Thinking about debt outside the twin intellectual straitjackets of state and market opens up exciting possibilities. For instance, we can ask: in a society in which that foundation of violence had finally been yanked away, what exactly would free men and women owe each other? What sort of promises and commitments should they make to each other?David Graeber, Debt: The First 5000 Years
This post is more about principles than detail; though I intend to follow up with more information about Pebble, a project I am collaborating on to create money around trust, soon. The idea is to use this post to define what I think is the most pressing question in the future of money debate: how to create genuine, decentralised and abundance-based peer-to-peer money. If that sounds like a mouthful, bear with me, as I try to try to convince you that it’s the shape of things to come…
Money matters
First of all, a detour. Why this discussion about money? There is a great deal of interesting thinking going on about the nature of money itself, and how that might be changing. Money, some believe, is not value-neutral but makes us think about the world through the lens of scarcity and materialism. There is also the debate surrounding social currencies, which attempt to measure and represent previously invisible forms of value, such as trust and reputation. These currencies have proven instrumental in creating trust between strangers, lubricating online collaborations, and allowing peer-to-peer “collaborative consumption” to take off. No doubt there will be much more to say about these fascinating inventions still.
However, I want to look at a different question, which I think is fundamental to the future of money. While I’m sure that the role of money is changing as new types of currency, forms of exchange, and a different values emerge, I still believe that money is, in principle, here to stay. By money I mean the thing we use to store savings, measure the value of scarce goods, and transact with. As a technology money is as old as the hills. It was never invented at a precise moment in time, and unlike Economics text books would have us believe, is probably as old as numbers, writing, cooking and clothing. It answers a fundamental need in human life which I do not think is about to go away.
Given this, I can return to peer-to-peer money. What is it, and why is it so important? Without going into the details of specific proposals to create it, I want have a go at defining the criteria according to which any such project should be judged. Consider this an attempt to set the groundwork for discussions to come…
1. Decentralised
Peer-to-peer money should be radically decentralised. By this I mean that nobody should have full control over how it is created, by who, and for what purposes. Any serious peer-to-peer money proposal should show how these tasks are delegated to the nodes of a network. The banking system, as should be obvious, is not such a network: the task of creating money as debt is performed by banks, who do so according to their own commercial interests, with some influence from central banks. Clearly this is undemocratic: the amount of money which gets created, and the projects and people who are deemed “creditworthy,” are controlled by de facto central planners, who have their own interest to look after. What’s more, these decision makers have very inadequate information for the task they have undertaken – a classic Hayekian argument against centralised allocation of resources.
It follows that, in an ideal scenario for peer-to-peer money, such decisions should be pushed out to the edges, to take advantage of local intelligence. The amount of money that gets created should be based on decisions undertaken by people, using their shared knowledge and mutual trust as a basic principle. If this is the political meaning of “decentralisation,” there is a further technological one to make. The kind of software which should underpin genuinely peer-to-peer money should itself be peer-to-peer. Any monetary system which depends on a central coordinator to take care of verifying payments and keeping records of transactions has a single point of failure. It will be vulnerable to rogue administrators, cyber attacks, and will create administrative overhead. In a digital, networked environment, serious peer-to-peer money should become a protocol, like email or HTTP, which can be used as a matter of convention. It should be part of the backbone of the internet, controlled by nobody and existing by free consensus.
You may be thinking that what I’ve described already exists, in the form of Bitcoin. Bitcoin is indeed a fascinating project for anyone interested in the future of money. It is decentralised, and delegates the tasks of running the currency to its network, without any central control. To date, it has never been successfully attacked or disrupted – an amazing achievement which its critics often overlook. However, Bitcoin is not what I have in mind when I think of genuinely peer-to-peer money. The reason why brings me to my next point.
2. Abundant
One of the main complaints a peer-to-peer advocate could wage against the banking system is the fact that it creates money according to the imperatives of a narrow elite, and forces everyone else to use its own IOUs rather than their own. Part of the complaint, as we have seen, is political – about who controls the money supply. The other side of it, from my point of view, is about artificial scarcity and abundance.
On this point, I’m in agreement with monetary theorists who recognise that the fundamental nature of money is social, not physical. While physical things have acted as money, they aren’t it by themselves. Even gold, when it has been considered money by governments, gains part of its value because of a political arrangement, not because of its inherent metallic qualities. Coins and notes, most obviously, circulate at much higher than face value. The reason is: money is a social phenomenon. It’s the collective agreement of a group of people to accept a certain symbol as a promise for value which gives it its power.
