50.3 Monetary-system conversion

The monetary transition introduces Central Bank currency and the Central Bank Payment System alongside legacy State currency, commercial-bank deposits, and existing payment networks. It also changes the legal position of commercial banks by progressively withdrawing State protection and bank-specific regulation. This subchapter concerns money, banking, exchange, and payment-system adoption; conversion to consumption tax is addressed separately.

Phase in the new currency in the central bank

Consider that the Central Bank, electronic payment system, and tax choice services are fully implemented.

From the moment it is introduced, Central Bank currency has a floating exchange rate with every other currency.

There needs to be an incentive for the public to start using it. The following measures apply during the relevant period or, where indicated, permanently:

• There is a free market for currency exchange with other currencies.
• During the currency-founding period, UBI payments create and distribute the initial supply while giving the public an incentive to register Central Bank accounts and begin using the new currency.
• The Government permanently accepts Central Bank currency for all payments such as legacy tax, permits, fees, licenses, and council rates.

People receive the new currency through UBI, government accepts it for taxes, and that gives people a reason to accept it in trade.

Founding distribution of Central Bank currency

Under the VoTa Constitution, Central Bank currency cannot ordinarily be created or destroyed. There must, however, be a finite inception period in which its initial supply is created and distributed. The constitutional transition provisions must expressly authorise this exception; otherwise, gradual issuance would contradict the rule against currency creation.

Before issuance begins, the constitutional transition provisions establish a target total supply of Central Bank currency. During the currency-founding period, currency is created ex nihilo and distributed as UBI. Both creation-funded and tax-funded UBI use the same constitutional age-weighting formula. Every eligible tax-compliant resident citizen of the same age receives the same amount, children receive the applicable fractional weight, and adults receive the full weight. This is a founding distribution, not a permanent power to finance expenditure by creating currency.

The founding period continues until cumulative creation reaches the target supply. Its duration is therefore estimated rather than fixed: it depends on the target, the creation-funded UBI rate, and the total UBI weight of eligible citizens over time. It might be expected to last approximately fifty years, but it ends when the target is reached. The final creation-funded payment is reduced proportionally if necessary so that the target is not exceeded.

Distributing the founding supply gradually reduces the risk of price and exchange-rate instability. It allows demand for the new currency, productive capacity, wages, and prices to adjust as adoption grows. A long founding period cannot guarantee price stability, but it avoids the much larger monetary shock that could result from creating and distributing the target supply at once.

Combine founding issuance and tax-funded UBI

During the founding period, each UBI payment has two separately accounted components. Let \(C_t\) be the number of new currency units authorised for creation and distribution in payment period \(t\), let \(T_t^{\mathrm{ubi}}\) be the existing currency allocated to UBI from consumption tax in that period, and let \(E_t\) be the set of eligible tax-compliant resident citizens. For citizen \(i\) of age \(a_i\), let \(W(a_i)\) be the constitutional age weight and define the total eligible weight \(S_t\) by:

\[ S_t = \sum_{j \in E_t} W(a_j). \]

Ignoring integer rounding for clarity, the UBI paid to eligible citizen \(i\) is:

\[ U_{i,t} = U_{i,t}^{\mathrm{issue}} + U_{i,t}^{\mathrm{tax}} = \frac{W(a_i)}{S_t}C_t + \frac{W(a_i)}{S_t}T_t^{\mathrm{ubi}}. \]

If \(P_t\) is the aggregate tax-inclusive consumption to which the UBI allocation rate applies, and \(R_{\mathrm{ubi}}(t)\) is that rate during period \(t\), then, apart from any separately defined externality allocations:

\[ T_t^{\mathrm{ubi}} = P_t R_{\mathrm{ubi}}(t), \qquad U_{i,t} = \frac{W(a_i)}{S_t} \left(C_t + P_t R_{\mathrm{ubi}}(t)\right). \]

Only \(C_t\) creates currency and counts towards the target supply. The tax component transfers currency that already exists. The implemented formula applies the constitutional integer rounding and remainder rule, so actual payments contain whole units and their total equals the amount created and redistributed.

Schedule the handover between the two UBI components

For most of the founding period, creation-funded UBI may be paid at its ordinary founding rate while the consumption-tax allocation to UBI develops on its own schedule. Over a predetermined handover interval near the end, perhaps covering the final several years, the issuance rate per unit of constitutional UBI weight is ramped down while the consumption-tax UBI allocation rate is ramped up towards its final constitutional value.

