trading, except for currency speculators.

How then can the Krath bankers possibly win?

Here is a proposal:

1)A New Central Bank
The Dynasty Bank, in its current form must be reduced merely to the treasury of Krath, while Nova Crystal production and issuance must be handled by a new Chartered Bank, in the same manner as the older IGBC. Its primary purpose must be the Minting and Issuance of Nova Crystals, as well as managing Nova Crystals in its vaults. It will also set a “discount” or “premium” on the Price at which it buys back Nova Crystals on a periodic basis. The Prime Rate will expand or contract the supply of Nova Crystals as necessary.The new Bank will continue to oversee the Storage and Distribution of Nova Crystals, but will not have a monopoly of Nova Crystal issuance. Any Banking Institution across the galaxy may partner with the new Bank and issue or store Nova Crystals.

2) No Fractional Reserves and Monetary Controls
The practices of Suspension of Payment and Investment Nova Crystals must come to an end. These practices constituted a declaration of surrender on the part of the Dynasty Bank. Announce that all INCs will be converted into Bonds redeemable at Par Value in 1 Year and let the market set their current value. Declare that the Price Floor of 50,000 per NC is over, and that the market will set the value, not the revenue of the Krath Treasury. Also announce that the restriction of 2000 NC per trader per month is lifted. Guarantee that the NC in Krath vaults matches the total potential depositor demand. Hold a Monthly Press Conference to update Galactic Traders about the Nova Crystal.

3) Galactic Viewpoints
If only one of these proposals can be followed, then choose this: An Annual Economic Summit. The purpose of the conference will be to discuss input on the state of the Galactic Economy. Regardless of who hosts the event, Nova Crystals must have an advocate, and the Krath Bankers must be prepared to take input and criticism. This summit must involve traders of all sizes and includes experts from different economic subdisplines and careers. These viewpoints are necessary for the allowance of new ideas on how the Nova Crystal can be successful to flourish.

4) Reject Autarky
The idea that you can structure your entire economy so that you are protected from the shock of the market has long since been disproved. Demonstrate how the Nova Crystal is a valid store of value, even for traders who do little or no business with Krath.


Conclusion:The Speculation Attack?

How do the Krath Bankers deal with the inevitable speculation? Whether these reforms are adopted or not, speculation will continue until the next Crash. Massive reforms, like those suggested above must be adopted or the Nova Crystal is doomed to irrelevance. All investment involves risk and the temptation to bail out investors who gambled poorly must not be mistaken for fraud. The true fraud occurs when existing depositors lose the value of the Nova Crystals they hold. Currency speculation, as with any commodity cannot be avoided, and is by no means the enemy. Good speculators can invest their earnings in other projects to improve the Galactic Standard of Living, instead of private arms stockpiles.

The next crisis will be facilitated by nefarious speculators who only seek to profit from the NC's destruction. The proposed “NC Prime Rate” can be the main weapon by which Krath Bankers fight attempts to damage the Nova Crystal. Properly designed, the Prime Rate can be an economic weapon against inflation, which is the process by which Nova Crystal holders are defrauded. A commodity money must be more than a speculative investment, it must be a store of value, and a means by which more sentients can be protected from Economic Crises.

Even if it should decouple the Nova Crystal from its Income, and a sharp decline in NC price may result, this is necessary. A decline means that the NC has been overvalued and that capital needs to be diverted elsewhere until the NC can settle at a price that fair.

Boom and Bust cycles are a result of Government economic intervention, and therefore the only way to end is to minimize that intervention so that debt is cleared and real economic growth can begin. Otherwise, the Nova Crystal will be stranded in a scenario where its continued success is dependent on how many worlds Krath planted their flag on this year.
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[White Paper] - The Crystalline Bubble - Prard'aga Rono
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