Showing posts with label Alternative Currencies. Show all posts
Showing posts with label Alternative Currencies. Show all posts

Tuesday, 12 August 2014

Much soul, very emotion: Why I buy into the cult of Dogecoin

Please note: This piece was originally commissioned by the magazine MCD, and will be appearing in French in their December edition.

I use Dogecoin because I’m emotionally drawn to the dog. Unlike the distant, fossil-like Queen on the Pound banknote, the Shiba Inu is at once transcendent and approachable, self-contained but cuddly, looking into my eyes with a sideways glance, as if it just noticed me and is wondering whether I want to play or be left alone. It’s not an aggressive dog, or for that matter, a bouncy dog trying to lick me. It has self-directed, quirky soul, and it’s almost impossible to imagine this dog being an asshole.

Some people in the crypto-currency community have written Dogecoin off as a joke, or even a scam.  Maybe it’s both, but does this matter? All currency in the final analysis is really a scam, and the real question is which of those scams we want to agree to. I for one would rather pledge allegiance to a mystical pooch than to worship the image of a redundant monarch.

Indeed, Dogecoin, to me, is the best of all of the so-called ‘alt-coins’, the alternative crypto-currencies that have emerged as offshoots from the original Bitcoin source-code. Here is why.

Money isn’t ‘rational’

Run this question through your brain: Why did people invent pottery?

The response from many people is ‘because it must have been useful to store food and water’, an answer which chimes well with our prevailing rationalistic world view. Nevertheless, not only is the assumption that pottery was explicitly ‘invented’ problematic, but evidence suggests that it was originally used to create abstract religious figurines. The details of such archaeological debates don't matter here - what matters is to realise that we often have an automatic bias towards thinking about history in terms of what we're used to in the present.

Why do I bring this up? I do so because there is a similar problem among many economists who attempt to peddle ahistorical narratives about ‘why people invented money’. Their story normally involves people ‘rationally’ designing money as an alternative to ‘barter’. There is very little immediately rational about exchanging real goods for pieces of paper or shiny bits of metal though. Sure, once the social convention of monetary exchange is set up, it’s useful, but the imagined process in which bakers and butchers ‘invent’ money to deal with the awkwardness of exchanging meat for sourdough loaves is an attempt to reverse-engineer history from the perspective of present dogma.

Money is not an object that can be invented. It is a social convention that has to be culturally constructed. The use of monetary tokens only appears rational once we’re party to a collective agreement (or delusion) to imbue those tokens with value, and that collective agreement needs to be constantly maintained.

State power, local trust, meta-national mysticism and labour

In the case of our normal fiat currency, the collective agreement is given strength by the psychological (and real) force of official authorities. Most of our fiat currency is created by commercial banks, but derives much of its ‘reality’ from state endorsement of its legal status.

In the absence of a state championing a currency, you need other factors to induce collective acceptance. For example, a very small community might be able to create and maintain a local currency backed by nothing but the preexisting communal trust network, woven together from mutual friendships, ties of honour and anxiety at facing exclusion from the social group.

To create belief in a non-national currency that is not located in a small community though, is especially hard. Bitcoin provides a fascinating case study of the process. When it first started, Bitcoin commanded almost no value. It had one crucial feature though. At its heart was a mysterious, almost immaterial figure called Satoshi Nakomoto, a focal point for a community to rally around.

The mystique of Satoshi was vital, imbuing what was otherwise a clever but cold piece of cryptography with a soul that people could believe in. Satoshi was the holy ghost in the machine, and the act of mining resembled a ritualistic quest to build on the blockchain started by the ghost. It’s through this process that the imagined value of Bitcoin came to life, and started taking on a reality.

By contrast, imagine if a well-known person, like Stephen Hawking, invented Bitcoin. It would be devoid of all mystery, resembling a science project or a corporate product, rather than an underground movement. The specifics of Stephen’s personality would replace the cryptic symbol that the Satoshi figure once stood for, and what would you have left? A clever piece of cryptography, and a somewhat banal act of using up energy in running computers.

That said, there is something about the pointless nature of randomly churning algorithms through a computer that is psychologically powerful. If you want to imagine that something essentially ephemeral is a useful commodity, it helps if you expend labour in creating it, because labour implies scarcity (you only need to work for things that are scarce), and scarcity implies a potential for an exchange value (if something is abundant there is no need to exchange anything for it).

The computing power (‘labour’) put into the Bitcoin network does not create value in itself, but is a further psychological backer to Bitcoin tokens’ imagined value. If they weren’t valuable we wouldn’t exert all this labour would we, and because we exert this labour they must be valuable, right?

The emergent myth of Bitcoin’s rationality

Interestingly, as the ritualistic process of mining has become increasingly competitive, and the commercialisation of Bitcoin has steamed ahead, new narratives have formed to explain why Bitcoin tokens ‘rationally’ have value.

Chief among these is the idea, touted by the Bitcoin foundation itself, that bitcoins have value ‘because they are useful’. It is part of a broader trend among the Bitcoin elite to rewrite history and claim, in hindsight, that the value of Bitcoin was always self-apparent, and that early adopters were just getting involved due to rational future expectations of increasing societal recognition of Bitcoin’s use value as a secure means of exchange.

In this formulation, Bitcoin tokens derive their value by being part of a potentially useful system, the value of each bitcoin reflecting the aggregate market assessment of how useful it is to have a secure means of exchange. It’s kind of like arguing that containers on train carriages derive the entirety of their value from the usefulness of the rail network. The implicit narrative is this: Hey, these things are useful as transmitters of value for exchange, so let’s compete over them, and in so doing create their market value, which can now be used for exchange.

Circular no? There may be a glimmer of truth in it, but it’s mostly an attempt to describe the essentially emotional and social process of currency creation with the language of cold individual rationality.

Tin-man currencies ain’t got no heart

This thinking has subsequently influenced the way that a lot of alternative crypto-coins have attempted to market themselves. Rather than embracing their own absurdity, many alt-coins have marketed their efficiency, their security, or their application to some specialist use case, as if the usefulness and competitiveness of the design was the most important aspect of why a person accepts a currency.