Once we can understand this, it’s ours to create and change as we see fit. Since its basis is in belief and confidence, its supply does not need to be artificially constrained by the availability of a physical medium. The amount of gold in the ground or processing power in a Bitcoin miner shouldn’t determine the quantity of money available. The basis for money issuance should be our mutual trust and confidence, and not the availability of physical objects, or artificially scarce electronic symbols. Michael Linton, the inventor of the LETS scheme, summarised this well when he spoke of the absurdity of not being able to build a house for want of inches. People connected by a chain of trust shouldn’t be prevented from transacting for lack of symbols with which to encode and formalise their trust. So, the reason Bitcoin fails the peer-to-peer test, in my view, is its flawed conception of what money is. This is not to say that it isn’t a great technological project; just that it doesn’t fulfil the potential of peer-to-peer money.
3. Community-oriented
The third criteria by which a peer-to-peer money project should be assessed is its conception of community. A community of individuals is more than the some of its parts. Community money, created as credit, is a promise which is backed by a group of individuals who accept it as payment. This makes it more valuable: since more people can accept it as payment, it can travel further, making it more useful as money. So, while a peer-to-peer credit network should allow for the creation of money by individual nodes, it should also allow for emergent, community phenomena. The credit of communities should be maintained by their constituent nodes, who internally rearrange their obligations to one another based on their acceptance of it as payment for value to outsiders. In this way, groups of people who regularly trade with each other can create extra credit, and use it to interact with other communities. There is no reason why there should only be first-order communities as well. Peer-to-peer money can exhibit fractal patterns of communities of communities, and so on, each creating a higher-order of credit sustained by their members. This feature of a peer-to-peer money supply will encourage a balance of local and global economic activity, rather than the radical centralisation our present monetary system encourages.
4. Debt-transcendent
This point is a little tricker, however, I think it’s also a crucial dimension of a peer-to-peer money proposal. In David Graeber’s terms, the practice of debt has historically been bounded by institutions which limited its corrosive consequences on social fabric. In ancient Sumer, the birthplace of credit money and lending at interest, debtors were protected by regular debt jubilees. In the next stage of credit money, the Middle Ages, lending was controlled by the religious institutions which regulated commercial activity. It was impossible to be made a slave because of one’s debts in the literal sense. Further, lending at interest was tightly controlled. It is one of the characteristics of the modern financial system that institutions which existed to protect debtors have been eroded, in favour of the interests of lenders. The rolling back of usury restrictions is one example.
However, historically the understanding that debt is socially dangerous, and to be controlled, is important. If money is just a promise, we need to have collective agreements preventing money creation from getting out of control. This is perhaps the biggest challenge for peer-to-peer money: to create credit money which transcends or limits the logic of debt. Since in software terms, agreements about the structure of the banking system will be a matter of which software gets used, the principles which limit the effects of debt will need to be coded in. How exactly this is fulfilled I will leave open for the time being.
Why build it?
Having outlined the general principles peer-to-peer money should fulfil, it’s worth returning to the original question. Why is it a desirable project, at this stage? One reason is simply that it should be done because it can be: the technology and know-how exist. All that remains are the design ideas, and the willingness to implement them, in search of a solution. With the available technology, it can only be a good idea to experiment and try to realise the ambition of genuinely peer-to-peer, democratic money.
However, the other reason I think this is the most pressing area in the future of money conversation is the current state of the world’s financial system. In this post I’ve argued that the banking system creates money in an inefficient way, at an angle to economic and democratic needs. One thing which should also be obvious, in light of the ongoing financial crisis, is that it is hugely unstable. According to some theories of banking and credit, the design of the banking system itself is inherently geared towards infinite growth, and endless expansion of debt. In a world of finite resources, and finite appetite for debt, the game of credit creation at interest cannot continue. Logically, we should expect the banking system to shake itself to pieces as it confronts its own inherent, paradoxical design. Politicians’ attempts to patch it up, rather than reconsider its basis, appear to me misguided and ignorant of opportunities to create something better.
The banking system is premised on two twin assumptions. If money is just a promise, then the existence of a centralised banking system presumes that individuals acting as peers cannot trust each other enough to make their own. It must also assume that individuals lack the technological means to create the necessary payment infrastructure to keep track of their mutual obligations. The project of peer-to-peer money should presume the exact opposite: that we cannot trust the banks to do this job for us. Given the technological means at our disposal, and equipped with an understanding that money is just a social agreement, we should be able to find a way to do it ourselves.
Very nice indeed. Seems promising.
Let me know if I can help in some way. As you know, I’m most interested in the future of learning. As we move away from institutional education to more peer-based learning, there exists a definite need for a p2p version of money. To be honest, however, I don’t know how it might work.
Gary
It would be great if p2p money was a catalyst for other p2p projects. One could imagine individuals paying each other for course modules with it, for example. More generally, it seems that when credit money is issued in a decentralised way, according to the actual needs and constraints of people, we might find a different sort of economy emerging… Thanks for your comment.
