A Broader Definition of Currency

Money and currency are considered synonymous, but a broader definition of currency gives an interesting perspective on the current financial crisis, as well as the next wave of currency innovation.

The Difference between Money and Currency

In a recent panel discussion called “Monetizing Intangible Capital” at the Future of Money conference (Feb 2011), Art Brock drew an interesting distinction between money and currency which I had not heard before. Brock suggested that a currency could be regarded as any symbolic representation of value, issued according to a set of rules:

I use the word currency distinct from money. Normally in every day speech we collapse the two. But monetary currencies or money is a subset of the overall range of currencies that we have. For me, something like “Certified Organic” is actually a currency. There are rules by which it’s issued. It changes value flows. It changes the way people shop. It changes the way production is done.

Art Brock, Monetizing Intangible Capital

According to this view of currency, money is just one type of currency which is fungible, enabling it to serve as a medium of exchange and a store of value. Symbols like “Certified Organic,” “Fairtrade,” or “AAA-Grade investment” or even “CNN” are all currencies too. Their issue is subject to rules which give them meaning, usually by the organisation which owns and operates the currency.

Brock suggests that one of the functions of a currency, in this broader sense, is to “change the way value flows.” The existence of the “Certified Organic” sticker on an apple makes visible an otherwise intangible part of the apple’s value. Consumers are able to factor in an aspect of the product they wouldn’t have otherwise known about, or perhaps valued – its organic production. Currencies of the broader sort have the power to change the way people perceive and value goods and services, and hence change patterns of consumption and production generally.

Brock’s distinction between money and currency is not entirely new. The ancient Greeks held a similar view. Diogenes the Cynic, a Greek philosopher and vagrant in the 5th century BC, famously called for the “defacement” of all currency. Diogenes was the son of a money changer, but meant more than “money” by the word “currency”. According to Peter Marshal:

The Greek for currency was nomisma, derived from the word Nomos (custom). Since Diogenes felt that the standard of society was wrong, his call to deface the currency represented an attack on all prevailing customs, rules and laws.

Peter Marshall, Demanding the Impossible

The less frequent use of the word “currency” – to describe an idea, belief or opinion which has common acceptance, also casts light on this broader definition of currency. Our currencies are, after all, symbols of value issued according to rules which have common acceptance.

Why do we need currencies?

After pondering Brock’s distinction for a while, I got thinking about the reason why currencies came into existence in the first place. It seems that symbols like “Fairtrade” or even brand names like “BMW” solve an epistemological problem faced by people having to make quick, accurate decisions based on limited knowledge of a complex world.

Our capacity for knowledge is limited in the first instance by sheer scarcity of attention. We don’t have enough time in the day to personally inspect and evaluate the production process underlying each good or service we consume. Additionally, and crucially for a democratic society, the degree of technical expertise in any domain of knowledge, from organic farming to finance, is beyond the grasp of the average citizen. There are very few people who know how to operate nuclear power stations, for instance. Yet, if we are going to rely on nuclear technology, we need to come up with a way of knowing who to trust, even if we don’t share their expertise.

It seems that we have invented currencies as a kind of social heuristic to solve these epistemological problems. By navigating our decisions with the help of currencies, we turn the knowledge problem into a trust problem. Rather than thinking about whether this apple really is produced organically (not to mention defining what “organic” means exactly,) by using the “Certified Organic” sticker we trust the organisation who regulates “Certified Organic” to do the job for us.

The trust problem which currencies give rise to is technically easier for us to solve than the knowledge one. This principle seems to be true of almost any currency you can think of. Take, for example, a car brand name like BMW. The value of the BMW symbol is a largely dependent on the quality of the cars to which it is attached. Consumers benefit from not needing deep knowledge of motoring and car manufacturing – they use “BMW” as a kind of short-hand in this regard – turning the absence of knowledge into an issue of trust towards the BMW brand.

When currencies go wrong

Brock’s distinction between money and currency also provides a powerful lens though which to view the ongoing financial and economic crisis. In many ways, there is a theme of “currency breakdown” where numerous, interdependent commonly accepted currencies failed to accurately reflect the underlying value they were supposed to represent. (The fact that such currencies still enjoy currency in the sense of common acceptance is perhaps an indication that the crisis is not over.)

