A New Economic Theory & Paradigm

The New Economics of
Perfect Market Equilibrium

Transitioning to a new, more efficient 21st Century digital global market and egalitarian economic system — where dis-intermediated P2P replaces centuries of institutional control over Forex valuation and cross-border payments.

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Page 1 — The Theory
Section 1

What is Perfect Market Equilibrium?

A new higher state of efficiency global fungible markets can accede to under the post-internet digital market structure of dis-intermediated P2P — where established market tenets and principles are fundamentally rewritten.

Perfect Market Equilibrium is a new applied ultimate state — not an idealised theoretical one — that global fungible markets can accede to under the fundamentally different post-internet structure of dis-intermediated P2P. This ultimate state is the new ability to find and maintain an absolute equilibrium point, or market clearing price, at all times.

As a new dynamic model, it postulates that despite the ever-changing shifting variables of supply and demand, the absolute market equilibrium point is never deviated from. Surpluses and shortages consequently never arise — and operating at this new absolute equilibrium point, all trades are instantly and perfectly cleared at all times.

From this new valuation system flows the implementation of a new global P2P Forex and cross-border payments architecture — one which dismantles the archaic, inefficient processes and methodologies of the risk-based inter-institutional OTC Forex market and interbank correspondent payments model.

"Economic ideas are always and intimately a product of their own time and place... so economic ideas, if they are to retain their relevance, must also change."

— A History of Economics: The Past as the Present, P.1. John Kenneth Galbraith

In its stead, a new more efficient risk-free market and frictionless cross-border payments architecture, where the Absolute Free Flow of Money is also acceded to — a radically new 'Perfect Netting' of cross-border payments that provides Central Banks with new economic levers to control the velocity at which money circulates in the global economy: Global Monetary Velocity.

Section 2

The Higher State of Perfect Market Equilibrium

The Law of Supply and Demand forms the theoretical basis of modern economics. Existing Equilibrium Theory fails to account for the dynamic interaction between supply and demand under a new market structure. Perfect Market Equilibrium breaks with convention entirely.

Early seminal works — Cournot 1838, Jenkins 1870, Marshall 1890 — laid the foundations of supply and demand curves and their relationship to price. Existing Equilibrium Theory, with respect to market clearing price, is postulated on ceteris paribus: all other things being equal, equilibrium variables will not change.

As a 'static' theoretical model, it fails to account for the dynamic interaction between supply and demand variables. It is an idealised state the markets it seeks to interpret can never truly reflect.

The new economics of Perfect Market Equilibrium breaks with this convention. It is not an idealised state, but an applied ultimate state. And as a new dynamic model, the absolute market equilibrium point is never deviated from — surpluses and shortages never arise.

Wholesale Market Diagram
Fig. 1 — The Wholesale Market: Distortions & Lags During Adjustment
Perfect Market Equilibrium Diagram
Fig. 2 — Perfect Market Equilibrium: Never Deviating from Absolute Equilibrium / Market Clearing Price
Section 3

How is Perfect Market Equilibrium Achieved?

Perfect Market Equilibrium is achieved by changing the way market forces are transmitted to market price (rate) — and the manner by which market price itself is generated — with respect to the fundamentally different structures of pre-internet intermediated wholesale versus post-internet dis-intermediated P2P.

Under the existing pre-internet wholesale construct, market forces are transmitted through multiple intermediary layers, where institutional market makers ultimately set Quoted market prices from Order Book buy/sell positions. Global market prices are consequently set between an exclusive club of financial institutions over Electronic Communication Networks (ECNs). Only they have access to the market's core.

The new post-internet dis-intermediated P2P construct inverts this pre-internet structure. The global reach and connectivity of the internet now directly congregates retail buy/sell Order trades as global communities at a new market core. Market forces under this new construct can be instantly and directly electronically transmitted to price over a single-point platform.

Devoid of distorting intermediary agenting or wholesale transmission lags, there are consequently no delays between shifts in supply and demand and price adjustments. The two now move in absolute sync.