The crypto-conference has thus become the realm of ‘serious people’ discussing ‘serious business’, not wishy-washing mysticism and emotion. They appeal to rational functionality, rather than inspiring people to use them. They are techno-fetishistic. A guy with a PowerPoint presentation calmly explains the business case for why his crypto-currency is valuable because it uses a state-of-the-art turbo hashing system, but for fuck’s sake, tell me why I should BELIEVE in it!

It’s true that this strategy has worked to some extent for some alt-coins like Lightcoin, Quarkcoin and Peercoin, which have gained some popularity based on design, but think about this question: Why do you use British Pounds or Yen? The answer to that is never, ‘because they’re well designed’, and neither is it ‘because I rationally see how useful it is for me to have a medium of exchange’, and neither is it ‘because I’m intimidated by the state and they force me to use it’.

Our answer is mostly just ‘because everyone else seems to use it and I was taught to use it’. We are born into currencies just like we are born into languages, and we learn to use them in a social context. If you want to convince a person to accept ephemeral electronic records as a currency, you need a story for people to hold on to. You need heart.

Dogecoin is a cult, and that’s how it should be

Which brings us to Dogecoin. I can believe in Dogecoin because it gives me something to believe in. It’s a direct appeal to irrationality, a direct appeal to transcend the banal world of individual utility calculation and submit to something hilariously absurd. It is, above all, a cult, and that is infinitely more attractive than any cold appeal to robust design.

It is the peaceful, playful gaze of the Doge itself that is the mystical foundation of the currency. It doesn’t matter who invented it, because Dogecoin is not experienced as a narcissistic project of a particular person, and it’s the symbol itself that is the leader. The Doge is a figure without ego, with cross-cultural, cross-gender, and yes, even cross-species appeal. We can all get something from the gaze of the Shibu.

This is reflected in the resultant community that has emerged around Dogecoin, people who refer to themselves as ‘shibes’ and give each other gifts of Doge. While the Bitcoin subreddit has turned into a moshpit of aggressive trolling, Dogecoin forums feel inclusive and accepting, cohering around a surreal world of esoteric slogans and acts of goodwill.

In closing then, a word on design. If there has ever been any clever design in Dogecoin, it’s been in the way the core members have focused on creating a culture from the bottom-up, rather than fetishising currency creation as a technical solution to be marketed from above. The Dogecoin community has grown rapidly in response to community acts that establish a reason to believe in the currency, such as the sponsorship of underdogs like the Jamaican bobsleigh team, and oddball stunts like backing a Nascar racer. 

These are things you can sit in a pub and laugh about, outside conference halls, and that makes all the difference.

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Thursday, 17 July 2014

Breaching the monetary Matrix: Five exercises to help you understand money

(Note: I originally wrote this article for the July 2014 edition of Contributoria, and it is republished here under the following Creative Commons licence. If you wish to use the article, please attribute the original)

"Like everyone else you were born into bondage, born into a prison that you cannot smell or taste or touch, a prison for your mind."

This is a line from The Matrix. Morpheus is explaining to Neo that he’s actually stuck in a nightmare prison-world enslaved to computers. The world is not as you think Neo, but I can set you free, provided you take the red pill.

In some ways Morpheus resembles one of those single-agenda zealots who goes around telling people that they have a certain secret truth that will liberate them, like the guy who corners you in a pub and says, “Don’t you realise we’re trapped in a corporate prison. The Bilderberg Group owns the world’s governments!”

Morpheus, however, is also different to the average conspiracy theorist. The key dynamic in The Matrix is that the power structure he’s trying to reveal is invisible in all ways, an immersive totality that transcends the world of identifiable ‘things’. He spins no tales of illuminati hiding in Goldman Sachs, or secret meetings between elites in Swiss cantons.

The problem with the average conspiracy theorist is that their targets – such as corporations – are too obvious. Corporations may be giant, semi-immortal entities that vaguely resemble autonomous hive-minds bent on cultural hegemony, but they often do it bluntly, pushing cheesy propaganda and brandishing gadgets at us, lobbying politicians, and so on. In the end, there are ways for people to exert influence over them, and they occasionally disintegrate. Corporate power is subtle, but not that subtle.

If anything in the world actually resembles Morpheus’ conspiracy, I’d say it is money itself. Money is extremely subtle. We think of the monetary system like we think of air, or language – as something that surrounds us and that we take for granted. We are born into a monetary system we cannot smell, or taste, or touch, so obviously normal as to be virtually invisible.

Indeed, when we’re asked to describe money, we often give fuzzy, imprecise descriptions, despite the fact that we may use it every day. Even those who work in the financial sector, and who spend all their time designing financial instruments like bonds to steer money from one place to another, frequently cannot tell you precisely what money is. Take, for example, the anti-hero of The Wolf of Wall Street, a hotshot broker immersed in money, but who literally has no idea of what it is, and what’s more, is controlled by it like a puppet.

I find money intensely mysterious, and there are no Matrix-style red pills that can be taken to help one deconstruct it. In August 2013 I published a piece called Riches Beyond Belief in Aeon Magazine, exploring the cultural dynamics of currency. Following that, it occurred to me that it would be useful to develop some more practical exercises and thought experiments to try stimulate thought about particular aspects of the monetary mystery. This article introduces five of those exercises, and I hope that collectively they may help you develop your own ideas. I’ve set them out in a particular order, but you can jump to those that interest you most.

Exercise No. 1: The web of value

This first exercise is a warm up, aimed at situating money relative to other goods. Look around you and try locate a few objects in your immediate vicinity. Perhaps you’re sitting at a desk, and there is a decent Casio scientific calculator, a Parker ballpoint pen, a bottle of Jack Daniels, and an A4 note pad. You’ll also need to have one foreign bank note, and one local bank note.

The challenge, part 1

Pick two of the objects, for example, the calculator and the Parker pen. Your task is to work out a rough exchange ratio between them. How many pens is the calculator worth?

You don’t have to work out an exact ratio, but aim to create a band of likely exchange ratios, testing the outer bounds of plausibility. The calculator is not likely to be worth 10 000 pens, for example, but it’s probably likely to be worth more than 1 pen. Perhaps you say the calculator is roughly worth 4-7 pens, depending on the situation and their relative quality.