One particularly obvious example is financial investment ratings leading up to the financial crash of 2008. The role of ratings agencies like Moody’s, Fitch and Standard and Poor’s is to analyse and rate financial products according to their level of risk. The three major firms effectively monopolise the ratings market: they are ubiquitous in the financial world, and their ratings are considered very strong indications of the safety of an asset. Many pension funds, for example, are forbidden from investing in sub-AAA rated investment products, which gives the ratings agencies a critical role in determining the flow of capital in the economy. This sounds very much like the kind of currency Brock is describing.

However, in 2008 investment ratings were one of the most unambiguous points of failure in the financial system, which led to the misallocation of billions of dollars into the sub-prime housing bubble. Financial instruments such as CDOs, which are complex combinations of sub-prime and prime mortgages, were systematically over-rated by the big three agencies, leading to large losses. It seems like an excellent example of a currency failing on a very large scale. Furthermore, there are some interesting insights to be learned about currencies by asking why this happened:

Centralisation

One of the overriding reasons for the failure of the ratings system were the conflicts of interest which arose within the ratings agencies, due to their centralisation and dependence on the investment banking industry for fees. The agencies’ revenues came from the investment banks who securitised and sold toxic financial products. A combination of short-termist self-interest, wilful delusion (and perhaps worse) led all three agencies to tell the investment banks what they wanted to hear.

Opacity

Another reason was the degree of complexity in the financial products which were being assessed. If the role of a currency is to provide a social heuristic for making accurate judgments about complex issues, there is a problem when the people responsible for regulating that heuristic – the investment ratings – do not themselves understand what they are rating. It doesn’t seem unlikely that investment banks benefited from and promoted complexity in their products for this reason.

Fetishism

What further characterises currency failure is a kind of fetishism where people mistake a symbol of value for value itself. In many cases, individuals made poor investment decisions because they uncritically accepted currency systems like investment ratings, allowing them to monopolise their attention and decision making.

Karl Marx described described something similar when he wrote of commodity fetishism – the fallacy of attributing inherent value to money and commodities, while failing to perceive the underlying social relations they derive it from. This fetishism is described quite well in a World Policy Institute article by Matthew Bishop and Michael Green:

The global economic meltdown may have busted these toxic ideas, but the institutional framework of today’s capitalism—including our economic statistics—still rest upon them. To tell us where the economy is going, business television channels keep on reporting quarterly profits and minute-by-minute stock price movements. Politicians are cheered or tormented by quarterly GDP statistics that are taken to be a measure of whether voters’ lives are getting better or worse.

Matthew Bishop and Michael Green, World Policy Institute, We Are What Me Measure

The example of the investment ratings shows how currencies in the broader sense can become “debased” in the same way that money can. This is why it is also an apt distinction. During the Roman Empire’s Crisis of the Third Century, the Severan emperors reduced the quantity of silver and gold in the aurei in order to finance the expansion of the military to police the Roman empire, bringing Rome to the brink of collapse. Today, fiat money is backed by nothing and debasement thought so-called “quantitative easing” is done at the push of a button. In the same way, the “AAA” currency of the rating agencies have been debased as a result of improper issuance.

The future of currencies

Brock’s main interest in proposing a broader definition of currency is to consider what the future of currency might look like. It seems natural, looking at the failure of antiquated pre-information age currency systems, to ask how we might be able to build more robust and reliable currencies in the future.

Brock suggests that we are in fact at the cusp of a new wave of currency innovation, which he compares to the advent of language. Much like language enabled humans to create and share gradients of meaning, future currencies will do a better job of capturing gradients of value. In this sense, Brock seems to see the future of currency as a kind of major cognitive and social leap forward, which could change the way “value flows” for the better.

Quantifying new flows

The first observation to make about the future of currency is that information technology gives us the possibility of quantifying the previously unquantifiable. The ability to make intangible types of value, like reputation, trust, or authority, visible is the idea behind the metacurrency project. We can see such currency systems at work already on the web. One example is StackOverflow, a masterful implementation of social software which rewards people for asking and answering programming questions. StackOverflow has a single “reputation” currency, which can be earned in a number of ways – by asking good questions, giving good answers, voting answers and questions up and down. StackOverflow also rewards participation with badges, which it hands out liberally for key achievements. The reputation currency drives further participation, increasing the value of the site for its users.