Animation — The Institutional Wholesale Market: Distortions & Adjustment Lags
Animation — Perfect Market Equilibrium: Perpetual Absolute Equilibrium

The Mechanism Principle

For Perfect Market Equilibrium to be acceded to, the P2P Fintech engine must perform a 'mechanism' adjustment — factoring and processing transmitted market force data as trades are executed, whereupon instant adjustments to new equilibrium price points are induced. Any artificial intervention, be it on price/rate or injected liquidity between buyers and sellers, destroys the purity of market force transmission and consequently the 'precision' of Perfect Market Equilibrium. It is only through purely data-driven Fintech mechanism-based adjustments that the precise absolute equilibrium point can be achieved and maintained at all times.

Section 3 — Platform Analysis

Why Existing P2P Platforms Cannot Transition Valuation

First-generation P2P fiat money transfer platforms have fundamentally misunderstood where the new valuation point lies in dis-intermediated P2P — leading them to either incorrectly configure their engines or fail to apply one at all.

Currencyfair
Peer-to-Principal — Not True P2P

Currencyfair's first-generation P2P Fintech 'matching engine' is a reconfigured adaptation of the institutional wholesale trade matching engine — originally designed to match wholesale trades over an ECN. Rather than configuring an engine that drives Price as a Function of Supply and Demand, the transposed model inadvertently attempts to make Price a Function of Price — which not only incorrectly applies the Law of Supply and Demand, but effectively inverts it.

As a consequence, Currencyfair cannot generate its own dynamically adjusting market rates. Its marketplace perpetually encounters matching rate imbalances ('mis-matches'), causing it to 'stick'. It is forced to inject externally-sourced institutional liquidity to shore up its model's performance failings — making it a Peer-to-Principal model in which buy/sell Order trades are executed into an intermediated 3rd-party liquidity rather than the congregated counterparty community's Orders. It is not true P2P.

Wise
Currency Converter — Market Anomaly

The Wise platform does not 'exchange' currencies but simply 'converts' them — as stated in their own Customer Agreement document, Section 11: Currency Conversion. In that they do not exchange, nor maintain a marketplace with a P2P Fintech Engine, means they are even further removed in their ability to generate their own rates or value.

Wise adopts a common 'currency converter' algorithm that scrapes exchange rates from a reference provider such as Google and applies them to money transfers. With no actual buying, selling, or exchanging of currencies — no Orders generated and no matching — there is no transmission of market forces to rate.

As a market anomaly, the Wise model reverses the natural order of markets through the manipulation of supply and demand to fit exchange rates, rather than exchange rates being the determinant — attempting, as an analogy, to make the cart pull the horse. And by fully circumventing the institutional market, it consequently does not contribute to exchange rate valuation as a reflection of cross-border monetary flows — producing an exchange rate distortionary effect.

Section 4

A Next Generation P2P Fintech Exchange Mechanism

The ability to accede to Perfect Market Equilibrium is derived from a Next Generation P2P Fintech Exchange Engine — not a transposed institutional Matching Engine, but one conceived specifically for the new world of dis-intermediated P2P. Configured with the Law of Supply and Demand as its building block, it generates new globally harnessed, directly data-driven mechanism-based global market prices and rates.

Different to flawed first-generation P2P marketplaces — which neither develop the global reach of the internet to harness and transmit global supply and demand market forces, nor are their engines configured to reflect them — the Next Generation Exchange Engine does both.

It has no Quotes — only instantly generated actual market rates. And unlike first-generation matching engines which encounter performance 'mismatches' and fall back into the hands of the institutional market, the Next Generation Exchange Engine, operating at Perfect Market Equilibrium, perfectly self-clears all P2P trades at all times.

As a radically new data-driven, mechanism-based global market valuation, it self-values and self-floats new instantly dynamically adjusting market prices and exchange rates — simply as trades are executed, without recourse to an intermediary's intervention or liquidity.

A new globally harnessed 'collective intelligence', derived from the valuation contributions of all buyers and sellers worldwide rather than a limited number of financial institutions, will always be more efficient and representative. Furthermore, instantly transmitted to price simply as the global collective execute trades, it is consequently a simpler yet more efficient structure — one that values more representatively and adjusts faster.

"The real transformative value proposition of the internet lies not in the dis-intermediation of middlemen, but in the harnessing of global market forces over it."

