Elastic Fiduciary Media on a Bitcoin Anchor

0. System Sketch (Layers)

• L0 – Base money: On-chain BTC is the sole final settlement asset.
• L1 – Narrow custody rails: 100%-reserve BTC custodians (audited, proof-of-reserves + proof-of-liabilities) issue par-redeemable BTC claims (sight deposits, payment tokens). No maturity transformation here.
• L2 – Elastic fiduciary media (EFM): Free-banking style issuers create inside money (notes/tokens/deposits) not fully BTC-backed, but backed by diversified loan assets plus pre-funded loss-absorbing capital and mutual insurance. Convertibility to L0/L1 at par is conditional and rule-bound.
• L3 – Credit markets: Term funding (time deposits, EFM notes) for productive loans. No government debt eligible as collateral or assets, ever.

1. Money Types and Legal Categories

• Sight money (S): Payable on demand at par in BTC/L1. Must be 100% matched by L0/L1 reserves or by fully liquid, overcollateralized repo to L1.
• Time money (T): Fixed-term claims funding loans. Not payable on demand; priced with market yield.
• Equity (E): First-loss capital of EFM issuers and of the mutual clearinghouse.
• Insurance shares (I): Callable, loss-absorbing capital subscribed by member issuers to the clearinghouse.

Rule: Only S circulates as “money proper.” T is savings; E/I are risk. No disguising T as S.

2. Elasticity Without State

Elasticity is achieved by market issuance and redemption of EFM against term assets and pre-funded capital, not by a central bank.

Mechanisms:

• Automatic issuance/redemption windows:
  ( \text{Net_EFM}_t = f(\text{loan_demand}_t, \text{S/T spreads}_t, \text{capital_buffer}_t) )
  with hard constraints:
  ( \text{EFM}_t \le \alpha \cdot (E_t + I_t) + \beta \cdot \text{stress_tested_portfolio_NAV} ),
  where ( \alpha,\beta \in (0,1) ) are pre-committed.
• Price-rule convertibility: Par convertibility holds while capital and insurance ratios exceed thresholds; when breached, par to BTC suspends for that bank only, and the loss waterfall triggers. No system-wide suspension.

3. Convertibility, Clearing, and Audits

• Private clearinghouse (PC): A member-owned utility that settles interbank positions in L0/L1, enforces risk rules, and runs real-time transparency:

  • Daily proof-of-reserves & liabilities for L1 custodians and EFM issuers.
  • Portfolio telemetry: standardized loan-level performance feeds; on-chain hashed reports.
  • Stress tests published quarterly; breaches auto-shrink issuance limits.

• No lender of last resort. The PC provides pre-funded liquidity pools (in BTC/L1) priced at penalty rates and haircut to equity only. Access is algorithmic, not discretionary.

4. Loss Waterfall (Averts Personal Bondage)

When an EFM issuer suffers credit losses or a run:

1. E (issuer equity) is wiped first.
2. I (mutual insurance pool) is tapped pro-rata across members up to caps.
3. Bail-in of EFM time claims only (T) via contingent convertible clauses to equity.
4. Resolution by PC: portfolio auction; solvent issuers absorb assets with insurance.
5. Personal bankruptcy safe harbor: borrowers’ discharge remains intact; no recourse to personhood or wage-slavery.

5. Anti-Spiral Dampers

• Countercyclical capital rule:
  ( E^{\min}t = E_0 + \gamma \cdot \text{credit_growth}{t-4:t} ).
• Dynamic haircuts: Collateral haircuts auto-increase with volatility.
• Par-suspension per issuer: Localizes failures.
• Convertible time claims: Absorb shocks before S is touched.

6. Hard Constraints That Neuter State Overreach

• No sovereign borrowing. The polity cannot issue debt instruments.
• No State asset eligibility. PC rules bar government obligations as collateral or assets.
• Tax-in, pay-go out. All public expenditure must be cash-funded from current BTC/L1 tax receipts.
• War finance lock: Defense outlay above a cap requires citizen referendum, funded by voluntary annuities, not debt.
• Emergency liquidity prohibition: The PC may not lend to the State.

7. Credit Allocation That Avoids Bondage

• Full-recourse to collateral, not the person. Statutes bar wage-garnishment beyond caps and prohibit servitude contracts.
• Positive-sum underwriting:
  • Income-share claims allowed but capped, non-perpetual, and always dischargeable.
  • Consumer credit ring-fenced; losses pre-reserved via pooled E/I.

8. Governance and Incentives

• Mutualized PC: Member banks post I-capital; mis-risking members pay higher assessments.
• Open resolution: Failed equity wiped; depositors (S) transferred at par to solvent members.
• Transparency as discipline: Real-time solvency dashboards; red-flag triggers auto-curtail issuance.

9. Technical Primitives (Bitcoin-Native)

• Programmable claims: EFM notes as tokenized liabilities on BTC-adjacent ledger (Lightning/sidechain), with CoCo logic.
• Oracles & proofs: zk-proofs of overcollateralization; loan book snapshots.
• Deterministic rulebooks: Risk rules codified in governance contracts.

10. Transition Path

1. Stand up L1 narrow banks with proof-of-reserves/liabilities.
2. Launch PC and insurance pool.
3. Begin with low leverage; cautiously expand.
4. Entrench State borrowing ban and collateral prohibitions.
5. Sunset legacy fiat exposures.

11. What This Achieves

• Elasticity: Loans expand/contract via private capital and savers; payments stability preserved.
• No personal bondage: Losses absorbed by equity/insurance/time investors.
• No public bondage: State barred from debt issuance.
• Bitcoin anchor: Final settlement cannot be diluted.

12. Minimal Math (Constraints Summary)

• Par-convertible S:
  ( S_t \le R_t + H_t ), with (R_t) = reserves; (H_t) = repo maturing ≤ 1d.
• EFM issuance cap:
  ( \text{EFM}_t \le \alpha E_t + \beta \text{NAV}^{\text{stress}}_t ).
• Capital floor (countercyclical):
  ( E_t \ge E^{\min}t = E_0 + \gamma g^{\text{credit}}{t-4:t} ).
• PC liquidity access: granted iff post-haircut CAR ≥ threshold; losses to E only.