You’ll note that you have an intuitive, almost subconscious ability to assess one object relative to another, even if it’s only in very rough terms. What precisely is it about the objects that allows you to make the comparison? Perhaps it’s their perceived utility (‘the calculator can undertake more complex actions that the pen, and it lasts longer’), or perhaps it's the imagined difficulty in creating the objects ourselves (‘the calculator seems to have more complex technology built into it, and is harder to make, requiring more physical or intellectual labour). Perhaps it’s just due to some learned perception of the value (‘Parker is a good ballpoint brand isn’t it?’), or some combination of those factors.

Now that you’ve established one exchange ratio, add another. How many note pads is your bottle of Jack Daniels worth? You will find that these exchange ratios fluctuate even with yourself, depending on what time of day it is and your mood or situation. That won’t stop you being able to make a rough band though: ‘It’s unlikely that I’ll ever exchange a bottle of Jack Daniels for just one note pad, surely it’s worth at least three, but I’d never exchange 200 note pads for a bottle.’

Now create a third exchange ratio, perhaps between the ballpoint pen and the notepad. In doing this, you’re building up a rough network of exchange values, and theoretically there should be some coherence between your perceptions. If roughly 4 good quality pens are exchangeable for a decent calculator, and roughly 3 standard notepads are exchangeable for a good quality pen, it is implied that roughly 12 standard notepads are equal to the calculator. Does that seem plausible to you, or do your perceptions of value have some inconsistencies?

(As a side note, you’ll probably find that your perception of value gets warped by scale, leading to certain inconsistencies. The perceived utility of any object tends to diminish with increased scale, a phenomenon economists call ‘diminishing marginal utility’. For example, you may be able to conceptualise the usefulness that three pens have to you, but it’s probably difficult to conceptualise the usefulness of say, 3000 pens)

The challenge, part 2

Let’s now assume you’ve developed a loose latticework, something like a spider’s web, of these object pairs and the exchange ratios between them. Now take a foreign bank note, a currency that you’re not used to using, and try to integrate it into the network. How many pens would you exchange for 50 Turkish Lira?

Notice something strange? We have some internal intuitive sense that guides us when making a rough comparison between two objects, but there is nothing about a foreign bank note that allows us to make a similar comparison. The truth is that you probably have no idea about how much a Turkish Lira is worth, unless you are from Turkey.

This is something that tourists frequently experience, holding a strange foreign currency in their hands, having little idea of what it should be exchangeable for. What actually happens when you are a tourist? You learn what the currency is worth by observing others and by experience. You slowly calibrate your sense of its worth by seeing examples of goods priced in it.

Now, by way of contrast, take a currency you’re familiar with, perhaps the British Pound, and integrate it into the network. You’ll find that you already have a set of pre-established ideas about the exchange ratios between British Pounds and the various goods. Oh, Jack Daniels is worth about £15 isn’t it? A good quality ballpoint pen is worth maybe £8. An A4 notepad is probably around £3. A scientific calculator is maybe £30-40. Take a look at the ratios between these prices. Do they correspond to the ratios you established in the first part of the challenge?


The point of this is to highlight that the value of modern currency cannot be thought of independently of the economy and people it is connected to. There is nothing about a British Pound in itself that can tell you how many pens it is worth, but once it is installed at the centre of a giant interconnected social network of goods and services, its value gets locked in – at least in part – by that positioning. It becomes like a hub connected to millions of spokes, serving almost as a routing mechanism between them. It cannot exist without them, but also gets much strength from its centrality.

Consider this statement: ‘If bread is worth £1.50 then I’m certainly not paying £10 for a cup of coffee.’ This emerges not from any comparison between Pounds and the goods, but from a known relationship between bread and coffee, expressed via Pounds. In theory then, whether we start off by pricing coffee as £2.50 or £250 doesn’t matter. The absolute numeric value in itself is arbitrary. What matters is whether that in turn plausibly corresponds to the prices of other goods.

The tendency to fetishise the numeric value is one reason why some people fall into the trap of thinking that because 1 British Pound is worth 173 Japanese Yen, the Pound must therefore be worth ‘more’ than the Yen. All it really means is that the starting point of measuring goods in the different countries is different, and when you first arrive in a foreign country, you have to learn the dynamics of the measuring system before you can start to measure goods in it. Thus, in much the same way that choosing to measure something in millimetres rather than centimetres will give you a higher number, the shirt you buy in Japan will display a higher numeric price, but relative to other goods in Japan may present a picture very similar to that in the UK.

Different currencies thus have different baseline price levels. The concept of ‘inflation’ refers to a general change in this baseline, one in which the measurement units become smaller over time, while the ratios between the goods being measured might stay roughly the same. Thus the ratio of £1.50 to £2.50 for bread to coffee becomes £3 to £5 over time. Societies that uphold any currency seem to accept the gradual overall shift as normal, provided it doesn't destabilise the intricate network of relative prices anchored and enmeshed in popular consciousness (most contentious is normally the wage prices that have an unfortunate tendency to stay fixed while overall goods prices rise, leading to worker outrage).

Exercise No. 2: Treasure Island

Some people get concerned by the lack of intrinsic value in the fiat currency described above (It’s not backed by anything!) and instead advocate commodity-based currencies, currencies that are supposed to be valuable in themselves. Gold is the traditional candidate for this, so here is a simple thought experiment to shake up some preconceived notions about the shiny metal.

The setting

Imagine a large island. It has a sizable population, perhaps 50 000 people, but it’s extremely remote and cut off from any trade or contact with the outside world. There is a rich agricultural system built on fertile volcanic soils. There is a good source of energy in the form of underground coal mines. There are ample building materials in the form of timber to build houses. These resources form the basis for a vibrant island economy.

It also so happens that once upon a time, a Spanish raider ship full of gold pieces got blown off course and floated for months before being wrecked upon the island, depositing its a huge stash of treasure. A hundred years later and these gold doubloons have come to form the basis of an island monetary system. They circulate in everyday trade, but a sizable percentage is held by a handful of powerful barons who mostly hoard it in hillside bunkers on the central volcanic cone that overlooks the island.

The scenario

One day the island is hit by a giant hurricane and a tidal wave. 80 percent of the fertile topsoil is washed away, or else soaked with saline water that crops cannot grow in. The coal mines are flooded too, making them largely inaccessible. The trees are broken by the winds. In short, the basis for vibrant economic production is decimated. People are forced to eke out a rough subsistence foraging, or take to the seas in flimsy rafts hoping to find new lands far away.

