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Sovereign Grassroots Currencies: A CBDC Architecture for Credit and Monetary Policy (Full Version)

Ehud Shapiro

arXiv:2609.27727v3econ.GNcs.DCcs.MAq-fin.EC

TL;DR

Leading CBDC designs risk accelerating deposit flight and leave credit creation and monetary-policy operations outside the CBDC. The paper proposes a grassroots-currency architecture combining sovereign coins, person-issued redeemable coins, and bonds. It proves a par price for on-demand-redeemed coins and argues that central-bank lending and bond rates bracket counterparties’ rates.

  • Problem

    Leading CBDC designs can accelerate deposit flight through deposit conversion and keep credit creation and monetary-policy operations in bank money and reserves.

    Source: §1 · pp. 1–2

  • Method

    The architecture combines central-bank-issued sovereign coins, redeemable coins issued by any person, and sovereign or non-sovereign bonds within grassroots currencies.

    Source: §1 · p. 2

  • Results

    On-demand-redeemed non-sovereign coins have an arbitrage-free price of one fiat unit, and central-bank lending and bond rates bracket counterparties’ corresponding rates.

    Source: §1 · p. 4, §7 · p. 37

  • Takeaways & Limitations

    The central bank can choose counterparties and terms for policy operations conducted in the coins and bonds the public holds, without on-demand deposit conversion into newly issued money.

    Source: §1 · p. 6

    The paper does not settle the aggregate effect of directly lending to a named recipient on output and prices.

    Source: §6 · p. 36

Abstract

from arXiv · show

A Central Bank Digital Currency (CBDC) is central-bank money in digital form, held by the public. Leading designs have two limitations: conversion from bank deposits into CBDC can accelerate deposit flight, requiring safeguards, and the CBDC stays outside credit creation and monetary-policy operations. Here we present a CBDC architecture based on grassroots currencies that overcomes these limitations. The architecture has three components: (1) Money: sovereign grassroots coins, which are digital debts of one unit of fiat currency issued by the central bank, constituting a direct CBDC; (2) Credit and Liquidity: non-sovereign grassroots coins, which are digital debts of one unit of the same fiat currency, redeemable at par, that can be issued by any person, natural or legal, thus adding credit; and (3) Interest: grassroots bonds, sovereign and non-sovereign, adding maturity and thus interest, standard banking instruments, and the central bank's instruments of monetary policy. The central bank can therefore lend, absorb liquidity, set its rates and buy and sell securities in the coins and bonds the public holds, choosing the counterparties and terms of its credit operations, and without converting bank deposits into newly issued central bank money on demand. We prove that the arbitrage-free price of any non-sovereign grassroots coin whose issuer redeems it on demand is one unit of the fiat currency. The central bank can choose to deal with any counterparty, not just banks, and we argue that the central bank's interest rates on lending and bonds bound from above and below the corresponding interest rates of its counterparties. Sovereign and non-sovereign grassroots coins and bonds have been implemented and tested on a small scale.

1 Introduction

The paper proposes a grassroots-currency CBDC architecture to address deposit-flight risks and the exclusion of credit creation and monetary-policy operations from leading CBDC designs. It combines sovereign coins, person-issued redeemable coins, and bonds so the central bank can conduct policy operations in instruments the public holds.

The two limitations

  • Leading CBDC designs can accelerate deposit flight through conversion from bank deposits and leave credit creation and monetary-policy operations in bank money and reserves.The cited safeguards include holding and transaction limits, tiered remuneration, and waterfalls into bank accounts.Source: §1 · pp. 1–2

The proposal

  • The architecture combines central-bank-issued sovereign coins, par-redeemable coins issued by any person, and sovereign or non-sovereign bonds that add maturity and interest.All three components operate under one grassroots social contract, with no separate protocol for the central bank.Source: §1 · pp. 2–3

What we show

  • The arbitrage-free price of any non-sovereign coin redeemed on demand is one unit of fiat currency, while the central bank’s lending and bond rates bracket counterparties’ corresponding rates.The rates are compared at like maturity, collateral, and risk; the central bank chooses which counterparties it admits.Source: §1 · pp. 4–6