Connecting flows

Another of Brock’s insights is that in the future, currencies will become more interconnected, much like web pages are hyperlinked to each other. He gives the example of borrowing a power drill from someone, based on trust points earned from receiving CouchSurfer guests. Similarly, we can already see eBay reputation points playing an important role in determining prices – sellers with less reputation history are likely to earn less on their sales, as the increased risk is priced in. StackOverflow are also putting their reputation metric to use in the area of recruitment – their careers site allows members to apply for programming jobs. Rather than claiming to know a programming language on a CV, today’s talented coders can simply point to their StackOverflow reputation score. More recently, a story has surfaced about a professor achieving tenure based on his 16,000 Wikipedia edits.

Decentralisation and transparency

This vision of currencies seems to reintroduce some of the lost values of the pre-industrial era, where the consumer’s contact with a producer was far greater than today, and values like reputation factored into decisions far more. The exciting prospect of meta-currency is that it will allow us to extend reputation, trust and other metrics beyond our immediate social circle, making them count among people we have never previously come into contact with.

The currencies of the future will need to learn from some of the mistakes of industrial-era currencies which are continuing to fail the global economy, leading to large resource misallocation and market failures. These currencies failed due to a combination of centralisation, fetishism and opacity, which made them impervious to scrutiny and prone to debasement. A network of meta-currencies will need to leverage the power of decentralisation and transparency to prevent these mistakes from being repeated.

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19 Responses to “A Broader Definition of Currency”


  • Two thoughts:

    First, just a quick note on rating agencies. People tend to underestimate the difficulties of operating in a bubble environment. It is certainly true that ratings agencies are excessively centralized and faced some perverse incentives. However, it is also true that it would have been impossible for them to provide accurate ratings, at least given accepted ratings/tiers.

    The problem is that in a bubble the possible returns are not normally distributed. In order to be accurate, a rating agency would have needed to be able to say something like: “If current (bubble) conditions persist this security is AAA, however if housing prices decline up to 20% it could rate as low as BB. We have no way of predicting the future direction of the housing market.” The existing system didn’t (still doesn’t) have any way of meaningfully accommodating non-normal returns, and it is not as if the buyers of these securities were begging for more nuanced ratings.

    Second, I am a little skeptical of the usefulness of speaking about brands, certifications, or badges as currency. I understand what Art is getting at but I think this perhaps takes the abstraction a step too far. A certified organic label or a bmw logo does not change value flows, it describes the value that is flowing. If the BMW logo is a currency then so is the spec sheet describing the power of the engine.

    The currency is the reputation that has accrued to BMW as a result of delivering successful products in the past. When they put the logo on a vehicle or a billboard they are redeeming that reputational currency for attention. The logo is not part of the exchange itself.

    A reasonable analogy might be to a credit card. A credit card itself is not currency…it is a a tool that facilitates the flow an underlying currency (the money available on your credit line). Likewise, a brand or a badge is a conduit for the flow of reputation.

    • Hi Gregory,

      I was probably being a bit sweeping in my analysis of the failings of credit rating agencies… However, hopefully my underlying point that credit ratings are overvalued insofar as they failed to protect investors adequately in a bubble environment still makes sense. If an investment’s being rated AAA doesn’t tell me if it is overvalued because of a credit bubble what does AAA mean?

      On your second point, it’s problematic allowing all kinds of things (e.g. engine spec sheet) becoming currencies for certain. However, I think more hinges on the “change value flows” part of the definition than you make out. A “certified organic” sticker does change value flows as compared to a hypothetical counter-scenario in which it is indistinguishable from any other non-organic apple. Same thing with a non-branded car, versus a BMW-branded car, even though they may be the same thing.

      I will keep thinking about this – I think the definition used by Brock (and Diogenes apparently) needs to be tested out much more rigorously than I have had the time to do yet. My feeling is we do gain something in terms of explanatory power by thinking about broad currency. To be followed up.

      Thanks for the comment!

      • On credit ratings, perhaps what I am trying to say is that no one should be thinking about these ratings as fail safe recommendations…so yes, they are definitely overvalued. In equity markets it is well understood that a ‘Buy’ rating on a stock is simply one analysts opinion and individual investors should conduct their own due diligence. The same should be true of credit ratings.

        My point with regard to the engine spec sheet is that, like the certification badge, it is not a flow in itself…it simply tells something about the product itself. The name BMW doesn’t flow, it is attached to the product. However, the reputation associated with the name does flow – it can be increased or decreased based on various actions and behaviors.

        If we compare the non-branded car to the BMW, they aren’t the same thing. One IS a BMW. That has nothing to do with the label, logo, or badge…it is a feature of the product itself.