The powerful barons though, still have their fortified bunkers full of gold on top of the hills.

A question, then. Are the barons still wealthy?


The point of this exercise is to pinpoint where you think wealth is found in society. It is often claimed that gold is a ‘store’ of wealth. In the aftermath of such a storm though, sitting atop the hill, one wonders in what sense any value is stored in the pieces of inert metal that have no immediate utility to the barons. The barons can try to exchange their gold for things, but given the context, are people really going to give away their few precious useful items for pieces of metal?

For much of history, gold has not had much obvious utility value like coal or timber or food might. Ironically, it tends to have most value in situations where it is exchangeable, and it is only exchangeable when there is a general surplus of goods that people need to exchange, and a process of mystification in which elites have imbued the metal with a god-like cultural status. This observation was very apparent to the likes of Adam Smith, who, in The Wealth of Nations, noted that:
‘the poor inhabitants of Cuba and St. Domingo, when they were first discovered by the Spaniards, used to wear little bits of gold as ornaments in their hair and other parts of their dress. They seemed to value them as we would do any little pebbles of somewhat more than ordinary beauty, and to consider them as just worth the picking up, but not worth the refusing to anybody who asked them. They gave them to their new guests at the first request, without seeming to think that they had made them any very valuable present. They were astonished to observe the rage of the Spaniards to obtain them; and had no notion that there could anywhere be a country in which many people had the disposal of so great a superfluity of food; so scanty always among themselves, that, for a very small quantity of those glittering baubles, they would willingly give as much as might maintain a whole family for many years.’

In other words, according to Smith, gold is only valuable in a society where there already are large economic resources built up. Outside of that context, it’s a largely useless decorative item.

Gold thus only ‘stores’ value insofar as it finds itself within a society that upholds a social agreement that it can be exchanged for goods outside of itself that have actual value. In other words, it derives most of its value, or is imbued with value (via a cultural-political process of mystification), from being present in situations where there are large networks of traded useful goods and people who require a medium of exchange. In essence it holds a contingent form of latent or potential exchange value. If the social agreement breaks down, or if the underlying goods disappear, the value of gold largely disappears too, or reverts to its more humble ‘intrinsic’ value of pretty decoration.

To illustrate this once more, let’s imagine the scenario in reverse. Imagine years later you find yourself stranded on this island, now long since abandoned and desolate. You stumble upon the bunkers of gold in the hills. Should you be happy? Perhaps, but only if you’re able to tap into a larger trade network that exists somewhere outside the island. Otherwise, if you want to re-mystify it, you’d better get to work rebuilding a new vibrant island society so that the gold returns to being a ‘valuable’ medium of exchange.

Intrinsic value: Utility vs. labour

Gold fetishists frequently reject what I’ve just said, absolutely convinced that the metal is the ideal form of money because it is scarce whilst having intrinsic value. It sounds superficially plausible, but think about this question: What really happens if something is an intrinsic store of value and is scarce at the same time?

Let’s say rare earth metals for example. Rare earth metals are very scarce, and they are very useful in modern high tech electronics. Does that make them the ideal candidate for being the ultimate form of money? While it’s true that they hold value, it’s also likely that they would soon disappear out of circulation to be used in the things that we normally use them for, like mobile phone parts. The problem about a scarce commodity that is also very useful is that it generally won’t circulate like a currency because people consume it.

Gold doesn’t suffer from this problem because historically it’s not actually been that useful, which is why it can sit in vaults for so long without being sold off for industrial usage. Bitcoin is a more recent example of this, a mystified electronic token that you cannot do anything with in itself, thereby making it strangely useful as a potential means of exchange.

Where gold does differ from fiat currency is in the fact that gold requires labour to create (mining). This does give it a psychological edge in maintaining the appearance of holding value in itself (‘We wouldn’t be mining this if it wasn’t valuable would we?’). Labour implies scarcity, in that you don’t have to work for things that are abundant, and scarcity in turn implies potential for exchange value (sunlight might have infinite use value, but no exchange value because it is everywhere and abundant).

Fiat currency doesn’t seem to require labour to create, and yet does this matter? You might say ‘the British Pound is backed by nothing’, and yet I’m inclined to say ‘Well, nothing apart a network of 63 million people in a productive economy who will accept it, a powerful state, and a banking system with a huge vested interest in keeping it that way. Is it really ‘weaker’ than gold?’

Exercise No. 3: Exiled from Main Street

Here’s a thought-experiment to think about when you’re in a confined space with other people, perhaps your office block. Let’s say it’s a medium-sized building, and you are with 49 other people. For the sake of the thought-experiment, imagine that you have access to a large rooftop space, where there is a rooftop gardening system.

Now let’s imagine that – for whatever reason – all your wallets are taken away as you enter the building, that the doors are then locked, and that the building is then cut off from the outside world. You find yourselves trapped in the space for several months without any access to money.

The question, then. Has your wealth disappeared?


What has effectively happened in this situation is that you’ve been exiled from a broader economy, and placed into a much smaller one, consisting of only 50 people and a small set of resources. You thus find yourself in the very situation that many small-scale communities have found themselves in over the course of history.

In the isolated space of that building, your wealth does not lie in your bank account. In the context of being in the same boat together, your wealth lies in the potential resources available, and in the collective labour and ingenuity that people can bring to bear in obtaining them. Perhaps some people in the building put effort into creating water tanks to capture rain, while others work on the rooftop farm. Some tend to those who are sick, and some create entertaining acts to lighten the mood and improve wellbeing.

Collective human labour might be required to get all the resources necessary for the society to survive, but human labour is situated in individual people, and thus informal systems of ‘keeping score’ emerge in such a society. I did the cooking, can you do the washing later? This gets called ‘reciprocity’. It’s the idea that, provided you’re able to, you’ll pull your weight over time. And if you don’t, people will start to get pissed off with you and try to exclude you from the communal resources.

A healthy system of reciprocity tends to both rely upon and create systems of trust (like the way your local pub landlord might allow you to keep an informal tab based on trusting you). If you so wish, though, you can begin to formalise this reciprocity by explicitly writing down people’s obligations on a collective ledger or list, perhaps a central whiteboard in the building.