Credit and liquidity

  • The currencies of persons and the sovereign are one currency, with fiat as unit of account, while redemptions are met; the architecture also enables any person to create credit.Person-issued coins redeem through a liquidity chain to sovereign coins and then fiat; banks issue their own coins in place of deposits.Source: §1 · p. 4
  • Sovereign coins do not create a demand-driven conversion right: a depositor obtains them from an existing holder or through an exchange the central bank elects to make.The exchange changes the form, not the quantity, of central-bank money; no demand-driven issuance limit is therefore needed for that purpose.Source: §1 · pp. 4–5

Interest

  • Grassroots bonds add maturity and interest, and the central bank uses bond-backed lending and bond issuance as monetary-policy instruments.The discount at which coins are swapped for a bond and the bond’s maturity determine its interest rate.Source: §1 · p. 5

A central bank with sovereign grassroots currencies

  • The central bank can lend, absorb liquidity, set rates, and trade securities in coins and bonds held by the public, choosing counterparties and operation terms without on-demand deposit conversion.Mutual credit lines let it swap its coins for a chosen counterparty’s coins; it may deal with banks, cities, firms, cooperatives, or households.Source: §1 · pp. 4–6

What we show

  • Grassroots coins and bonds have been implemented and tested on a small scale, while their throughput, deployed scale, and measured ease of use remain unmeasured.The reported realization is a prototype rather than a deployment with those measurements.Source: §1 · p. 6

2 Money: Sovereign Grassroots Coins

Sovereign grassroots coins are the central bank’s direct digital money, while a shared contract defines denominated coins and bonds for all issuers. The central bank joins as an ordinary issuer, and its coins enter and leave circulation through voluntary transactions and redemption.

2 Money: Sovereign Grassroots Coins

  • A sovereign grassroots coin is a central-bank-issued digital debt of one unit of fiat currency and the architecture’s direct CBDC.The central bank bears the same contract obligations as other issuers, but it alone can issue fiat coins to fulfil presentations of its own coins.Source: §2 · p. 6, §2.2 · p. 9

2.1 Denominated Grassroots Coins and Bonds

  • A denominated coin is an issuer’s debt due now, while a bond is debt due at a later date and may be exchanged for an issuer’s coin at maturity.A coin is redeemable at face value on presentation; a mature bond’s bearer may take an issuer’s coin.Source: §2.1 · pp. 7–8
  • The shared contract governs minting, swaps, acceptance, payments, redemption, pricing, denomination, dates and escrow, with denomination and acceptance clauses added here.A swap of each party’s own coins opens a mutual credit line; exchanging coins for larger-face-value bonds due later constitutes a loan.Source: §2.1 · pp. 8–9
  • Issuing denominated instruments needs no permission from the denomination’s central bank, though circulation may engage jurisdiction-specific financial laws.A denominated currency can operate before and without the sovereign, which may join later as another issuer.Source: §2.1 · p. 9

2.2 The Sovereign

  • The sovereign grassroots currency is the denomination’s sovereign issuer’s coins and bonds; the central bank follows the same contract as other issuers.The central bank may join an already operating currency, and only it can issue fiat coins to fulfil presentations of its own coins.Source: §2.2 · p. 9

2.3 Issuance and Redemption

  • Issuance requires an issuer’s voluntary minting and transfer, while redemption is a bearer-elected presentation the issuer must fulfil.Redemption reduces circulating debt; maturity shifts face value from bonds to coins without increasing the issuer’s combined debt.Source: §2.3 · pp. 9–10
  • The central bank issues coins through swaps for fiat coins or payments to accepting persons, and fulfils redemption with fiat coins or instruments it holds.It does not provide guaranteed on-demand conversion of bank deposits into its digital currency; redemption into fiat reduces coins in circulation, so outstanding sovereign coins and bonds are bounded by what it issued and has not taken back.Source: §2.3 · p. 10

2.4 A Payment and Its Digital Realisation

  • Payments are signed by the payer, countersigned by the coin issuer and recorded in its log; countersignature establishes holdership and prevents double spending.A payment is final when countersigned and recorded, without a shared ledger or third-party consensus; sovereign-coin payments require access to the central bank and its log machines, and the central bank sees them. The instrument’s legal enforceability and negotiability depend on jurisdiction, while the cited implementation work specifies safety, recovery and payment-finalization properties under stated liveness conditions.Source: §2.4 · pp. 11–12

3 Sovereign Grassroots Coins as a Central Bank Digital Currency

Sovereign grassroots coins are assessed against retail CBDC principles and features, with issuance structured to avoid demand-driven creation of central-bank money. The section also identifies boundaries in offline use and regulatory compliance, while pointing to personal credit and bonds as answers to what the feature checklist omits.