Let \(s_t\) run from zero at the start of the handover to one at its planned conclusion. A simple linear schedule is:

\[ u_{\mathrm{issue}}(t) = (1-s_t)u_{\mathrm{issue},0}, \qquad R_{\mathrm{ubi}}(t) = (1-s_t)R_{\mathrm{ubi},0} + s_t R_{\mathrm{ubi},1}, \]

where \(u_{\mathrm{issue},0}\) is the creation-funded UBI rate per unit of age weight before the handover, \(R_{\mathrm{ubi},0}\) is the consumption-tax UBI allocation rate at its start, and \(R_{\mathrm{ubi},1}\) is the final constitutional allocation rate. Subject to the remaining target supply, planned creation in the period is \(C_t=S_tu_{\mathrm{issue}}(t)\).

The schedules should be calibrated so their planned issuance reaches the target supply. The target, not the estimated date, remains binding: \(C_t\) can never exceed the unissued remainder. The last creation-funded payment is adjusted under the published integer remainder rule, after which \(C_t=0\) permanently. Variations in consumption and tax revenue cause the tax-funded component and therefore total UBI to vary; they do not authorise a change to the target supply.

Consumption-tax-funded UBI is accounted for separately. It redistributes Central Bank currency that already exists and therefore neither increases cumulative founding issuance nor counts towards the target supply. When the target is reached, creation-funded UBI ends permanently and the transitional authority expires. Subsequent UBI consists solely of redistributed consumption-tax revenue, so no Central Bank currency is created or destroyed and the ordinary constitutional rule applies without exception.

Adoption alongside commercial-bank money

Central Bank currency and commercial-bank deposits can coexist. Banks remain free to make loans and issue private liabilities, but these are not Central Bank currency.

Exchanging deposits for Central Bank currency with another person merely changes who owns the deposits. Repaying a bank loan with deposits extinguishes them. If a bank itself redeems a deposit in Central Bank currency, it cancels the deposit and pays currency it already holds. Exchange rates are determined by the market; there is no public guarantee of conversion at a fixed rate.

UBI payments and use in taxation and commerce encourage adoption of Central Bank currency. As customers switch, banks have a commercial incentive to offer services and arrange loans in it. They can obtain currency from savers, investors, loan repayments or asset sales. Private bank liabilities may lose acceptance or trade at a discount, encouraging banks to rely less on them. Banking and credit continue, while the change is driven by customer choice and competition.

Phase out protection and regulation

During the transition, both State protection and bank-specific regulation are phased out smoothly according to a predetermined schedule. Deposit guarantees, compulsory acceptance, guaranteed conversion rates, lender-of-last-resort support, and taxpayer bailouts are progressively withdrawn. Capital requirements, reserve requirements, lending limits, and other regulations intended to control risks ultimately borne by the State are reduced in parallel.

At the end of the transition, commercial banks receive no special protection from the State and are subject to no bank-specific regulation. Subject to the ordinary laws applying to everyone, including contract, property, fraud, and insolvency law, they may choose their own capital and reserves, lend as much as they wish to whomever they wish, and accept whatever risks they wish.

Sound money can displace unsound money

Where different forms of money may be accepted voluntarily and exchanged at market-determined rates, people can prefer the money they consider more reliable. They may save in it, request payment in it, price goods in it, and discount or refuse private liabilities whose issuers present greater risk. A sound currency can therefore progressively displace less trustworthy forms of money without their being prohibited.

This differs from Gresham's law, under which bad money drives good money out of circulation when the State requires currencies with different market values to be accepted at the same legal value. When there is no compulsory parity, differences in solvency, scarcity, redemption terms, and public confidence can instead be reflected in exchange rates and acceptance.

Precious metals provide a historical illustration of this selection process. Their durability, divisibility, portability, recognisability, and relative scarcity made them more useful as money than many alternatives, although law, taxation, coinage, and trade institutions also contributed to their adoption.

Central Bank currency is intended to succeed through the same broad principle of voluntary selection. Its constitutional supply constraint, freedom from issuer-default risk, acceptance by government, and use for UBI and constitutional commerce give people reasons to prefer it. This does not guarantee that every private currency or bank liability will disappear: convenience, established payment networks, and individual risk preferences may allow competing claims to continue circulating.