Maybe you can even try to quantify the work done, perhaps in terms of hours. I did 5 hours of work on rooftop farming. I thereby claim credit for 5 hours, and it’s written down on the ledger so everyone knows. In essence, that ledger entry is now a claim on the product of the collective labour of the group. My personal ‘wealth’ may come to lie in the recognition that others in the building will pay to that claim, and in their acknowledgement that I ‘own’ it.

Now imagine taking that claim to 5 hours of the society’s labour, currently written up on the whiteboard, and writing it down instead on a piece of paper that can be passed around, traded and owned.

Wait a moment, isn’t that just normal paper currency?

Exercise No. 4: Cracking the commodity illusion of credit money

Note what just happened in the exercise above. A ledger entry – essentially a claim backed by a community – was turned into an object by being written down on a piece of paper that can be owned, and subsequently traded. Our ability to imagine that social (or perhaps political) claim as an object that can be owned, and our subsequent ability to exchange it for an actual good, allows us to imagine monetary transactions as if it were akin to exchanging two commodities.

This imagined physicality of money is perhaps what allows people to believe that it is a ‘store of value’. For something to be a store of value it must be physical right? Even the term ‘money’ sounds physical, a noun used to describe an object, rather than a verb used to describe a process. Here’s an exercise to help destabilise that.

The challenge, part 1

Try to become aware of every time you mention the word ‘money’ in conversation, in thought, in emails, and in general.

Now, try to not use the word ‘money’ for a few days. Instead, every time you’re about to say it, insert into its place a description of its form. For example, when you hand over coins at a store, ask ‘is this enough little pieces of metal?’, and when you’re paying by card, ask ‘do you accept these electrons, travelling through wires?’ You’ll see the cashiers looking at you strangely, because in some sense you’re breaking a taboo by drawing too much attention to the material form of the money.

The challenge, part 2

Now move to a description based not on money’s physical manifestation, but rather on what it can achieve. Regardless of your perception of what money is, we know that you can use it to claim goods and services within a certain geographical boundary. You go into a shop, take out a note, and claim a sandwich, and in so doing pass the claim to someone else.

So try this for a few days. When you see a person driving in a Lamborghini, and you’re about to say ‘that person must have loads of money’, you instead say ‘that person must have loads of claims on goods and services’. When you're borrowing cash from a friend, say, 'hey, do you have some claims on goods and services I can use?' It sounds a bit silly perhaps, but the words are breaking away from the physical form, and instead referencing money to things external to itself. In so doing you are actually pointing out its position in the centre of a socio-economic network.

Of course, you don’t want to have to say ‘claim on goods and services’ all the time. I rather use the acronym COGAS (‘Claims On Goods And Services’). COGAS-UK is what I use for British Pounds, meaning ‘claims on goods and services within the geographic boundary of the United Kingdom’. It’s a claim I can use to draw on the productive power of the 63 million people who accept it. This might seem like a fairly small action, but naming money differently helps you to become aware of the immense cultural and political system that underpins its value.

Exercise No. 5: Fractional electronics

There’s one big elephant that’s left in the room. All the above exercises are aimed at trying to focus in on what money might be to us. This though, is a different question to how money is actually created in modern society. The question ‘how is money created’ is different from the question ‘what is money’, in much in the way that the question ‘how is art created’ is different to ‘what is art’. Monetary reform groups like Positive Money deal with the question of ‘how is money created’ rather than ‘what is it’, and this is a deep political issue. I left this for last because it’s often an issue that distracts people from thinking about the more basic social nature of money, which is required before the creation process can occur.

This exercise really just involves reflecting on three questions:

1) What form does the money in your bank account take?

2) If you were really depositing it into the bank so that they can then lend it out to others, how come it’s still there for you to get?

3) If the bank suddenly took it away from you, would you have legal recourse against them? (e.g. if you woke up to find that Barclays had eliminated your bank account and the money in it, would you be able to sue them?)


The money in your bank account is electronic money, which is to say that it is simply a ledger entry stored in the huge datacentres of commercial banks (imagine huge excel spreadsheets recording account numbers and how much is attributable to each one). They could do the same thing in a giant book if they wanted to – and that is what banks used to do – but electronic ledgers are more efficient, a digital equivalent to the clerks who used to carefully write down how much people deposited, and how much was given out to those who the bank granted loans to.

Now to the second question. Textbooks often claim that banks take deposits and then lend them out to people, but if that were entirely true then your deposits would not be sitting there waiting for you would they? How is it that you can have access to your money when it’s ostensibly being lent out to others?

This is where we get into the realm of fractional reserve banking, the process whereby commercial banks take the base money created by the central bank (technically called M0, which includes the physical cash you may carry around) and amplify (or multiply) it by extending credit greater than the initial deposits they're given, thereby creating new money that exists nowhere else except as an entry in their accounting system (technically called M1-M3). Indeed, electronic money does not exist outside of the banks’ IT systems, but it is the main form of money we use in society, claims which can be passed around, but that cannot leave the system.

Sometimes people are bewildered by the notion that ‘commercial banks create money’. It seems to make it sound like they can create it and destroy it at will. If you have money in a Barclays account though, recorded as a data entry in their IT system, they cannot just take it away from you. It might have originally been created via the process of bank lending, but once it’s released as a legal claim into society, it cannot just be destroyed, any more than an artist can suddenly make an artwork disappear once you’ve got it hanging on your wall. There is a legally-backed reality to the money once its created, and this provides a check against complete surreality of the money supply.

The fundamental nature of the claim that you now own is precisely what we’ve discussed in the earlier sections – a social claim that has value insofar as people will accept it in exchange for goods and services. This would not be any different if the government or god or your neighbour George was creating the money. The politics of fractional reserve banking sometimes get cast as questions about the fundamental nature of money, but to me they are actually questions about whether letting private banks be primary creators of that money is responsible or fair, whether it will eventually undermine faith in currency, and whether it confers on them too much political power.

Red pill

You’re in an electronic money world largely existing in the data centres of commercial banks, and held in place by collective consciousness and power. Whether you think there is anything wrong with that is really dependant on your view of reality. If you truly do believe that money is ‘supposed’ to be gold, and if you truly do believe that only gold has ‘intrinsic’ value, then you’re likely to shit yourself at the prospect of modern money. On the other hand, if you like me see money essentially as having always been a strange, somewhat irrational social contract, your mind should rather move to the political and psychological tradeoffs involved in different forms and creators of money, and the economic distribution effects of different variations on the monetary theme.