3 Sovereign Grassroots Coins as a Central Bank Digital Currency

  • No deposit holder can claim newly issued sovereign coins on demand; exchanging them for cash changes the form, not the quantity, of central-bank money.The architecture leaves open whether limits are wanted for concentration, transition, or usability.Source: §3 · p. 14
  • A run can reach sovereign coins only through holders, and the public's access is bounded by coins and bonds the central bank has issued and not taken back.A bank run remains bounded by what the bank can pay depositors; no run creates newly issued central-bank money.Source: §3 · p. 14
  • Sovereign-coin payments cannot be made offline from the central bank because they require the central bank and machines holding its log to be reachable.Payments in a person's coins may use a local network without Internet access, but still are not offline from that issuer.Source: §3 · p. 14
  • A protocol key identifies a party but not a verified person; identity binding and applying KYC, anti-money-laundering, and record-keeping rules depend on deployment and jurisdiction.The central bank log records payments in its coins and counterparties to its transactions, providing a transaction trail by protocol identity.Source: §3 · p. 14
  • The CBDC feature checklist does not address who creates credit or whether policy instruments operate in the public's money; personal credit and bonds address those omissions.The section identifies credit of persons and bond maturity and interest as the components answering this limitation.Source: §3 · pp. 14–15
  • Tables 1 and 2 assess sovereign coins against the retail CBDC principles and features, describing the mechanisms and status of each check.The tables assess coins before the personal-credit and bond components; later sections may strengthen a row.Source: Table 1 · p. 15, Table 2 · p. 15

4 Credit and Liquidity: Non-Sovereign Grassroots Coins

The architecture makes every person an issuer of redeemable grassroots coins, while sovereign coins provide base money and mutual credit creates inside money. It connects issuers to sovereign money through redemption, establishes par pricing under stated conditions, and characterizes solvency, liquidity, and runs using holdings and redemption flows.

4.1 Every Person an Issuer

  • Every person can create inside money by swapping coins, with social collateral supporting repayment and unfulfilled presentations evidencing default.A bank’s coins play the economic role of its demand deposits.Source: §4.1 · p. 17

4.2 The Central Bank’s Mutual Credit Lines

  • The central bank issues sovereign coins through mutual credit swaps with chosen counterparties, without on-demand conversion of bank deposits or an open-ended digital run into central bank money.The central bank chooses the counterparty, quantity, and timing; swaps are at par, on demand, and bear no interest.Source: §4.2 · pp. 18–19

4.3 The Peg and the Price of a Coin

  • An issuer’s coin is worth one unit of fiat under arbitrage when the issuer meets presentations on demand; sovereign-connected issuers can meet them through a redemption path to the sovereign.The price result does not establish how much can be redeemed at once; that depends on available liquidity.Source: §4.3 · pp. 20–21

4.4 Liquidity, Solvency and Redemption Runs

  • For a sink-closed community, holdings clear if and only if each non-sovereign member’s assets are at least its liabilities; group liquidity equals maximum flow to the sovereign in the coin-holding graph.A redemption run is met in full when an issuer’s coin assets cover its coin liabilities; otherwise, the shortfall remains in circulation as unfulfilled presentations.Source: §4.4 · pp. 22–23

4.5 Among the Contenders

  • The comparison describes payment structure across CBDC architectures and alternatives; in the proposed design, each issuer keeps its own record and is party to payments in its coins.The central bank is out of retail operations without an intermediary tier, while credit creation becomes a transaction of the currency.Source: §4.5 · pp. 23–24, Table 3A

5 Interest: Grassroots Bonds

Grassroots bonds add maturity and interest to coins, supporting standard credit instruments and central-bank monetary-policy operations. The central bank can set lending and bond terms for chosen counterparties, and its two rates bound admitted counterparties’ corresponding rates when the facilities remain available.

