Showing posts with label money. Show all posts
Showing posts with label money. Show all posts

Wednesday, 1 August 2018

How to Burn Digital Money

This article is published in print format in the amazing Burning Issue Magazine created by legendary moneyburner Jonathan Harris. To pick up a copy of the full 160-page magazine go here

To burn digital money requires an act of arson. You must undertake a mission to an industrial park to burn down the fortified datacentre of a large bank like Barclays. But even if you achieved that, they would have backups, and to fully burn the digital money supply you’d have to destroy all bank and central bank datacentres. Our everyday digital pounds, dollars and euros do not reside in your computer or on your phone. They reside as records imprinted on huge bank-controlled computer arrays, and your laptop or smartphone is just there to interact with those central hubs. 

We can burn cash because we have personal autonomy over it. We can hold it in one hand whilst striking a lighter flame in the other. Digital money, by contrast, is not directly held by us. It is held by those who control the account databases that keep score of it for us.

In the series Mr Robot, the hacker hero Eliot wishes to destroy the digital records of student debt held by EvilCorp. In accounting terms he is attacking the asset side of a bank’s balance sheet – destroying the digital records of what people owe the bank – but the same process could be applied to the data records of bank liabilities, the promises they issue to people, the ‘money’ we see in our bank accounts.

The average person, however, does not possess the skills to bring down entire datacentres through elaborate hacking operations. So are there other ways to destroy your digital money? 

Method 1: Render your account unusable?

One method may be to renounce your bank account somehow, or render it unusable. To attempt this type of action requires you to wilfully destroy all your personal records of your account number and PIN code, and to make sure that you forget them. You may think that this stops you or anybody else from being able to access the money, thereby effectively retiring it from circulation.

An analogous experiment was tried in 2014 when Geraldine Ju├írez tried to burn bitcoins by burning the hard drive that held the private keys that would enable her to control an account on the Bitcoin network. Bitcoin, like digital bank money, is a ledger money system. The ‘coins’ do not reside on your phone or laptop. They are recorded on a public database. By burning her private key, she was attempting the cryptocurrency equivalent of burning a bank PIN code. It didn’t technically destroy the data record of her tokens, but it stops her or anyone else being able to use them.

With normal banks, however, there is a little snag. In the UK, abandoned or dormant bank accounts can be reclaimed by government under the Dormant Bank and Building Societies Act of 2008. Banks are required to transfer money from dormant accounts to the account of the Big Lottery Fund, which uses the money for social projects.

Method 2: Repaying debt or withdrawing cash?

If I was being a smart-ass I could note that another way to destroy digital fiat is to repay debt, or else to redeem my bank deposits for cash at an ATM. The digital bank money you see in your account is created either when people deposit cash into banks, or when banks issue credit. Both of those actions manifest in digital records of money being recorded into accounts, and – by definition – the opposite process of withdrawing cash or repaying credit extinguishes those records.

That doesn’t feel satisfactory though. I’m not really ‘burning’ digital money by lowering the amount recorded in bank accounts. I want to actually burn it, with flames and heat.

Method 3: Burn your own bank!

So here’s one final suggestion. Start your own financial institution. Get a few friends around, turn on your computer, and open an excel spreadsheet. Write their names down in one column. Get each friend to give you £20 in cash. As they hand it to you, put it in a box and then record how much they have given next to their name on the spreadsheet. Now get them to sign a legal agreement which states that they have transferred ownership of the cash to you, but that you have simultaneously promised them the cash back, and officially recorded that promise as a digital record on the spreadsheet.

You now own the cash and they now own a digital IOU promise issued by you, recorded in accounts for them. Now take the box of cash out of their view and throw it onto a fire. This destroys the reserves backing the IOUs you issued, but they need not know this. They may indeed still transfer their IOUs between themselves, not realising or caring that the reserves don’t exist. Now take the computer and dump it onto a fire in front of them. This burns the records of your digital promises. The legal agreement notes that the spreadsheet held the legal record of their money. The spreadsheet no longer exists. Congratulations, you have burned digital money!

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Thursday, 10 March 2016

Money is not a store of value. It is a claim upon value

Note: This was originally published as a response to the Aeon Conversations piece 'What is Money'

Money is not a store of value. It is a claim upon value. This might sound like pedantic semantics, but it is crucially important, especially if you’re trying to alter how it works.

Imagine a Coca Cola bottle with Coke in it. That bottle is a store of value. If I open it and drink the Coke, it will kickstart energy processes in my body and help me to carry on surviving. Now imagine a piece of paper next to the bottle that says ‘whoever holds this is entitled to claim this bottle of Coke’. That’s a claim upon value. If a group of people come to believe in the validity of that claim, the note can be passed around as a means to metaphorically ‘transfer’ Coke value, or - more accurately - to transfer access to Coke value. That’s then a form of money.

The fundamental difference between the note and the Coke can be tested by a simple experiment. Burning them. Imagine I drop the Coke into a furnace and it evaporates away. Nobody can ever drink it now, and we have destroyed value. The note is simultaneously rendered meaningless. It’s just a piece of paper saying you can claim a non-existent thing.

Now imagine that instead of incinerating the Coke, I burn the note instead. The Coke remains, and no value is destroyed. All that has happened it that I’ve destroyed my claim to that value.

