Wednesday, 25 September 2013

The Grassroots Reinvention of Money

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Written by David Conger (Guest Author) on . Posted in Small Businesses

Digital Cash Changes Everything

Our money itself is broken. Whether we’re talking about the UK, the US, or anywhere else in the world, our money is created by indebtedness to banks rather than adding value into our economy. This causes a lot of problems that have been well explained by an increasing chorus of voices.
Fixing our broken money system isn’t going to happen from the top down. It will come as a result of a grassroots movement in legislative reform, such as the one initiated by Positive Money, and as a result of a grassroots movement in reinventing money itself.
It is actually possible for groups of people to band together and form their own local economies. This is both legal and beneficial. It’s happening in the UK (click here, here, and here for examples), the US (examples here and here), as well as many other countries.

Opening the Floodgates with Digital Currencies

Creating custom economic systems is actually becoming significantly easier with the advent of digital cryptographic currencies, or cryptocurrencies for short.
A cryptocurrency is something quite different than the electronic money used for credit or debit cards. Debit and credit cards are digital representations of money held by banks and credit card companies. Cryptocurrencies, on the other hand, are digital forms of cash. Unlike credit and debit cards, cryptocurrencies provide the same level of privacy as physical cash.
As an analogy, you may recall the days when businesses created and moved around mountains of paper documents. We digitized the documents and the paper went away. We still have the documents. We can still do everything with them that we could before. But the paper is largely gone.
Digital cryptocurrencies digitize cash. When we digitize cash, the bills and coins go away. But we still have money with all the properties of cash–one of them being privacy.

Bitcoin Paves the Way

Bitcoin is currently the most well known cryptocurrency.  Bitcoin is a digital currency and a digital currency system. No one really knows who created the bitcoin system. Its creator appeared on the scene using a pseudonym and disappeared rather mysteriously. But the software he wrote is sheer genius.
The bitcoin software contains a digital wallet for storing and spending your bitcoins. When you digitize money, the coins and bills go away. Your money is now bits. So you need digital wallet software to store and use our money just like we need digital music players to store and use our digital music.
Therefore, the bitcoin software comes with a digital wallet. But in addition to being a wallet, the bitcoin software also does two other things. First, it contains a cryptographic puzzle that produces bitcoins. I won’t go into the details of how that works, but the cryptographic puzzle ensures that it gets harder to produce more bitcoins over time. It also limits the total number of bitcoins that will ever be created to 21 million.
The second thing that the bitcoin software does is to validate transactions. Everyone that installs the bitcoin software essentially contributes some of their computer’s processing power to the bitcoin network. When you install the bitcoin software, it uses the internet to automatically contact the rest of the network. This network collectively validates all bitcoin transactions.

The Watershed Event

A US court recently ruled that bitcoin is a currency and that the government can regulate it. In doing so, they’ve recognized it as a valid form of money. They’ve also established a precedent that can be used by any issuer of a non-national currency.
This decision means is that anyone can now legally issue a currency and it is acceptable as a valid form of money as long as its users agree to transact business with it. Like bitcoin, all currencies must accept government regulation. In other words, issuers must “come in through the front door” and not try to sneak past the laws that apply to currencies. As long as you play by the rules, you can issue a usable currency–but not legal tender–in the US. The same is likely to be true over most of the world.

Where Do We Go from Here?

The advent of digital cash has profound implications for our money and banking systems. In the next two blog entries, we’ll see how new currencies can be used in grassroots movements to provide ourselves with sound money, to create more humane financial systems, and to solve otherwise intractable social problems.
Money and Unmoney
This is the 2nd part of the series The Grassroots Reinvention of Money. You can read the 1st part here.
The advent of digital cash, which we discussed in Part 1, means that anyone can now issue a currency. This week, we’ll look at some of the new forms of money that digital cash allows.

Special-Purpose Currencies

Digital cash enables us to create currencies for addressing specific needs.

Currencies for Business

Large businesses offer cash back or other incentive programs, which are basically special-issue currencies. Cryptocurrencies let any seller issue a digital currency that is branded to their business. This digital cash incentivizes customer loyalty. Examples of this include airline miles, Amazon’s coin, and more.
As cryptocurrencies mature, we’ll see industries using specialized money through their entire supply chains. Business-specific currencies are rapidly becoming big business.

Currencies that Solve Social Problems

Most economic theories say that money is value neutral. The theory goes that, all things being equal, the features of money itself do not affect spending habits. This is false.
Money can influence people’s purchasing decisions. So it is possible to use new forms of money to solve otherwise intractable social problems. These complementary currencies, as they are called, enable anyone to match excess supply with unmet demand in a way that has social benefits. By simply rethinking money, we can create more humane economies and communities without increasing taxes, redistributing wealth, or going into debt.

Local Currencies

Another new form of money that digital cash makes viable is local currencies. For instance, if a local government wants to revive its area’s ailing economy, it can issue a bond as the backing for a local currency. The currency contains digital certificates of bond ownership. So a £20 bill in the digital currency would actually give the holder ownership of a £20 bond certificate. At maturity, the bond could be redeemed for physical cash. In the meantime, it can be spent at local businesses and used as payment for local taxes. This keeps money and value in local communities.
By the way, this same method can be used to issue money backed by gold, silver, or other commodities. The digital cash for a commodity-backed currency would simply contain certificates of ownership for that particular commodity.
While none of these new forms of money are legal tender, they are all legal currencies in most countries. There are a few things that people need to know in order to put local currencies on par with legal tender. But it’s perfectly possible to do business with sound local money rather than inflating national money.

Transcending Money

It’s actually possible to buy, sell, and do business with no money at all. Instead, you use certified digital IOUs that are designed to give the “look and feel” of cash.

Credit Clearing Cooperatives

Credit clearing cooperatives let you issue digital IUOs, called credits, to buy products from the economy instead of using money. You redeem them by selling goods and services in exchange for other people’s credits. You form cooperatives and networks of affiliated cooperatives to build the system into an entire economy. Your credits are a cryptocurrency issued through your co-op, which you can then spend anywhere in your co-op’s network.
In the co-op system, banks don’t create money. Because you’re using credits (IOUs), your “money” is created when you spend it and redeemed when you put value into the system. No debt is needed to create money. The supply of “money” always matches the demand. There’s never a shortage.
Credit clearing co-ops networks are a free market of competing businesses that profit from providing you with economic infrastructure and new investment opportunities. Competition pushes the networks to create the most stable, usable, and valuable system possible.
An excellent introduction to credit clearing is Thomas Greco’s book, The End of Money and the Future of Civilization.

Commercial Credit Circuits

Credit clearing can be specialized for business needs into a commercial credit circuit (C3). C3s enable business to issue insured IOUs (credits) as payment for goods and services instead of obtaining bridge loans.
For example, a housing contractor gets paid when she completes a house. But she must buy materials and pay for labor during construction. A C3 lets her issue insured credits that are guaranteed to be redeemable for actual cash when her customer pays her. If the customer doesn’t pay, the insurance does.
The contractor’s suppliers and workers have the option of cashing in the credits right away (and paying an early withdrawal penalty), spending the credits, or hanging onto them until they mature. If they spend their credits, then those recipients have the same choices.
In the end, everyone in a C3 is guaranteed to be paid in cash. But there are no loans needed and the capital costs are much lower because the insurance is cheaper than an interest-bearing loan. With C3s, businesses can vastly reduce the amount of money they pay to banks as interest.

What’s Next?

We’ve seen that cryptocurrencies provide us with many paths to sound money and lower capital costs. Next week, we’ll look at an example of how we can build more humane, fair, and profitable financial systems.


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