5.1 Maturity and Interest

  • A bond is an issuer’s debt due at a stated date, and interest is the difference between its face value and the coins exchanged for it.The return is for the bond’s term; unlike coins, which are due on demand, bonds bear interest.Source: §5.1 · p. 27

5.2 The Instruments

  • Swaps and escrow agreements form instruments including loans, debt sales, forwards, term credit lines, options, collateral, guarantees, and insurance.The central bank’s term credit line uses escrowed coins and bonds; draws are consented to in advance and fall due at their own maturities.Source: §5.2 · pp. 27–28

5.3 The Central Bank’s Instruments

  • The central bank conducts monetary-policy transactions in coins and bonds held by the public, choosing counterparties and terms for credit operations.It can lend, issue its own bonds to absorb liquidity, and buy or sell securities for its coins.Source: §5.3 · pp. 28–29

5.4 A Counterparty-Specific Rate Corridor

  • At like maturity, collateral, and risk, the central bank’s lending rate bounds a counterparty’s borrowing rate above, and its own bond rate bounds the counterparty’s lending rate below.The corridor is counterparty-specific and holds while the counterparty can still borrow from the central bank and acquire its bonds.Source: §5.4 · p. 30

5.5 Among the Types of Money

  • Table 4 compares money designs and the proposed architecture’s components by liability, backing, recordkeeping, issuance, interest, and uses; grassroots bonds are dated credit claims, not money.The central bank’s coins bear no interest, while it charges interest on borrowing of those coins and pays interest on its bonds.Source: §5.3 · p. 29, Table 4

6 Related Work

The related work spans CBDC design, monetary policy, payment and credit networks, and community currencies. The paper distinguishes its architecture by denominating grassroots obligations in fiat and using redemption chains and central-bank operations rather than deposit conversion and reserve backing.

CBDC and monetary policy

  • Prior CBDC research examines deposit conversion, disintermediation, and policy operations; this architecture instead issues coins to chosen counterparties, without a depositor’s right to newly issued coins.Earlier work finds that deposit effects depend on how the central bank recycles funds, while this design bounds issuance to coins it has issued and not taken back.Source: §6 · pp. 32–33

Synthetic CBDC

  • Unlike synthetic CBDC liabilities backed one-for-one by central-bank reserves, grassroots coins are unbacked issuer debts that reach base money through redemption chains.The comparison is between reserves held against private claims and redemption obligations realized through liquidity chains.Source: §6 · pp. 33–34

Money, bonds, and financial networks

  • Grassroots coins resemble privately issued bank money, while the sovereign’s coins supply outside money; grassroots bonds digitize debts traded before maturity.The paper also distinguishes its clearing analysis from models using common-numéraire payments or credit-flow capacity.Source: §6 · p. 35

Monetary transmission

  • The central bank’s term credit lines specify counterparties, amounts, rates, and timing, while aggregate effects on output and prices remain unsettled.The framework’s counterparty-specific rate bounds differ from interbank corridors between standing facilities; credit allocation also depends on the central bank’s mandate.Source: §6 · pp. 33, 35, 36

Grassroots and community currencies

  • The architecture adds fiat denomination and redemption at face value to mutual-credit and community currencies whose pegs otherwise rely on convention or operator policy.Grassroots coins also differ from reserve-backed stablecoins: each issuer bears its own redemption obligation rather than pooling reserves.Source: §6 · pp. 34, 36

Other credit and payment networks

  • The paper relates grassroots currencies to hawala and community credit, but describes denomination as making obligations fiat-unit debts and assigning each issuer individual default liability.In the hawala comparison, denomination also makes obligations legally binding and recorded; cross-denomination exchange can use escrow.Source: §6 · p. 36

7 Conclusions

The conclusions combine a direct sovereign CBDC with person-issued fiat-denominated coins and bonds under one contract. The authors state that on-demand redeemable coins price at one fiat unit, while the architecture’s implementation and deployment performance remain limited in evidence.

7 Conclusions

  • The architecture combines sovereign coins as direct CBDC, non-sovereign coins as credit, and bonds as maturity-bearing instruments for lending and monetary policy.The central bank can transact in the coins and bonds the public holds, choosing counterparties and terms for credit operations.Source: §7 · p. 37
  • One fiat unit is the arbitrage-free price of a non-sovereign coin whose issuer redeems it on demand.While redemptions are met, personal and sovereign currencies form one currency with the fiat unit as its unit of account.Source: §7 · p. 37
  • The central bank may deal with any counterparty, not only banks, and its lending and bond rates bound counterparties’ corresponding rates from above and below.Source: §7 · p. 37
  • Coins and bonds have been implemented and tested on a small scale, but measured throughput, deployed scale, and measured ease of use are not established.The design rests on a prototype realization.Source: §7 · p. 37
  • A grassroots currency economy may form without the denomination’s central bank, which can join later by issuing its denominated coins.Source: §7 · p. 38

A The Act Schemas, Transactions and Modalities of the Contract

The contract is expressed through act schemas that specify roles, consent, and changes to recorded state. The appendix explains how those schemas realize the contract’s clauses and which clauses describe acts.

