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MyCHIPs Digital Money

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At this point, the more statist readers are having a panic attack because they just can’t fathom the thought of interacting with a “bank” that is a small business. Many people would feel more comfortable with “Wells Fargo Bank” than say, “Steve’s Credit and Trust.” However recent history would suggest, this instinct could be somewhat misguided.

Admittedly, you would not want to trust your deposits to a bank with a questionable reputation. But when it comes to creating a recorded lien to secure a documented debt, it is not really rocket science. Any lawyer or title company can get it done just fine. And if you provide the proper documentation, others can reasonably evaluate the quality of your security.

However, the world is full of crooks and cheaters, both inside and outside the traditional banking industry. And they are bound to find their way to the MyCHIPs network to try to somehow steal value if they think they can. So we should take other prudent steps to make network credit even more secure. One of those steps involves auditing.

At least two forms of possible auditing are contemplated. The first, we will call “voluntary.” As a credit certifier, either for yourself, or for others, you could voluntarily hire someone to audit your collateral from time to time. The best auditors to use would be those who had already established a great reputation, and a history, tracked by the system, of accuracy and objectivity.

Auditors would review the public information about security collateral and compare it to other information they may have, such as comparable sales, market trends, and so forth. They might fully endorse the valuations published by credit certifiers, or they might have a different opinion. Their valuations would give another important and objective opinion about the quality of your credit. If you are willing to issue money in a ratio, and according to standards consistent with their recommendations, your own quality rating will be much higher.

You might ask: what if the credit certifier and the auditor are in league together to cheat the system? First, it would be difficult for an auditor to maintain any kind of long-lasting, positive reputation if he makes such compromises in his work. And a brand new auditor won’t have a valuable reputation anyway. But let us consider the case, in order to discuss a second possible kind of auditing—freelance.

A freelance auditor would scour through the network looking for public credit security he thinks might be questionable. This could be due to fraud. It might be because of sloppy work in documenting or recording liens. Or it could just be, the value of a property is depreciating over time and more recent valuation data needs to be taken into account.

Some freelance auditors might seek out and report faulty securities just to improve their own reputation. Then, they could use that reputation to get more regular jobs as a paid auditor. Or, in a fully developed MyCHIPs network, they could do it for profit by short-selling as follows:

Once a flaw in the issuance was detected, the freelance would seek to borrow a number of existing CHIPS, specifically issued against the over-valued collateral. He would then sell those CHIPs or, in other words, trade them for other CHIPs with a higher quality rating. Next, he would then reveal the flaw, and fully document it according to standard MyCHIPs procedures and protocols. This would cause the quality rating to drop, and with it, the demand for the targeted CHIP issuance. At the new, lower rating, the auditor could then purchase (or trade for) enough CHIPs from the targeted issuance to repay the CHIPs he borrowed in the first place.

If he is skillful in his analysis and trades, he could provide the market with a needed correction, and earn some money for himself in the process. Maybe a lot.

This may seem unduly harsh to some. An uncompassionate, greedy freelance auditor has just revealed a potential weakness in someone’s issued credits. Now everyone who was holding that issue just lost some potential value, due to the new, lower quality rating. And to make matters worse, he earned a profit in the process!

But that’s the beauty of the free market. Left to their proper function, the natural feedback mechanisms inherent in the laws of economics provide a regulating function. They solve problems while they are relatively small so they don’t become “too big to fail.”

It is true: Having an auditor successfully reveal a flaw in someone’s valuations can strike a painful blow to their reputation on the network. But if companies start to issue credit dishonestly or even carelessly, it can be dangerous to others they are trading with. So we should want to know as soon as possible if a credit representation is less reliable than we might have thought.

We should also remember, most people won’t be exposed to this kind of auditing. It only works for companies who are seeking widespread acceptance of their credit or, in other words, borrowing from the public. Those of us who are quietly existing on the network as consumers will be subject only to the private credit relationships we have established.
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