        I may not really be communicating this distinction clearly but I promise you it makes sense in my head ;)

        Will continue pondering…

    • Hi Gregory,

      Certified organic labels and brand logos most certainly change value flows. Farms change their practices to have that currency issued on their products, I buy this vegetable and not that one based on the sitcker. Real value in the real world flows differently because of that type of information. It’s almost exactly parallel to how I buy this vegetable and not that one based on the numeric price on it. It’s just that the information carried is of a different order, i.e. of a different dimension of the value proposition.

      That’s part of the whole point of broadening the understanding. To come to a bigger picture of how these information systems build wealth, and especially, how to build more wealth in non-tradable arena.

  • I should add though, I absolutely agree with regard to where currencies go wrong and the future. I suspect that “quantifying new flows” and “connecting flows” will take care of decentralization. These will be greenfield usage cases that don’t have any current centralized incumbents.

  • I think that using “currency” in a broader sense is an interesting twist. It has been and is going to be a challenge when communicating with people. Yes, currencies do measure flows, but they get their name not because they measure currents, but because they move in the inverse direction of the goods/services. Moving bills and coins is the first thing that come to mind for most people.

    My understanding of Art’s definition “currency” is that it is a set of socially agreed rules to measure flows. I think getting people to agree and enforce such rules – so that they are consistently applied over time, result in shared meaning – is difficult. Describing them in a language is even more challenging. Both may not be necessary tough: last year I have questioned whether we need shared meaning at all, or only personal intelligence tools which we use to create the representation of our world, which drives our actions. http://lebleu.org/blog/2010/04/21/are-shared-units-of-wealth-still-relevant-in-a-world-of-open-data/

    • Hi Guillaume

      Agreed that it is difficult to establish a currency, as part of what makes a currency is common acceptance. If it isn’t already commonly accepted, the early adopters are accepting it partly in the hope that it will be one day.

      Still, taking this broader definition of money, I think we can see some interesting examples of currencies embedded in contexts of value exchange. One of the thoughts that occurred to me when wondering about TweetDust was that people won’t value a currency merely because of how it’s generated or earned (e.g. by being retweeted) but also in terms of what they can get with it (both tangible and intangible value.) So it makes sense to invest in StackOverflow responses if that is a sign of community respect, and something you can leverage to find a job. It makes sense to earn positive reviews on airbnb if it affects your future earning potential, etc.

      In general, it seems that the contexts into which currencies are introduced matters. Our ability to “opt-in” to these different definitions of currency is also huge advantage: unlike the fiat money regime, people will subject their day-to-day metacurrency choices to rigorous market test.

      Merci!

  • I believe what you’ve done here is isolating the “is recognized” verb, the trust element, in the jungle of currency ideas.

    The expression “has currency” has this connotation. Critically, when we use that phrase we often indicate *to whom* a particular symbol of value has currency. For instance: “Peer-reviewed papers have currency in the academic world”

    • Hi Seb,

      I agree – perhaps we could envision trust currencies increasingly replacing monetary transactions. Consider a situation in which the members of a web site gift each other favours for trust points and a reciprocation percentage score. The decision to send gifts would take into account how well the recipient reciprocates with the community. Because we favour people who play fair in our exchanges (even where we don’t stand to directly benefit) reciprocation would be rewarded, and value exchange would be balanced.

      The exciting thing about metacurrency is also that such scores are virtual, and can therefore be portable beyond traditional constraints – as valid for someone in another country as it is for someone down the street, as long as they both accept the rules of the currency.

      Good point about further specifying to whom something has currency – we have to remember a currencies are contextualised within communities of exchange.

      Merci!

  • Following what Seb wrote, I think it has long been recognized that peer reviewed research papers are a “currency”. This currency can get you real money (e.g., grants).

    A fundamental distinction however is that these currencies are not meant to be traded, unlike money. For example, you reputation is valuable and it can help you get money, but trading it against money would be… committing fraud.

    In this sense, they don’t replace money…

    • Hi Daniel,

      I agree that broad currency is not necessarily fungible. It also doesn’t make sense to say that you can spend your reputation, since we don’t think of reputation as being transferable (in the same way that we don’t think of identity being transferable.)

      However, I’m not sure that broad currency won’t replace money in many areas. It comes down to whether or not we can use metacurrency to enable value exchange between willing participants. I think this is possible: imagine an informal favour economy in a professional circuit. People will keep “tabs” on the favours they have done for each other, and won’t do favours for long for people who don’t reciprocate. Now if we formalised this type of system, and quantified favour “points” we would see something similar – goods and services changing hands based on the reasonable expectation of reciprocation.