A The Act Schemas, Transactions and Modalities of the Contract

  • A grassroots social contract is a finite list of clauses parties undertake toward one another, with act schemas specifying roles, required consent, and state changes.The contract’s transactions are compiled from schemas, and three syntactic conditions suffice for the realized protocol to be volitionally grassroots.Source: A The Act Schemas, Transactions and… · p. 44
  • The appendix maps transactions to clauses and classifies each clause as enforced, attested, or undertaken according to what runs determine and record.Source: A The Act Schemas, Transactions and… · p. 44
  • Denomination adds variable f to every act but adds no act; clause 4 adds acceptance, payout, and spend, and no clause names the central bank.The denomination does not determine governing law, and cross-denomination swaps require two denomination-specific swaps or escrow.Source: A The Act Schemas, Transactions and… · p. 44

A.1 The Act Schemas

The act schemas formalize coins, bonds, dates, acceptance, and the parties involved in transactions. The appendix distinguishes inherited schemas from denomination-specific additions and explains how payment forms encode acceptance.

A.1 The Act Schemas

  • The contract uses predicates for bonds or coins, dates, date warranties, and acceptance, with roles for payer, payee, escrow, and a third-party issuer.The denomination variable f is carried through schemas; payment, redemption, and escrow expand into multiple schemas.Source: §A.1 · p. 44
  • Three schemas are new: accept, payout, and spend; payout and spend cover payment in coins not issued by the payee.The other nine schemas extend the undenominated contract by carrying the denomination variable.Source: §A.1 · pp. 44–45
  • Payment is represented as pay when the payee issued the coin, payout when the payer did, or spend when a third party issued it.Payout and spend require the recipient to delete the issuer’s acceptance record; pay relies on the payee’s acceptance.Source: §A.1 · p. 45
  • No payment schema reads or warrants a date; the issuer participates to countersign and record the payment.Source: §A.1 · p. 45

A.2 The Transactions

The transaction model represents each person by their holdings, date, warranties, and acceptances, and makes transactions depend on stated preconditions and participant consent. Its rules cover coin and bond operations while preserving debt and denomination boundaries.

A.2 The Transactions

  • The protocol is safe when every step is a transaction, and correct when it is both safe and live; it is volitionally grassroots when groups can operate independently.Transactions change only participants’ states and are taken only when their preconditions hold and every guard consents.Source: §A.2 · pp. 45–46
  • The transaction schemas include minting and advancing dates, plus swaps, acceptance, payment, redemption, maturity, and escrow transfers.Minting a bond requires a future maturity date; a matured bond can be exchanged for its issuer’s coin at the bearer’s election.Source: §A.2 · p. 46, §3 · p. 46

9. Releasee,q(¢k

  • Acceptance is a renewable quota, not an exposure cap: each accepted issuer-coin payment uses one quota, while the per-issuer limit bounds exposure.The issuer participates in every payment in its coins but is not a guard; swaps and escrow transfers require both parties’ consent.Source: §9 · pp. 46–47
  • In any safe run, a person’s debts in a denomination are exactly the one-unit coins and bonds they minted; transactions cannot move instruments across denominations.Swaps, payments, redemption, and escrow transfers move instruments without creating or destroying them; maturity replaces a bond with a coin of the same issuer and face value.Source: §9 · p. 47

A.3 The Modality of Each Clause

The appendix classifies contract clauses by how protocol runs determine and enforce them. It explains which obligations are enforced, attested, or undertaken, and distinguishes contractual records from fiat settlement outside the contract.