— The New Economics of Perfect Market Equilibrium
Sections 5 & 6

Breaking Up the Power of the Wholesale Market & Devolved Liquidity

01

Institutional Power Dismantled

Perfect Market Equilibrium dispenses with the need for an intermediated 3rd party's liquidity to facilitate buy and sell side trades. With buy/sell trades now directly executed into each other, institutional control over the market is dismantled. Conventional wholesale price-size advantages no longer apply.

02

A New Devolved Liquidity

Executed buy/sell trades are now directly structured into congregated community Orders — without recourse to an institutional middleman's liquidity. Congregated buy/sell community Orders can now be deemed to be liquidities in their own right, in that trades are executed into each other rather than a facilitating 3rd party.

03

Systemic Stability

If there is no middleman buying from the seller to sell to the buyer on a vast scale, then there can be no risk. This new structure devolves power and redistributes wealth, devoid of risk — a systemically stable and considerably more resilient construct which, with no core risk, can never fail to perform.

Page 2 — The Absolute Free Flow of Money
A New Bretton Woods Moment

The Path of Intermediated Wholesale versus Dis-intermediated P2P

The Bretton Woods conference of 1944 was a seminal decision point in the shaping of the post-war international monetary system. Today, the international monetary system stands at a new crossroads of equivalent historical magnitude.

Set forth at Bretton Woods were two quite different visions of a post-war monetary system — one by John Maynard Keynes of the UK, and the other by Harry Dexter White of the US. Ultimately, the US vision prevailed. The Economist at the time observed that "the world would bitterly regret" not having adopted Keynes's vision — and indeed, some economists argue today that the failure of globalisation and current global wealth inequalities are the result of not having opted for it.

Today, as a result of the digitalisation of money, the international monetary system stands at a new crossroads akin to Bretton Woods. The path opted for will shape the world for decades to come: whether to build CBDC Forex valuation and cross-border payments through the pre-internet structure of intermediated wholesale, or to aspire to the new post-internet world of dis-intermediated P2P.

All existing financial institution-oriented and BIS-promoted CBDC Forex and cross-border payments investigations — in all of their failed wholesale approaches — are the manifestation of an attempt to preserve an antiquated 20th Century institutional control over global Forex markets, in all of its failings and imperfections.

This is indicative of an increasingly post-Bretton Woods, neo-liberal economic system, which — dislocated from the realities of an evolving global structural landscape — seeks through financial self-interest to re-impose itself on a new CBDC world to which it is structurally unsuited.

The Missed Opportunity — Atoned For

The missed Bretton Woods opportunity of 1944 would be atoned for by taking the correct, natural and linear path of dis-intermediated P2P — establishing a new international monetary system which equitably works for all, whilst promoting global prosperity, with no single nation state's currency or platform dominating or controlling.

7.4%
Average cost of global cross-border payments
2–5
Day delays in current interbank settlement
$250T
Estimated global cross-border payment value by 2027
Section 2

Institutional Control — No Economic Benefit to Society

The only economic service of financial institutions to society through their control over global currency valuation and cross-border payments is to facilitate it. They have evolved into this role as a result of having been advantageously positioned as the sole pre-internet conduits by which currencies could be valued and money moved cross-border.

Global economic integration — and the consequent exponential increase in the value of global Forex and cross-border money flowing through financial institutions — has also led to a concurrent, ever-expanding increase in systemic risk.

There is, as a consequence, no systemic banking or economic downside to financial institutions being divested of their control over global currency valuation and cross-border monetary flows. Only new world upsides.

"Cross-border payments are expensive, slow, and opaque — senders may be unable to know when the payment will be settled, and recipients will not know the charges that will be deducted on an incoming credit."

— Bank of England CBDC Discussion Paper, P.19

Central Banks themselves lament the deficiencies of the institutional cross-border movement of money on 'cost, speed, access and transparency' — and have called for a more fundamental paradigm shift to address these challenges in a holistic way, enabled by new technology platforms. Perfect Market Equilibrium is that paradigm shift.

Section 3

Retail CBDCs — A 'Route 1' Build Out with Natural Structural Compatibilities

Since domestic retail CBDC (rCBDC) accounts are Central Bank liability-held and balance-recorded, they provide for a simpler yet more efficient international CBDC monetary system — where a 'Route 1' build out directly between rCBDC Central Bank infrastructures (ledgers) is developed.

