Sovereign Capital Securities (SCS) White Paper v0.3
From Government Bonds to Sovereign Capital
Sovereign Debt-to-Capital Swap
Preventing the Perpetuation of Debt by Converting Liabilities into Capital
⸻
Executive Summary
Sovereign Capital Securities (SCS) are a new type of national security designed to shift government financing from a debt-based fiscal model centered on government bonds to a capital-based fiscal model incorporating Sovereign Capital Securities.
The most significant feature of SCS is that they carry no obligation for principal repayment, nor do they carry any obligation for fixed interest payments, unlike government bonds.
Instead, SCS holders are provided with the opportunity to receive capital returns determined based on factors such as the nation’s economic and fiscal conditions.
Therefore, SCS aims not for the
perpetuation of government bonds
, but for a
system to convert the debt known as government bonds into sovereign capital
.
⸻
1. Basic Structure
The basic structure of SCS is
Government Bonds → Sovereign Capital Securities
.
For example, when targeting existing government bonds worth 100 trillion yen,
Conventional
100 trillion yen in government bonds
↓
Maturity
↓
Repay 100 trillion yen + interest
↓
Issue new 100 trillion yen in government bonds if necessary
becomes the process.
With SCS, we aim for a structure of
100 trillion yen in government bonds
↓
Exchange/Convert to SCS
↓
Extinguish government bonds
↓
Form 100 trillion yen in sovereign capital
.
We call this a
Sovereign Debt-to-Capital Swap
.
⸻
2. SCS are Not Perpetual Bonds
To distinguish SCS from government bonds, the following principles apply.
Item Government Bonds SCS
Principal Repayment Obligation Yes No
Maturity Yes No
Refinancing May be necessary Unnecessary
Fixed Interest Payment Obligation Yes No
Capital Returns None Possible
Voting Rights None None
Ownership of the State None None
Market Trading Possible Possible
Therefore,
SCS ≠ Perpetual Bonds
.
Rather, we aim for the positioning of
SCS = Sovereign-specific Perpetual Capital Securities
.
⸻
3. Capital Returns
SCS require an economic incentive for investors to hold them.
Therefore, instead of fixed interest, we introduce a mechanism called
Capital Returns
.
Capital returns can be determined by referencing economic and fiscal indicators such as the following:
• Nominal GDP growth rate
• Real GDP growth rate
• Growth in tax revenue
• Net assets of the nation
• National economic growth rate
• Other indicators defined by law
However, what is important is to
separate the linkage to indicators from the government’s legal guarantee of payment
.
For example, it is possible to form expectations such as
“If the nominal GDP growth rate is 3%, the benchmark capital return rate for SCS will also rise within a certain range.”
On the other hand, the government does not bear the obligation to pay a fixed amount every year.
⸻
4. Determination of Capital Returns
As a basic model, we adopt an
indicator-linked, non-guaranteed type
.
For example,
Benchmark Capital Return Rate = Calculation rate based on national economic indicators
.
However, this is not “interest.”
It is positioned not as a fixed debt claim against SCS holders, but as a return accompanying the holding of sovereign capital.
Through this, we distinguish between
Government Bonds = Fixed Debt Service
and
SCS = Capital Returns based on the results of the national economy
.
⸻
5. Why Would Investors Hold SCS?
SCS will have different investment rationales than government bonds.
The main elements are:
1. Being a security issued by the state
2. Being perpetual capital that does not assume principal repayment
3. The possibility of obtaining capital returns
4. Being tradable in the market
5. Being divisible down to the smallest currency unit
6. Being able to share in the growth and profit opportunities of the national economy
In other words, investors will engage in a new investment behavior of
“holding sovereign capital”
rather than
“lending money to the government.”
⸻
6. Minimum Unit
SCS are divided down to the minimum currency unit.
In Japan, we set
1 SCS = 1 sen
.
100 SCS = 1 yen.
Therefore, transactions of less than 1 yen become possible.
When using an electronic ledger, we will build a mechanism that allows SCS to be transferred and traded unit by unit.
In this respect, it has properties closer to digital securities and crypto-assets than conventional government bonds.
⸻
7. Total Issuance
The total issuance of SCS shall be based on the
cumulative outstanding balance of deficit-covering government bonds
.
However, the entire amount will not be supplied to the market at once.
It will be issued in stages in line with exchanges for government bonds or the redemption of government bonds.
Therefore, we will transition from a mechanism of
refinancing government bonds with new government bonds
to a mechanism of
converting government bonds into SCS
.
⸻
8. Exchange Ratio with Government Bonds
In the basic model, we start with
1 yen face value government bond ↔ 1 yen equivalent of SCS
.
However, in the actual system, it is also necessary to consider exchange methods that take into account:
• Market price of government bonds
• Remaining maturity
• Yield
• Market price of SCS
Therefore,
1:1 exchange
is a reference model for system design and does not imply the final exchange price.
⸻
9. Government Bonds Held by the Bank of Japan
In Japan, the Bank of Japan holds a large amount of government bonds.
Therefore, when introducing SCS, there are multiple options:
A: Convert government bonds held by the Bank of Japan into SCS as well
B: Exclude holdings by the Bank of Japan
C: Perform separate processing for holdings by the Bank of Japan
Since this significantly affects the total issuance of SCS and the balance sheets of the government and the Bank of Japan, an independent system design is required.
⸻
10. Market Price
SCS prices are formed in the market.
Therefore,
1 SCS = 1 sen
is the “minimum unit” and does not mean that the market price is necessarily fixed at 1 sen.
This point is an important change from the conventional “1 yen fixed-type government stock.”
The market price of SCS can fluctuate depending on:
• Economic conditions of the nation
• Expectations for capital returns
• Financial market conditions
• Supply and demand
Whether the government guarantees the market price also needs to be decided as a separate system.
⸻
11. Sovereign Capital Securities and Crypto-assets
SCS are not crypto-assets themselves.
However, they can incorporate properties common to digital assets, such as:
Fractionalization
Electronic transfer
Market circulation
Programmability
Therefore, SCS aims for a new category of
Government Bonds + Capital Securities + Digital Securities
.
⸻
12. Formation of Sovereign Capital
The ultimate goal of SCS is not simply to change the numbers of the government bond balance.
What is important is to
change the structure of financing on the national balance sheet
.
Conventional: Tax Revenue + Government Bonds
After SCS introduction: Tax Revenue + Government Bonds + Sovereign Capital
And in the long term, we will examine the possibility of transitioning to a fiscal structure centered on
Tax Revenue + Sovereign Capital
.
⸻
13. Why This System is Fundamentally Different from Government Bonds
Government bonds are
securities that raise current funds with the government’s promise to repay in the future
.
SCS are
securities that raise current funds as sovereign capital without the premise of government repayment
.
This difference is the core of the SCS concept.
⸻
14. Basic Philosophy
SCS is
not a system to perpetuate government bonds.
It is a system to convert the debt known as government bonds into sovereign capital.
And to make that conversion possible, we combine the properties of:
• No principal repayment
• No maturity
• No fixed payment obligation
• Capital returns
• Market circulation
• Divisibility into the smallest currency unit
⸻
15. One-Sentence Definition of SCS
Sovereign Capital Securities (SCS) are sovereign-specific perpetual capital securities issued by the state that carry no obligation for principal repayment or fixed payments, and offer the possibility of receiving capital returns based on the nation’s economic performance.
And the central phrase of this concept is
Sovereign Debt-to-Capital Swap
“From government bonds to sovereign capital.”