Let’s scale this vision up now. Imagine a nation of people with energy, intellect and resources to make things. This is real productive capacity, and it a source of real value in the form of real goods and services. Now imagine a piece of paper that says ‘whoever holds this is entitled to claim goods and services from the people of this nation’. That’s a claim upon value. Now imagine that 60 million people believe in that claim. A network like that is so powerful that it’s in nobody’s interest to not believe in the claim.

That’s pretty much like the British Pound, for example.

And if I take my £10 note and burn it, what happens? I’ve destroyed no value. All I’ve done is destroyed some of my personal claim upon the good and services created within the UK.

That’s an act of sacrifice, because the curious thing that occurs as a result of this is that all the remaining claims become worth slightly more. We call that deflation. So, when the Joker in the 2008 Batman film The Dark Knight burns millions of dollar bills, he’s giving up his claim to the underlying value they represent, and transferring it to others.

Of course, it’s a bit more complex than that, because that act of altering the number of claims in the system can induce all manner of economic activity. This is what we sometimes call ‘monetary policy’. Creating new money claims via credit systems is one means of activating and steering real economic activity producing real value.

And the key players in that are not just central banks, but the entire commercial banking sector. Because really, it’s not like most money claims take the form of physical notes any more. Most are data entries, binary code imprints on hard drives of computers within data centres controlled by commercial banks. The act of creating and moving monetary claims around in such a system is the act of editing databases.

And this poses interesting possibilities for designing alternative forms of money. Change the nature of the database, the rules concerning who gets to create claims, and the rules concerning what a valid claim looks like, and you can alter real economic activity in interesting ways.

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Saturday, 10 January 2015

Show me the real money: Three monetary myths that need busting


This article originally appeared in the December edition of Penguin's ThinkSmarter Newsletter.

Money pervades our everyday economic interactions. But, despite its importance, it is also pervasively misunderstood. Here are three common monetary myths – frequently perpetuated by economists – that need challenging.

Myth 1: Money emerges from barter

Economists often tell a tale about how old communities first used barter to exchange goods and services. Bartering throws up tricky situations. Take as an example a farmer trying to exchange a cow for bread from a baker, a clumsy and difficult negotiation. Thus, according the old economists like Adam Smith, money was supposedly 'invented' as a way to get around that inefficiency and confusion.

This narrative is ahistorical and inaccurate. Anthropologists have long had a much more convincing account: in small communities without money, exchange does not take place through on-the-spot barter. Rather it takes place through reciprocity, the process whereby I give you something now, and then you return the favour over time. In essence, communities develop elaborate systems of score-keeping – informal ‘mutual credit’ systems are created, and if I don’t eventually honour my obligations under that system, I will be shunned from the community.

It is these ‘I owe you one’ systems that are behind the origins of money. Money is an abstracted form of such credit, taken out of the interpersonal context of a small community, and formalised and legalised within a political system.

Myth 2: Money is a commodity, and a store of value

Money is commonly defined as a store of value, a means of exchange, and a unit of account. But if we break it down, we see that money alone does not store value – whatever form that money takes.

Compare a £5 note, £5 worth of coins, and an internet banking screen saying you have £5 in your account. The same concept of £5 can be expressed in paper, metal or electronic form. There is nothing about the physical state of the money that carries the value. Instead, the value is held in the collective agreement of a community to honour what the money stands for.

There have been many cases where that agreement breaks down, for example, in Zimbabwe. In 2008 there was ‘hyperinflation’, a phenomenon where people lose belief in the money. As that belief disappeared, so too did the value of the money, and Zimbabwe was forced to abandon their national currency. The money itself is not the store of value. The community that agrees to uphold money is the store of value.

Nevertheless, people still cling to the notion that money is a ‘thing’ that has an independent existence that we can identify, like oil or rocks. This is the commodity illusion of credit money. Money is in fact a socially constructed, and politically backed, claim on goods and services. While it may have a physical manifestation, it could also exist purely as an accounting entry.

Imagine doing 5 hours of work for a community, and in return getting given a credit for 5 hours, which is simply written down on a central list that everyone can see, saying ‘We acknowledge you did 5 hours of work, and now you can claim back 5 hours from the rest of the community’.

Now imagine tearing that entry for 5 hour credits off the central list, and shaping it into a rectangle piece of paper – like a voucher – that you can pass around to people. That’s pretty much what paper money is right?

Myth 3: Modern money is created by central banks

If you ask many people who creates the money we use, most people say that it's down to the central bank. In reality, the central bank creates only a small percentage of the money we use. The majority is created by commercial banks, via a process called fractional reserve banking, in which they issue IOUs against central bank money. Nowadays these IOUs are electronic, and we use them every time we use internet banking or a debit card.

This means that if you bank with HSBC, your money actually takes the form of HSBC electronic IOUs which exist nowhere else but in HSBC’s IT system. That’s what you use when you pay with a card in a shop. This act of ‘moving’ your digital money is really just one bank telling another bank to change a data entry in their IT system. The central bank exists to back up trust in the system, and attempts to influence the private issuance of electronic money by commercial banks, but it doesn’t control the money supply itself.

Some further reading

If these topics interest you, you might want to take a look at my piece Breaching the monetary Matrix: Five exercises to help you understand money, and my essay Riches Beyond Belief. You might also consider taking a look at David Graeber's Debt: The First 5000 Years, Felix Martin's Money: The Unauthorised Biography, and Nigel Dodd's The Social Life of Money.

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