Individual rCBDC accounts have a natural structural compatibility with the new Forex and cross-border payments architecture, in that it operates on a P2P or individual rCBDC-to-rCBDC basis. From this structural compatibility, a seamless architectural build out — vastly simpler, yet also vastly more efficient — can be implemented over that of the inter-institutional wholesale CBDC route.

Central Bank recorded digital 'cash' provides for a unilateral global exchange of 'cash' on a new technologically enhanced P2P basis over the internet. This is its natural structural compatibility with post-internet dis-intermediated P2P, and therefore the most logical and preferable build out route.

To pursue the path of wholesale CBDCs is to take an indirect and convoluted route — creating and encountering system-point complexities resulting in friction inefficiencies, as all wholesale CBDC cross-border projects are finding out.

As substantiated by the Atlantic Council: global cross-border payment systems "are costly, slow and complex" — US $23.5 trillion were transferred cross-border in 2020, costing US $120 billion, equivalent to one year of Morocco's GDP.

CBDC Cross-Border Payment Solutions Must Be Genuinely P2P

A value payment directly from the remitter's rCBDC account to the beneficiary's rCBDC account in another country — without a wholesale assembly (FX or cross-border) nor an intermediary performing these services. The underlying approach of nearly all cross-border CBDC projects thus far undertaken are fundamentally wholesale and intermediated in one form or another.

Section 4

The Perfect Netting of Cross-Border Payments — The Absolute Free Flow of Money

Cross Border Architecture Diagram
Fig. 3 — Consolidated and Streamlined P2P Cross-Border Architecture built out through Central Banks

That the new P2P Fintech Forex platform, operating at Perfect Market Equilibrium, never encounters shortages and surpluses — and instantly self-clears all trades at all times — also provides for a new Perfect Netting of cross-border payments, where conventional interbank vostro nostro account debits and credits also never arise.

Domestic payment systems — Faster Payments, FedNow, Eurozone's Target 2 — can now be directly and seamlessly connected at the point of perfectly cleared P2P currency exchange trades, rather than through SWIFT. Only domestic payment systems and domestic account payment details are used.

As a paradigm shift in the construct of global cross-border payments, with no settlement or risk, it can perform instantly and at virtually zero cost — the new global Absolute Free Flow of Money.

This provides for a new Nation State stakeholder participatory architecture — not only in the platform build out of cross-border CBDC payments, but novelly in CBDC Forex valuation as well. Under this construct, the Dollar's Bretton Woods-established hegemony would be dismantled.

Each Nation State would automatically have the right to assume its place as an equitable stakeholder partner as they rolled out their CBDC — with full voting rights. Consequently, no one country's platform would be positioned to assume control of the new CBDC international monetary system, and neither would any one country's currency dominate cross-border payments.

Existing Wholesale Model

Vostro nostro account settlement dating to 13th–14th century Italian banking

Average 7.4% cost, 2–5 day delays

SWIFT dependency and complex IBAN routing

Settlement risk at every institutional node

Thousands of disparate correspondent relationships

Perfect Market Equilibrium

Perfect Netting — no vostro nostro settlement whatsoever

Instant and virtually zero cost

Direct domestic payment system linkage — no SWIFT

Structurally risk-free — no settlement, no positional risk

Consolidated sovereign currency 'Gateway' architecture through Central Banks

Page 3 — CBDC Architecture
A New P2P CBDC Forex and Cross-Border Payments Architecture

Consolidated, Seamless and Frictionless

The new Perfect Market Equilibrium P2P CBDC Forex trading, valuation and cross-border payments architecture at once resolves both wholesale CBDC Forex and cross-border payments configurational and interoperability issues at their core.

The many different cross-border wholesale CBDC projects — currently standing at 13, per the Atlantic Council's GeoEconomics Centre — if rolled out, present a future scenario of a disjointed and fragmented global cross-border architecture, akin to the existing correspondent model.

Governors of the US Federal Reserve have observed that central banks are reluctant to allow central bank money to circulate on platforms they do not control. The looming systemic issue of CBDC platform interoperability is already being commented upon by experts, who note that the industry will need to consider alternative solutions.