Further reading

I hope these exercises have been useful, even if you don’t agree with my conclusions. If you want to go further down the rabbit hole, here is some potential further reading.

My piece Riches Beyond Belief in Aeon Magazine was pretty popular and generated a lively discussion. It explores alternative currencies, and what they reveal about normal currency. If you want to look at how Bitcoin interacts with modern money, and the politics around that, check out my piece, Visions of a Techno-Leviathan: The Politics of the Bitcoin Blockchain, which has also been pretty well received.

For some serious reading, check out David Graeber’s Debt: The First 5000 Years. It's is on its way to becoming a monetary classic. It’s very good at obliterating classical economic myths of barter as the origin of money, and pointing out the deeply intertwined relationship between money, debt, and money-as-debt. Adam Smith is the founder of the outdated myth of barter that Graeber dismantles, but it’s worth delving into Book 1 of the Wealth of Nations to see his ambiguous treatment of gold as money, at once admitting that it’s a construct whilst trying to simultaneously claim that it actually is a bearer of intrinsic labour value. Another classical take comes from Karl Marx, who carries forward some of Adam Smith’s theories of commodity money in Capital (check out Ch.1), but who gets more sophisticated by pinpointing how the money form is locked into a network of other goods, and elevated by them, taking on a certain mystical status.

From that point monetary theories have abounded, but I'd recommend trying to read anthropologists and psychologists rather than the bland rationalistic explanations of the mainstream economics profession. Above all though, the real red pill takes the form of undertaking your own explorations of money, exploring its orthodox and unorthodox forms, and cracking the deceptive shell that society cloaks it in.

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Saturday, 31 August 2013

Adventures in Alternative Currency

I published an epic 4200 word article on alternative currency in Aeon magazine. Take a read if you're having a lazy weekend afternoon and wish to casually reflect on the nature of economic reality. I believe that coming to basic grips with money itself is a good foundation for making further explorations into the financial system, and economic systems more generally. As I say in the article:
"The financial system exists, above all, to mediate flows of money, not to question what money is. Investment banks create financial instruments that steer money from one place to another, with built-in sub-conduits to siphon it back... To draw an analogy with computer coding, we might say that financial instruments are analogous to ‘high-level’ programming languages such as Java or Ruby: they let you string commands together in order to perform certain actions. You want to get resources from A to B over time? Well, we can program a financial instrument to do that for you... By contrast, money itself is more like a low-level programming language, very hard to see or to understand but closer to gritty reality. It’s like your computer’s machine code, interfacing with the hardware: even the experts take it for granted.
The piece has been pretty well received. I'll leave you with some Twitter recommendations, to convince you to read it. The first comes from Izabella Kaminska of FT Alphaville

Wednesday, 26 June 2013

Seeking #futureofmoney interns for help with gonzo finance: Will pay with alternative currency

I've got some alternative currency, and I'm willing to give it to interns who can do part-time work for me to help me with publicity for my new book on global finance. I'm going to be resuming work on the London School of Financial Activism soon too, so there are possibilities to get involved there as well.

Up for grabs: Alternative currency for alternative work
I'd like open-minded people who are keen to learn more about alternative finance. I'll be straight up with you though: Some of it is total drudge work, like trawling through a list of 100 institutions and finding email addresses for them. I have a series of discreet tasks you can volunteer for in exchange for a bounty in certain esoteric currencies I've got from selling my book. Choices include:
  1. Bitcoin: Not only is this an interesting experience to use in itself, but you get to tell people at parties that you're paid in cryptocurrency
  2. Brixton Pounds: I'd like to get at least one South London dweller to do a couple hours for Brixton Pounds
  3. Barter: This option is available for people who'd like a copy of my book in exchange for an hour or two of work

How to apply
My email is in the right-hand column, so ping me message if you're interested. I'm favourable towards slightly outsider, underdog, anarchic types. I'm not so interested in how clever you are, or what extra-curricular activities you did at school. Send me a brief description of yourself, and a (non-finance) Youtube video you particularly like (could be anything), or write a haiku about money. I can then send a list of things I'm looking to get done, and we can start a conversation.

Wednesday, 27 June 2012

The Block-Chain of infinite mystery: What the hell is Bitcoin?

[Note: for my more recent article about bitcoin, see How to Explain Bitcoin to your Granny]

By now many people will have heard about Bitcoin. That’s the global, decentralised, online crypto-currency (check out this Wired Magazine article for some background). You can either buy it on online exchanges, or your can ‘mine’ it by running algorithms that are likely to cause your laptop to catch fire. You can then use it to buy things from vendors who’ll accept it, albeit Sainsbury’s still only accepts British Pounds. There are even mainstream currency traders who actively trade Bitcoin now.

I’ll bet all the Bitcoins I have though, that very few people actually understand what the hell Bitcoin is. I myself do not understand it. Try listen to this guy explain it, and feel your mind frazzle. More than anything, I have the sense that Bitcoin is a cult. A strange cybernetic cult. An anarchic techno-pirate, quasi-mystical collective on a dystopian mission to subvert the global monetary system. I guess that’s why it attracts me, but I’d still like to know exactly how it works.

The Blockchain
One thing I do know is that the Bitcoin network worships something called the BlockChain. I don’t really know what the blockchain is, but it exists on a huge global network of nodes. It all sounds a bit like the Matrix. My friend @Webisteme understands it, and he keeps trying to explain it to me. The other night we were at the Dogstar pub in Brixton and he said various complicated-sounding things like:

1) "It's almost like a section of the blockchain has my signature on it, and then I sign it with your name, and then the whole network agrees that we've done a transaction"
2) "The blockchain is on everyone's computer. The nodes compete to process the blockchain, to create the next piece, which then everyone has to validate again"
3) "The network is so powerful, you'd need at least 50% of the total processing power to override it, and not even the world's largest supercomputer can do that"

I'm not sure if I've quoted him correctly, but I mostly sat at the table and stared at him with a strong feeling of bewilderment. In the absence of a nuanced understanding of the currency though, I come up with my own rough analogy: "Riiight" I say, "So would you say it's a little bit like the Borg in Star Trek?"