      Hope that makes sense.

      Thanks for the comment.

      • Have you read Accelerando by Stross? You can grab the e-book for free. It is a beautiful novel.

        In it, the primary character makes a living without money. He renders services to others who reciprocate by other services. Of course, the government is after him for unpaid taxes.

  • Well, if we turn a knowledge problem into a trust problem, how will metacurrency help us check if an authority isssuing currency is trustworthy.

    It is important to note that this ,I think, is one of the reasons we need a centralized system.

    One solution to that is given for example by the ripple monetary system. It creates new flows of money based on personal trust.

    Another question. if metacurrency is trying to quantify values that havent been quantified yet so as to create new flows, I would like an example of such a value that cannnot be quantified by an authority right now.

    Give an example of Metacurrency working.

    • Hi Supporter,

      “Checking if an authority issuing currency is trustworthy” is indeed important, and describes exactly what is meant by a “trust problem.” With the use of a currency, for say sustainable fishing practices, I need to know if I can trust a particular label to represent this value for me. This trust is based in turn on common acceptance, and endorsement by experts (people who are in a position to judge the reliability of the currency.) Currencies will indeed need to be scrutinised by independent experts who can judge their worth and communicate their level of trust in lay terms. This is already largely what happens with various food certifications or national currencies.

      I disagree however that centralisation is somehow necessary in order to ensure trustworthiness. Actually, it appears that the opposite is true. Centralised money supply, as exemplified by fiat money, is adopted partly on the basis of legal tender laws (the enforcement of acceptance of the currency as payment for debt and taxes.) This introduces an element of coercion into the currency’s use – meaning it is capable (and likely) to become abused.

      On the other hand, decentralised money – or at least a parallel currency ecology to the national money supply – has many advantages. Competition for adoption and use provides market discipline to those issuing the currency. Nobody is forced to use such currencies, and the competition means high levels of scrutiny and ease of exit for users.

      For examples of how currencies in general change value flows, you might find this more recent post of interest: http://www.webisteme.com/blog/?p=340

      • I find the fact that metacurrency doesnt try to decentralize the means that people need to check the trustworthiness of a currency, an important reason that will disallow common people from creating new currencies.

        So metacurrency does give the language for people to create their own currencies but those currencies will not be used because common people are not experts and they dont have tools to judge those currencies. They will have to rely on cetralized authorities/experts to judge those currencies.

        Anyway, I have found a way to decentralize the “trustworthiness problem”. It is a mathematical model, i cant say more but i hope to implement it in the near future. (You could say this model is a decentralized currency trust system to judge experts”)

        In fact, if my work happens to …well work, I would be delighted that the metacurrency project and i cooperate.

        Apart from my solution, the ripple monetary system as I already said, is a currency system that takes trustworthiness into account.

        • Hi Supporter,

          I would distinguish metacurrency from currency as I’ve discussed in this post, as the former is a project to support an ecology of currencies, rather than a particular view of currency.

          My views about currency have shifted slightly since this article, but I still see currencies as symbols which have broad acceptance and mediate value flows. Certainly, many currencies rely on expert judgement to be scrutinised, however I’m not sure why this necesitates centralisation. For instance, Ph.d.’s are a currency of the broader sort, but there is no single, central authority for issuing them.

          Reliance on experts is a weakness for currencies, since it invites abuse of trust where conflicts of interest are possible. This is why competition among currencies is good. We extend trust to experts all the time, not just in the context of currencies. For example, most people have no idea how nuclear power stations are run, or how brain surgery is performed, but are willing to trust other’s judgments in these domains. Specialisation and reliance on expertise is characteristic of modern societies everywhere.

          The implications for currency aren’t as clear cut as you suggest, in my mind. Currencies are unstable, do collapse, and are subject to market pressures and loss of confidence. Yet, they work remarkably well. We rely on them every day to transact and make judgments about things we don’t understand all the time. It’s all relative, I suppose.

          I’m not sure how trust could ever be eliminated as a necessary condition for a currency, but your mathematical model sounds intriguing!

          Thanks for the comment.

          • http://opensociety.referata.com

            I only suggest that this mathematical model might work. Feel free to contact me. I am the user xekoukou.

            If we manage to get a good decentralized ‘reputation’ system, then we could use it to evaluate currencies, then we would be able to trust the creation of currencies by people that would have never been trustworthy with the current certification scheme. A phd is issued by a university. That is not decentralized enough for me.

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