A.3 The Modality of Each Clause

  • Clauses are enforced when every correct run keeps them, attested when possible breaches are witnessed against the obligor, and undertaken when no transaction can breach them.Enforced clauses are determined by runs; undertaken clauses are not.Source: §A.3 · p. 47
  • Clauses 1, 3, 4, 5, 6, and 9 are enforced, clause 2 is attested, and clause 7 is undertaken, as for the undenominated contract [80].Payment and redemption obligations in clauses 5 and 6 self-execute: payment adds coins to the payee’s holding, while redemption deletes the bearer’s instrument at the issuer. Clause 2’s date warranty is recorded during mature, and the coin added to another party’s holding records clause 7’s pricing undertaking.Source: §A.3 · pp. 47–48
  • Fiat handover is outside the contract: its coin records a one-unit debt, while contractual redemption provides in-kind fulfilment.The coin’s presentation for fiat and fiat payment occur outside the contract.Source: §A.3 · p. 48
  • The sovereign is not a distinct contract role: it follows the same transaction schemas and has its warranties and undertakings recorded like any party.The sovereign’s ability to issue fiat coins lies outside the contract.Source: §A.3 · p. 48

A.4 The Contract Is Grassroots

The contract is shown to be syntactically grassroots, and its protocol volitionally grassroots. This means groups can operate independently and connect only through a swap willed by a member of each group.

A.4 The Contract Is Grassroots

  • A syntactically grassroots contract has an unobstructed introductory act, traceable provenance for required predicates, and a connected role graph.Roles are connected when one requires an atom naming the other; acts not willed by all parties run only between parties that already record each other.Source: §A.4 · p. 48
  • The denomination argument names no person, so the grassroots checks for the shared schemas carry across numeric values; the contract remains syntactically grassroots.The added acceptance, payout, and spend schemas preserve traceable provenance and connect their roles through the issuer.Source: §A.4 · pp. 48–49
  • The transaction set is polite and its protocol volitionally grassroots, including across the union of schema instances.Any two people can mint coins and then swap, establishing openness; closure follows because enabled transactions link only participants already in one instance.Source: §A.4 · p. 49
  • Any group can operate the protocol on its own, and two groups connect only through a swap willed by a member of each.This is the protocol’s stated volitionally grassroots property.Source: §A.4 · p. 49

B Financial Instruments

Grassroots bonds add financial instruments through escrow programs built from the currency’s existing transactions. Swaps express credit, debt sales, loans, and forward contracts, with their terms encoded in the instruments exchanged.

B Financial Instruments

  • Grassroots bonds add escrow programs for consent, while every instrument transaction uses the existing currency transactions and stays within one denomination.The instruments are represented as issuer-and-maturity bond lots or issuer coin lots.Source: B Financial Instruments · p. 50

B.1 Instruments That Are One Swap

  • Symmetric mutual credit exchanges equal lots of each party’s coins; asymmetric mutual credit gives fewer coins for the counterparty’s larger lot.Because coins redeem at par, the premium in asymmetric mutual credit is not interest.Source: §B.1 · p. 50
  • A sale of third-party debt discounts the debtor’s coins to price doubt about solvency; before maturity, the discount also prices time to maturity.The debtor is not a party to the sale.Source: §B.1 · p. 50
  • A zero-coupon loan exchanges present coins for larger-face-value bonds maturing at a specified date, with the difference serving as term interest.The bond is not presented for redemption, so the loan cannot be recalled; the borrower may repay early by redeeming the lender’s coins against its own bond.Source: §B.1 · p. 50
  • A forward contract swaps the parties’ bonds at inception, leaving each with a claim on the other at maturity and exposing each to counterparty default before then.Currency swaps and repurchase agreements are sequences of two swaps; factoring is a debt sale, a mortgage is a collateralized loan, and bank time and demand deposits correspond to bonds and coins.Source: §B.1 · p. 50

B.2 The Escrow Agent

The escrow agent holds coins and bonds for an agreement and transfers them according to its programmed conditions. The arrangement depends on trust in the agent, and the model cannot represent a committee agent.

The Escrow Agent

  • The escrow agent holds instruments for the parties and transfers them according to the agreement’s conditions; each transfer is between the agent and a party.Conditions may depend on the agent’s local date or its judgment of an event, informed where needed by an oracle.Source: §B.2 · pp. 50–51
  • The arrangement assumes both parties trust the agent to follow its program and, for event-based conditions, to adjudicate the event.A depositor transfers instruments to the agent, which later releases them to a beneficiary or returns them to the depositor.Source: §B.2 · p. 51
  • A committee escrow agent acting by member threshold is outside a model in which each agent is one person.Source: §B.2 · p. 51

B.3 Instruments That Employ an Escrow Agent

Escrow makes exchanges conditional on deposits and supports instruments with scheduled or event-triggered transfers. It can coordinate both sides of an exchange, but the parties rely on the escrow agent to execute the agreement.