Cryptocurrencies — ungrounded in nation state economic fundamentals — are fully speculatively wayward and non-representative of individual nation state economic performance. They pose, despite their disruptive universal frictionless payments capability, a deep global systemic economic threat.

China's M-Bridge's claims to be P2P are definitionally misleading. As lawfairmedia.org notes in their analysis: "The peer-to-peer feature mentioned here is for banks. These transactions are 'wholesale' payments between large financial institutions rather than retail payments involving individual consumers."

As the father means to tractionally assume and accommodate the new market structure, the new integrated and consolidated Perfect Market Equilibrium CBDC Forex and cross-border payments architecture is fully 21st Century online, digital and P2P.

No Interoperability Required

As a new perfectly cleared and netted platform with neither FX nor cross-border payments settlement, it can apply a new satellite architecture to the different CBDC money platform technologies — seamlessly linking them without the need for technological interoperability. Without settlement, there is no technological crossover of systems, and therefore no requirement of interoperability. Whilst seamlessly globally interlinked, each CBDC platform technologically stands alone.

Bolt-On Architecture

A New Nation State Stakeholder Construct — A New CBDC Bretton Woods

The new fully process-consolidated and integrated P2P CBDC FX trading, valuation and cross-border payments architecture — devoid of the complexities of settlement and due to P2P compatibility simplicity — can be globally built out at a fraction of the cost and realisation timeframes of all existing wholesale projects.

It seamlessly accommodates different CBDC platform technologies without interoperability, meaning it can be architecturally built out on a 'bolt-on' basis as respective nation state CBDCs are launched — according to their preferred technology of choice.

Furthermore, there is no relinquishment of settlement control of one country's CBDC to another country's or regionally controlled platform — whilst globally inter-linked and interconnected, there is no settlement. This allays sovereignty money-control concerns and averts the prospect of regionally fragmented CBDC platforms competing against each other for supremacy.

Under the Perfect Market Equilibrium Nation State stakeholder construct, the Dollar's Bretton Woods-established hegemony would be dismantled. The power of intermediated liquidity is dismantled — and so it applies to the Dollar's depth of liquidity as a global currency of settlement.

Each Nation State would automatically have the right to assume an equitable stakeholder position as they rolled out their CBDC, with full voting rights. No one country's platform — such as China's M-Bridge's aspirational global dominance — would be positioned to eventually assume control.

1944

Bretton Woods — The Missed Opportunity

Keynes's vision of an equitable international monetary system was set aside in favour of US Dollar hegemony.

Today

A New Crossroads

The digitisation of money presents a new Bretton Woods moment: wholesale CBDC (preserving institutional control) or dis-intermediated rCBDC P2P (transitioning to a new equitable structure).

The Path Forward

Perfect Market Equilibrium — The Paradigm Shift

A globally equitable, stakeholder-owned CBDC architecture. No single nation dominates. No settlement. No risk. Instant, frictionless, zero cost.

Page 4 — A New Economic System
Section 1 — A New Role for Central Banks

The New Economics of Global Monetary Velocity

"Economic ideas are always and intimately a product of their own time and place... so economic ideas, if they are to retain their relevance, must also change."

— A History of Economics: The Past as the Present, P.1. John Kenneth Galbraith

Evidencing the extent of globalisation and the need for a new economics better able to interpret the new globalised landscape: the growth of daily Forex market turnover from US$1.7 trillion in 1978 to its current vastness of circa US$7.5 trillion in 2022 — with a 60% increase in the last decade alone.

Central Banks have previously entertained the role for themselves as all-consolidating 'Super-correspondents' — but this was unviable and impractical under their antiquated methodological wholesale approach, where the ever-present issue of settlement risk is relayed in a magnified capacity.

Perfect Market Equilibrium and the new Perfect Netting of cross-border payments changes everything — allowing global monetary flows to be routed through Central Banks not as 'Correspondents', but as perfectly netted sovereign currency clearing account 'Gateways' — absolving them of all conventional risk.

With global cross-border payment timeframes able to be adjusted and calibrated on a new instant, delayed minute, hourly, or in extremis daily basis — all according to newly facilitated inter-Central Bank monetarist policy — new economic levers can be applied whilst comfortably operating within existing cross-border timeframe performance capabilities.

