Thoughts on The Future of Money
Money is an informational good: it allows us to quantify worth, to compare the value of goods and services to each other, and to store value over time, in symbolic form. It makes sense then, given the rise of the internet as an unprecedented information sharing technology, that the nature of money itself should come into question.
Over the past few months, I have been following with interest conversations around this theme. At the moment, I can see two different (though not necessarily mutually exclusive) ideas of what the future of money could look like: electronic commodity money, and for want of a better term, “abundance currency”.
I’d like to look at these two very different ideas of money, which both seek to tap into the enormous potential of the internet for redefining what it is, and how we use it.
Bitcoin, or electronic commodity money
Bitcoin is a type of electronic money like none which has existed before it. It is designed to solve some of the weaknesses of electronic currency systems, and as a means to bypass the monetary systems of states.
Bitcoin works as a peer-to-peer network. The nodes in the network collectively keep track of the entire history of all transactions, in the “block chain.” New money is issued into the system to nodes who contribute processing power to the network. This is done through a proof-of-work system, where each new “block” of transactions must be encrypted up to a certain standard of difficulty. The first node to solve this problem is awarded a batch of Bitcoins. The difficulty level of the cryptographic problem the nodes must solved is automatically adjusted periodically, to ensure a constant rate of inflation.
Bitcon’s inflation is programmed into the original source code, which all of its users have access to. It is set to issue 21 Million BTC, at a declining rate, over the next hundred years. Participation in the network implies acceptance of these rules. Every new Bitcoin transaction is checked against the history of transactions, to ensure that the sender actually owns the bitcoin they are spending. This ensures that there is no double spending, or other hacking of the system.
What is in my opinion revolutionary about Bitcoin is its combination of decentralization and anonymity. You don’t need to declare who you are to spend and receive Bitcoins. Furthermore, since nobody, including the architect of the system, can control either the record of transactions, or the rate of inflation, it is truly the world’s first peer-to-peer money. It would take immense computational resources to stifle the Bitcoin network. What’s more, the anonymity of transactions makes it extremely difficult to control or regulate.
The Bitcoin economy has been growing steadily since the currency began in 2009. As a decentralized currency born out of the crypto-anarchism movement, it tends to appeal to a certain breed of right-wing libertarian hacker. Freelance software coding contracts, web hosting services, casinos and credit cards are among the items which can be purchased with Bitcoin.
Obviously, a powerful feature of Bitcoin is the fact that it cannot be controlled. Austrian economists, who tend to place the value of money in its scarcity, will find in it a potential digital counterpart to gold. Like gold, there is a limited number of Bitcoins which will ever exist, and there is a financial cost to mining them. These factors are under nobody’s control, meaning Bitcoin is largely immune to potential government interference.
Bitcoin is an immensely interesting project. We could potentially be witnessing the first of a new type of currency, more suited to the world of science fiction than to the world today. In this new world, money would be a stateless commodity, produced through peer-to-peer networks under nobody’s political control. A competitive free market in currency would give users the option to choose between currencies with different rates of inflation, use and acceptance, and long term viability. In other words, this starts to look like a crypto-anarchist’s utopia. The project could, of course, fall prey to government crackdown: questions remain open about its legality, and its susceptibility to enable money laundering.
We should be excited, at least in part because Bitcoin offers a novel solution to the age-old political problem which goes hand-in-hand with the ability to issue money. However, even if Bitcoin thrives, it is still an opt-in currency which no one is forced to use. We may be interested in looking at alternative ideas of how money could work, and evaluate those along side it. We might find that Bitcoin satisfies certain needs, while new types of money are called for for others.
The (imminent) birth of abundance money
Bitcoin rests on a conception of money as a commodity, which must remain scarce in order to maintain its value. Abundance money, or meta-currency, goes in a different direction. Discussions about what abundance money might be and how it could work are still in course.
How might a currency be based on abundance, rather than scarcity? This seems paradoxical, in light of what Austrian economists believe about scarcity as a necessary condition for the underlying value of money. Well, the Austrian view is not entirely wrong but it is limited in its appreciation of the way the internet is transforming the way we collaborate, share and interact.
Abundance currency is based on the idea that money as it is traditionally conceived can be partly transcended. That is: we can satisfy more of our needs and desires through non-market transactions, in a “gift economy.” This type of behavior is already happening online, in the context of open source software projects, amongst others.
What we can observe about open source collaboration is that it too is entirely opt-in. Nobody is compelled to contribute. There is very little “friction” between coming and going. Contracts don’t need to be negotiated up front: a person simply demonstrates the value they can bring to the project by producing, rather than negotiation. This spirit of “mucking in” and not waiting to be told what to do is what makes collaborative projects a joy to work in. They have very little need for management. What’s more, through a self-selecting process, everybody ends up doing what they want to do.
The discussion about abundance currency can best be understood in this context. While open source collaboration, sharing content on the web, and helping each other for no fee is nice and rewarding, there is an open question about how such contributions could be quantified and rewarded.
Various metrics already provide some clue: the number of posts for a forum user, the number of code commits for a software developer, the influence of a blogger or the number of retweets or votes for one’s content. These are all useful concepts, and the age of measurement is in some respects still in its infancy. There is still widespread debate about what influence means in the context of the web, and how we should go about measuring it, for instance.
It is an inspiring goal to try and reach. In a world with abundance currencies, nobody is prevented from working for a living because of a limitation in the amount of money available. New money is created in the appropriate currency whenever someone contributes something of a value according to a community’s shared criteria. Such measurable value could presumably be stored, traded, or used to buy other goods and services, just like any other kind of money. Creating new money in this way is not necessarily inflationary. To understand why, we can take a leaf out of the book of Keynes (The General Theory of Interest, Money and Employment.) Expanding the money supply, Keynes realised, is not necessarily inflationary if there is spare capacity in the economy, such that the new money is used to productively employ resources, including labour, which would otherwise go unused. What this boils down to is that you can have a money supply which expands commensurately with an increase in output, without inflation.
Abundance currencies would therefore offer true abundance: there is always as much money as a society needs to produce, since new money can be created to reward new work. Like Bitcoin, because abundance currencies would exist beyond state sanction, they work as opt-in systems. The coercive element is gone; nobody is forced to participate. This imposes free market discipline, to an extent, on the creation of new abundance currencies. The terms must be agreeable to participants, or they may not accept it.
A final point I take away from the abundance currency discussion, is that such a paradigm doesn’t merely present us with a new type of money. It also proposes that we rethink our relationship to money itself. We are free to examine whether or not we need money to satisfy our needs and desires. We could decide to push back against the the rising tide of market ideology, which suggests market mechanisms as the main way to meet our material and productive needs. We are free instead to look to gift economies, lubricated by the abundance currency, favour economies and other mechanisms to get what we need. We are free to want less – the need for money no longer dictates how we would like to live, work and share, but the other way around.