Is Bitcoin the BORG?
If you’ve never seen the Star-Trek episodes with the Borg, you can check out clips on Youtube. The clips do have something of a negative spin on them, with the Borg being portrayed as an enormous sociopathic cube bent of destruction. The interesting thing about the Borg though, is that it's an entity which has no leader, its direction being rather a function of all the pieces that make it up. According to WikipediaThe Borg manifest as cybernetically-enhanced humanoid drones of multiple species, organized as an interconnected collective, the decisions of which are made by a hive-mind, linked by subspace radio frequencies.” It is perhaps most famous for the phrase “Resistance is futile”. The analogy with Bitcoin is apparent to see: Interconnected collective? Tick. Hive-mind? Tick. Linked by subspace radio frequencies? Hmm... well, I think it uses internet relay chat. Resistance is futile? Yep, the Feds can attack it, but it doesn't exist in one place so they'd have to attack all nodes at once to shut the system down. Wait a minute, Borg and Bitcoin even have two letters in common - a coincidence?

@Webisteme looks at me from the table. “Um… I guess it’s kind of like the Borg," he says, "The network is very resilient but we’re not really cybernetic drones. It’s mostly guys with big computer rigs and powerful graphics processing cards”.

The mojo of Nakamoto
What strikes me most about Bitcoin though, is how it’s managed to capture the imagination of its users. People cite various reasons why it’s powerful, including how it’s managed to overcome double-spending problems you find with other online currencies. To me though, the real source of its power comes from its mythical foundation story, involving the mysterious character of Satoshi Nakamoto.

Let me explain. Imagine a group of researchers at MIT said "Hey guys, we’ve invented a cool new crypto-currency that is decentralised and resilient. Do you want to try it?" Maybe some people would take them up on that, but it would have no mystery, no intrigue, no dark story about mafia and the CIA. Now imagine that instead of that, a mysterious dude with no traceable identity releases strange tracts onto the web, describing a new currency, and then disappears. That’s exactly what Satoshi did, and it’s the very mystery of his story that makes people want to take part in the first place. It gives the currency soul, and that’s crucial because currency that is not legally mandated needs to be imbued with soul in order to start working. That’s one reason why gold continues to be viewed as a valuable currency: It shines and you can’t really do anything with it, and for some reason humans take that to be a good indication that it has mystical quasi-religious properties worthy of being valued.

Satoshi Nakomoto basically created crypto-gold, and sent all the miners out to find it. He then departed the earth, leaving disciples such as Gavin Andresen to continue the work in his absence (check out this psychedelic video that visualises the activities of the original developers). The elite nature of that exercise is part of the appeal too. Everyone has the potential to get the crypto-gold, but only those who invest the most time and passion will actually do so. I mean, look at this fanatical maniac who will almost certainly burn his warehouse down with his Bitcoin rig. There’s something about the sheer absurdity of devoting huge amounts of computing power to something that has no physical existence which gives power and reality to the currency.

Getting my piece of the Blockchain

I've decided to buy Bitcoins. I want a file on my computer with a bunch of numbers, created by the mysterious hands of the miners, little keys to the blockchain. If only I could enter the network, jumping from computer to computer, navigating my way through the corridors of the blockchain right to the very core of the entity created by Satoshi Nakamoto himself… or herself… or themselves. I'm not sure I could do that, but I have set up an account on InterSango and have just purchased 3.986 Bitcoins at around £4.15 per coin. Now I need to work out what to do with them. Any ideas?

If you want to learn more about Bitcoin, you can go to the main site here. If you want to work on developing it yourself, check out the Sourceforge site here. If you want to see Bitcoin blocks as they’re created check out Blockexplorer, and if you want to monitor transactions as they occur see here. If you want some free Bitcoins, you can apparently get them from this kind Samaritan here. If you want to check out more general info, see WeUseCoins. Good luck, and keep me posted on how it goes.

Monday, 12 December 2011

Suitpossum's Ecologist article No.2: Four strategies of subtle financial subversion

Last week I got published in The Ecologist. The article was called A four-step guide to bypassing high street banks. This is my second article for the magazine (my first was on food speculation), and this time the aim was to sketch out how people might engage in financial protest, not by waving placards, but by changing debit cards.

Many people agree in principle that major high-street banks have too much power, and that they frequently abuse that power. Nevertheless, many individuals don't necessarily have the time, or inclination, to protest about it directly in the manner of the Occupy protesters. There's been a lot of discussion about how to make financial protest more inclusive (including this piece by Kenth Gustaffson on a type of ‘virtual occupy movement’), but perhaps one of the most profound (and often overlooked) forms of protest is to distance yourself from mainstream finance by withdrawing deposits and avoiding using the services.

The article is pretty straightforward. It goes through four (UK-focused) strategies:
  1. You can move your money to a more socially responsible bank like the Co-Operative Bank, or to building societies and credit unions
  2. You can invest savings in socially responsible alternatives, including certain investment funds and specialist investments with environmental or social benefits
  3. If you need a loan, you can bypass the mainstream loan system and engage in peer-to-peer (P2P) finance or crowdfunding
  4. If you want to go bold, you can try detach from the mainstream currency system and use alternative currencies
Bypassing mainstream finance is not necessarily easy or convenient, and it's not a solution to the deeper structural problems of the financial sector. Change though, needs to come from many different angles. Regulatory and policy changes are needed, internal cultural changes are needed, and more competition is needed. Moving your money and getting involved in alternative finance is one way to boost competition, and one way to support sustainable finance innovation. It's an act of protest, but in encouraging financial diversity, it's also an act of creativity.

Please do check out the article. Any comments are most welcome, and I’d dig to hear any other suggestions for alternative strategies that I might have missed.

Saturday, 8 October 2011

The Finance Innovation Lab: Escape to the Country

A few weeks ago a group of wayward individuals met at Waterloo station. We hitched a ride on a train going north into the English wilderness. Bertrand was forward-thinking enough to have brought beers for the journey, a skill he learnt in his 10 years working for Deutsche Bank as a structured equity derivatives trader. Next to him was Ingo. Ingo does things that make my mind hurt, which involves channelling and managing innovation and systems design, in Sweden. Behind me was Neil. He works for the Young Foundation, helping to design things called Social Impact Bonds, ways of allowing private investors to get involved in financing early interventions that might reduce social malladies. He was chatting to David, who specialises in design, and in particular, new means of mapping and visualising the financial sector. Bertrand started talking about social CDOs, and that's when people on the train started to look at us funny. A girl sitting next to me asked me who we were. Um, how do you explain that? We kind of work in finance, but at the same time are trying to disrupt it, alter it, play with it. I gave her my card. "Come to the dark side", I said, "there are cool things going on". Enter the Finance Innovation Lab.