Under this new monetarism, the velocity at which money circulates between economies can be further fine-tuned and calibrated on a bilateral currency pairing or multi-lateral currency basis — and further by specific currency segment — from which a new inter-Central Bank macro-economic policy can be co-ordinated on a global, regional, bilateral country and currency segment basis.

Global Monetary Velocity — A New Economic Lever

A faster velocity places more money into the real economy, but less held in Central Bank clearing accounts. A slower velocity lessens real economy money, but increases the transiting account value held by Central Banks. This provides Central Bank policymakers with a new mix of levers and options, with respect to prevailing global economic conditions — radically providing access to new monies from a segment of the global monetary system now vastly larger than the Bond market.

Section 2

A New Source of Public Monies

$27T
Released vostro nostro trapped liquidity (McKinsey, 2015)
$150T
Global cross-border payment value routed through Central Banks (BoE, 2017)
$250T+
Projected by 2027 — rising as global economy expands

Taxation and the Bond market — as the existing means by which society raises public monies, respectively dating back to antiquity and 1694 — are fully pre-globalisation, pre-Forex market expansion, and pre-Perfect Market Equilibrium methodologies and systems.

The first structural economic effect of the new global cross-border P2P Perfect Netting system is to release trapped vostro nostro account balance liquidities into the global economy — estimated at US $27 trillion per McKinsey (2015), as a first release of concentrated wealth held by financial institutions into the real economy.

The second and vastly more significant effect, with respect to re-routing global cross-border payments through Central Banks, is to place within their hands the estimated global value of $150 trillion (Bank of England, 2017), rising to over $250 trillion by 2027.

The accepted conventions of Taxation and the Bond market carry always an offset or compromise. The greater the taxes levied, the greater the burden to society — and the greater the sovereign bonds issued, the greater society's repayment cost.

Under this new technologically enhanced 21st Century Central Bank fractional reserve methodology, there is no offset or imposed burden to society, in that it simply taps into a new vast and ever-expanding pool of money Central Banks now have control of. Furthermore, it is a virtuous circle — the more the global economy expands, the greater the amount of new monies availed to society for its upkeep.

As a new economic system which meets with and is in concert with the new landscape of an integrated globalised economy, it addresses the shortcomings of pre-internet, pre-globalisation theories — and spearheads a new ethical age of globalised prosperity and equality.

Section 3

Changing the Ethos and Moral Compass of Markets

The ability to operate at Perfect Market Equilibrium transitions core market valuation from a traded risk/reward construct to a new neutral, globally harnessed, data-driven one. Dis-intermediation of the financial institution and elimination of risk in global market valuation fundamentally changes the imperatives and driving forces at the heart of the free market system.

Since the market's core of valuation and operational efficiency are no longer governed or bound by the naked pursuit of profit, nor the liberalisation of markets, the ethos and moral compass of markets can be set on a new more tempered, self-interested yet efficient course — one which works in concert with society's aspirations of a fairer and more egalitarian distribution of wealth.

In its entirety, this is the new economic system's ability to meet with and release the promise of globalisation under the dis-intermediated P2P market construct and Perfect Market Equilibrium — where once-concentrated wealth and expanding economic risk fault lines no longer exist.

This is the manner by which the higher state of Perfect Market Equilibrium facilitates the transition to a new more efficient and equitable market structure — and also a new sustainable global economic system, which preserves humankind and ecological life on earth by enabling a fast-tracked transition to renewables, funded by public monies freed from existing systemic public purse constraints.

"Just as globalisation has led to the inordinate rise to power of the financial institution within the international monetary system, so the advent of the internet lends for the dismantling of this power — and its reversion back to basics, as a fractional reserve lender."

— The New Economics of Perfect Market Equilibrium
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Perfect Market Equilibrium represents a new economic theory and applied market paradigm — one with significant implications for global Forex market structure, cross-border payments architecture, CBDC design, and the broader international monetary system.

We welcome enquiries from academic institutions, economic research bodies, policy organisations, Central Banks, development finance bodies, and investors who are engaged with the structural questions this theory addresses.

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