As a thought experiment, consider the following question:
How do I go about preserving my wealth such that no one (person or committee) can destroy it?
Ideally, you could purchase a small amount of every tradable entity (commodities, stocks, existing currencies…) in the world; regardless of the fluctuations in value between the existing securities, your relative purchasing power would remain constant.
This is impractical, but we have a financial instrument that crudely approximates it: the mutual fund. Purchasing shares in a mutual fund is equivalent to purchasing a portion of the pooled securities and, in the “open-end fund” case, you can exchange your shares in the fund for your share of the underlying securities any time you want. [1]
Most funds are at least partially actively managed, which is another way of saying that the manager is trying to consistently outguess the market. There is strong theoretical [2] and empirical support for the theory that most actively managed funds will fail to do so.
The alternative to active management is to peg the fund’s underlying pool of securities to an index: typically a list of about 100 to 500 publicly traded companies published by a committee who periodically tweaks the list to keep it representative of the economy as a whole. Index funds generally outperform actively managed funds but can still show surprising variance - the NASDAQ composite notoriously peaked and crashed during the 2000 dot-com bubble.
Building a Better Index
There are a few things that can be done at scale to reduce variance in the value of the index and prevent deliberate manipulation:
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Assemble an initial list of all the publicly traded companies at several, international stock exchanges. (Perhaps with some minimum valuation and/or maturity requirements.)
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Draw a very large number (say N = 1,000) of companies at random from this list to form the initial index. The companies can be drawn from a uniform distribution, or via some capitalization weighted or float-adjusted distribution. (Other strategies exist, but may be more difficult to automate.)
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Periodically rotate (say every quarter) companies in and out of the index by replacing some small fixed percentage of the current companies with new companies randomly selected from the stock exchanges. It may be the case that it is more practical to sell off currently held stock and acquire new stock over a period of time to help avoid demand and supply shocks.
N.B. The weighting of the distribution that the companies are drawn from can be different than the index weighting, i.e. how much of each company to acquire. There is a strong case that the index weighting should be capitalization or float-adjusted, as this obviates much of the the need to rebalance holdings as prices fluctuate. These weightings are also insensitive to a stock split or merge. In contrast, other common index weightings such as price-weighting do not have this property; for example, a 2-for-1 split would halve a stock’s index weight, all else being equal.
The resulting “random world index” is low variance, closely matches the economy as a whole, and is fully automatable drastically reducing opportunities for manipulation or human error. Some trusted party would have to certify that the random selections are indeed truly random and drawn from the appropriate distribution, but such a task could probably be taken up by existing credit rating agencies.
Given the potentially large number of stocks, it may be impractical to implement the index exactly. However, credit rating agencies can supply a “tracking” rating, in addition to, or as a component of a traditional credit rating. Any party that wishes to implement the index simply acquires enough shares to meet an appropriate level of “tracking”.
Providing Liquidity
Like all mutual funds, such a fund supplies equity to its investors. With some additional bookkeeping, it can also offer liquidity.
Define a “unit” to be a portion of the fund equal in value to the average share of the index (i.e. N “units” should be redeemable for exactly 1 share of each company in the index). This allows “units” to act as a unit of account, independent of any nation’s fiat currency. Note that by this definition, stock splits or merges act as a sort of “micro re-denomination”; for example, with N = 1,000, with all equally valued companies, a single company executing a 2-for-1 split would lower the overall value of the “unit” .05%. To properly preserve a stakeholder’s original account, the number of units they own would have to be rescaled appropriately. With modern computing power, this is not difficult.
With public-key cryptography, units - or any fraction thereof - can be easily and securely transferred between parties. Exchanges between different unit funds can be resolved by contracting a clearinghouse.
With this infrastructure in place, the “unit” acts as a store of value, a unit of account and a unit of exchange - by all standard accounts, money. The only remaining step is convincing people to accept units as payment.
Motivation
The motivation to build and maintain a “unit fund” is straightforward: stocks pay dividends. The managers of unit funds can use dividends to pay for overhead, and reinvest the rest by purchasing additional stock. By guaranteeing stakeholders a percentage of the new units created, “unit funds” can mimic the interest that banks currently provide. However, this might not actually be necessary - historically, merely holding stocks offers much higher average returns.
The acceptability of units as payment for goods and services depends on the average consumer’s tolerance for higher volatility in exchange for higher average future value (compared to fiat currency). However, the international nature of units combined with the larger number of backing corporations should provide much lower volatility compared to a traditional index fund. And should units need an even larger pool of securities, commodities can be added in addition to stock.
More quantitative research is needed.
[1] Technically, you have the right to sell them back at the current net asset value in exchange for cash. Barring transaction costs, this is equivalent.