Packaged exchange

  • Packaged exchange releases each party’s lots only after both parties deposit all lots, and returns deposits if either party misses the establishment window.Neither party holds the other’s lots before both deposits are complete, so all lots change hands or none do.Source: §B.3 · p. 51

Loans

  • A fixed-payment loan represents coupon payments at scheduled dates and a principal bond due at maturity.Source: §B.3 · p. 51

Interest-rate swap

  • An interest-rate swap exchanges fixed payments for payments that vary with a reference rate, settling the net difference at each date.Source: §B.3 · p. 51

Loans

  • A term credit line caps draws at the lender’s commitment, with the escrow agent tracking drawn credit and returning the undrawn balance at expiry.Draws issue borrower coupon bonds; repayment reduces the drawn amount, while coupon bonds from repaid draws remain outstanding.Source: §B.3 · pp. 51–52

Options

  • An option gives one party the right, but not the obligation, to execute a specified swap during an agreed exercise window.If unexercised by expiry, the escrow agent returns the underlying bonds and transfers the premium to the other party.Source: §B.3 · p. 52

Insurance, credit default swaps, and letters of credit

  • Escrow can implement insurance, credit-default swaps, and letters of credit by holding reserves and releasing them when the specified claim or contractual condition is met.For a letter of credit, the agent verifies the seller’s performance before releasing the bank’s payment; the buyer reimburses the bank with bonds held in escrow.Source: §B.3 · pp. 52–53

C The Sovereign Market, as It Runs

The sovereign-market run implements minting, acceptance, payment, redemption, and escrow through the same denominated agent used by other parties. Its transactions demonstrate coin circulation and reconciliation, but do not measure throughput, deployed scale, or ease of use.

Implementation

  • The central bank runs the same denominated agent as other parties, with guarded requests for minting, acceptance, and payments.A third-party payment can pass through the issuer, which countersigns and records it when the payee accepts the coins.Source: C The Sovereign Market, as It Runs · pp. 53–54

The village

  • The village run scripts transactions among eight parties, including the central bank and a community bank, to exercise coin, bond, and escrow operations.The scripted run includes redemption, payments, a maturity-dependent bond exchange, and deposits that are released or returned by escrow.Source: C The Sovereign Market, as It Runs · pp. 54–56

Results

  • The run’s holdings reconcile with Conservation of Debt: instruments held across the eight parties, including self-held instruments, equal the amounts each issuer minted.The recorded totals include 30 central bank coins, 30 Alice-coins, 15 Bob-coins and 24 Bob-bonds, 25 Charlie-coins, 45 Diana-coins, 20 Eve-coins, and Frank’s 10 coins and 18 bonds.Source: C The Sovereign Market, as It Runs · p. 56
  • The run shows a household redeeming a Diana-coin through Diana for a sovereign coin, then paying the central bank and receiving one fiat unit.The central bank then pays four coins to Frank, who spends three at Bob; the central bank countersigns and records the payment without a payer-payee conversation.Source: C The Sovereign Market, as It Runs · p. 56

What the run does not show

D Exchange across Denominations

People can exchange grassroots coins across denominations through paired payments or escrowed exchanges, without bank accounts or correspondent banking. Parties set exchange rates themselves, and the architecture neither performs nor constrains conversion.

Exchange across denominations

  • Coins in different denominations can be exchanged directly among people, potentially bypassing the US dollar as a vehicle currency.The passage identifies the US dollar as a vehicle for foreign exchange and commodity invoicing.Source: D Exchange across Denominations · p. 57

Paired payments

  • In a paired-payment exchange, each party pays coins in one denomination at a rate they agree, leaving one party exposed between the two payments.That exposure can be bounded by exchanging coin by coin or by extending mutual credit.Source: D Exchange across Denominations · p. 57

Escrowed exchange

  • Escrow can complete both exchange legs or return a lone deposit, avoiding the need for mutual credit or trust between the parties.The parties still trust the escrow agent, and one leg may complete before the other.Source: D Exchange across Denominations · p. 57

Consequences

  • Competition among people who quote exchange rates sets rates; migrants can exchange into a home denomination and pay family without correspondent banking, though fees or spreads may apply.People may also use exchange to cover assets and liabilities in different denominations, while bearing rate risk.Source: D Exchange across Denominations · pp. 57–58
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