This is me, trying to talk on camera after three days of mind-disruption. We were talking financial reform and innovation, but most of all, the group of 21 of us were all together to discuss and map the potential future strategy and vision for the Finance Lab. The Lab was originally set up to bring people together under the common goal of finding out what a 'financial system that served people and planet looked like'. I'm a comparative newcomer to the group, but in the year or so that I've been hanging around I've seen the fantastic potential the Lab has to connect people, and to promote learning and collaboration. The next challenge though, is how to scale it up to the next level, to bring in new streams of funding, target more people, and incubate more projects. Jen Morgan, Charlotte Millar, Richard Spencer, Rachel Sinha, Tina Santiago, Maria Scordialos, Vanessa Reid and Hendrik Tiesinga set up the frameworks to help us to think about these questions, and then let it run. A particular discussion point concerned the extent to which the Lab should shift from its current role as a facilitating and connecting organisation, to an organisation with a more explicit focus on advocating specific policies. The process of shifting to a more political stance isn't likely to be easy, but that why Chris Hewett has come in to explore the possibilities for 'finance policy for a green economy', with support from the Gulbenkian Foundation, represented at the weekend by Louisa Hooper.

Note the beautiful setting, on the grounds of West Lexham, a fantastic enterprise on an old converted farm. Manager Edmund wants it to be a hub for community empowerment, permaculture, renewable energy and creative solutions for sustainability, so that suited us pretty well. In our crew was Niahm, a whirlwind helping to drive WWF's sustainable food initiative, Tasting the Future - concerned with issues around sustainable food systems. We had Bruce, one of the guys behind peer-to-peer lending site Zopa, and now launching Abundance, a means for retail investors to put their money directly into financing wind farms and solar energy. We had the guys interested in unorthodox monetary systems - including Ben, pushing the boundaries of the monetary reform debate, and Leander, working on nurturing the complementary currency ecosystem. I shared a room in an old piggery with Maxime, representing both France and the socially responsible investment community.


The Fellowship of the Ning
The Finance Innovation Lab is a great space for those looking to get involved in designing a sustainable financial system. The first point of contact for those who are interested in getting involved is the online network hosted by Ning, but the core team is working on setting up a new website with enhanced capabilities. The plans are grand. By 2013, I expect we should own a large part of Canary Wharf. Until then, we get our strength from diversity. It's certainly not just for financialismos. It's for anyone with an interest in sustainability, creative design, systemic thinking, chaos theory, food systems, climate change, social justice, and last but not least, all those who just like causing a little bit of havoc.


Sunday, 22 May 2011

How to get involved in disruptive finance: The Finance Innovation Lab

Trading floors and paneled offices in Canary Wharf look profoundly hi-tech, and yet they are built on blueprints inherited from the past, in some cases the very distant past. Modern financial institutions like to use the language of innovation, and yet they endorse only a narrow conception of innovation, focused on product innovation. There’s very little tinkering with the base level assumptions from which they are created.

To challenge the deep-level normative status quo requires one to move out of the mainstream salons, and into the fringe coffee shops and covert speakeasies. Close to Moorgate station is one such safehouse, down a small alley, behind an austere wooden door. Enter the Finance Innovation Lab.

The Finance Lab initially started as a joint project by the WWF and ICAEW, asking the question “What does a financial system that serves people and planet look like?” It’s now a forum for an assortment of financial heretics, some outrightly so, others more subtly so. The community is partially centered on an online platform hosted by the Ning social networking architecture, and partly on monthly meetings where ideas are presented and workshopped.

On Friday, I attended the monthly brainstorm. The setting is old English, in a meeting room with gilded portraits, but the content was anything but traditional. The session focused on work by David Braid, showcasing his graphic design visualisations of the financial sector as a tool for altering the way people perceive the sector. Ben Curtis was also there to discuss the PositiveMoney campaign that seeks radical monetary reform. The atmosphere is part collaborative, for people to throw around wacky ideas, and part critical reflection, to bring attention to shortcomings in proposed innovations. Friday’s session saw both impulses in action. For my part, I wanted to see David’s financial maps interpreted by graffiti artists on the walls of the urban downtown, and I wanted to see a more robust proposal by the PositiveMoney guys.

In the end, the sessions are not designed to be prescriptive. Presentations are used to set up loose themes as a backdrop for open-ended explorations. Key topics that have developed over the months include complementary currencies, social finance innovations, methods for dealing with complexity in finance, building resilience and dealing with risk, grassroots finance and mutual credit systems, social enterprise and community investment, behaviourial economics, environmental economics and the art of dealing with externalities, crowd financing, religion and philosophical aspects of finance, alternative conceptions of value, alternative metrics of economic wellbeing, and alternative goals for economic systems.

In part, the specifics of what is discussed doesn’t necessarily matter. More important is the fact that you’re able to do it, and to meet others who are doing it. Ideas have a way of fertilising other ideas and creating mutations. It’s the Silicon Valley effect. You hang out with people like Bertrand, Eli, Tav, Nick, Mary, Timothy, Max, Deeti, Giles, Rachel, Jen and loads of others who are doing similar things, and your own ideas get sharpened and informed in light of theirs. 

There’s also no single objective. Some have a particular agendas. Some frame their goals in utopian or moral terms, whilst others are more hard-edged or pragmatic. There's a general sense of trying to make the financial system better. For me though, the objective is disruption, change for change’s sake. I think the true value of these forums is to workshop ideas that can cause shit, for better or for worse, and see if the resultant disruptions, outcomes not strictly known, could potentially lead somewhere worthwhile. I like the idea of a creative dialectic to keep the system on its toes.

Over the next few months I’ll profile some of the movements I've encountered at the Finance Lab in this blog, some of the fascinating thinkers and some of the shit-stirrers. Keep tuned, and sign up.