Excellent stuff. I think this just became my favourite article from your site.
I agree with more of it than you’d probably think !
Very best of luck with Pebble. You’re spot on in saying that we need lots of people trying to make the idea of P2P currencies work. I think it must be the most exciting thing to be involved with at the moment.
I’ll forgive you saying ‘money is just…’ near the end. Careful though
‘Money is just’ rears its ugly head… my apologies
Thanks for your interest and glad you enjoyed the post.
Great article. And LETS, developed in the comox valley of BC, answers all points. There are LETSystems still in operation in Toronto as well as other cities. One problem with p2p systems is groundswell. It takes flow a LT or time to come around even in a down economy. And once they subscribe to the principle, it takes even more time for one to start using the system, what thoughts do you have for gettimg folos to use p2p money?
Thanks. I’d say LETS systems come close, but aren’t p2p money. One of the reasons is the need for a centralised administrator to keep books, and encourage people to pay down their negative balances. I agree that p2p money would, theoretically, have some bootstrapping challenges which LETS might not, initially. That’s because personal money is less useful than community money… until you have a decent network to spend it through. How to get there is definitely a challenge. The trick is to leverage the right kinds of personal incentives to drive network effects, what Tim O’Reilly called an “architecture of participation.” I think this is doable, but that’s another post.
Great post, clear and inspiring.
Although central authorities may lack the grassroots information required for efficient wealth creation, could it be that there is a role for some kind of central or hierarchical oversight of the health of the system as a whole?
By analogy with the nervous system, higher level or executive function could have an inhibitory rather than excitatory role eg destroying concentrations of debt which are harming the overall functioning of the system, rather than creating such concentrations in the name of ‘wealth’ as is presently the case.
Excellent stuff, though I’d like to clarify one point which, quite understandably – because there’s confusion from many sources on this – is scrambled.
In the main posting, Eli mentions Michael and the first LETS as a ‘scheme’ then in reply to Robert Rex refers to LETS systems as needing a central administrator.
Although much of the literature switches almost randomly between the terms, the LETSystem and LETS schemes are not the same. Michael designed the LETSystem – which has no central administration – and has never favored the subsequent scheme versions partly because they do involve central administrations.
The decentralised features which Eli recommends are part of the LETSystem design. Account holders can – openly – see each other’s balance and turnover and can therefore make informed decisions about whether to let whoever they’re about to trade with, issue currency.
This feedback loop(which works better in small groups hence the ‘click to start a new currency’ aspect of open money), is consistent with Eli’s ideal scenario in which decisions are ‘pushed out to the edges, to take advantage of local intelligence.’ In the actual (though often wrongly described) LETSystem, participants replace the function of a conventional central administration. The thinking behind the emergence of LETS schemes involved a rejection of that (and other parts of the LETSystem design) and instead they use conventional, central administrative structures.
With Michael, I’ve been writing about the distinctions between the different versions of the generic LETS, how when and why different models emerged, the history and politics of the split between advocates of the LETSystem and LETS schemes, and the effects on the movement of the chronic confusion in the literature between models which in part, lead to the introduction of the term open money to describes a space which includes the LETSystem and Community Way.
I hope this is helpful for now, and I look forward to sharing more on this in due course.
Andy.
It’s nice to know Mr Linton did not intend things to become so rigidly controlled. Regrettably, whether it is LETSystem or LETS scheme, LETS collectivized debt exposure, which is fatal to the design. In their centralized administration, LETS schemes merely make explicit the inherent weakness of LETS in order to compensate for it.
Fortunately, LETS has stimulated a ton of thinking on money and led to Ripple, in which individuals regulate their own debt exposure on a case by case basis. It is the sum of such decisions that keep a group afloat, not regular decisions made as a group.
Great work Eli. Really looking forward to see how Pebble progresses.
I guess a potential elephant in the room is the question of how a government would respond to a future blossoming of P2P currencies – e.g. how would they be integrated into tax models etc. Admittedly, this question is purely intellectual right now, but perhaps worth a blog post at some point.
My feeling is that they would probably not respond well
Another interesting question is what they could do about it, even if they don’t like it.
The following maybe of interest.
http://www.p2pfoundation.net/Transfinancial_Economics
Here on Merseyside, U.K. we are developing a project using a software tool called tgl, which involves a p2p currency. To give you some background, I have been developing the concept of tgl for about 15 years, originally as ICTV – interactive community TV. It evolved into tgl – ‘teaching, giving, learning’ – simply because that’s really what it’s about. In other words, it’s a tool to support the growth of new socio-economies founded on people choosing to find and pursue their innate talents and interests. In the process, production and growth can become founded on the demands for the goods and services required by creative human beings collaborating to produce a revitalised world. Currently, we are upgrading the site with improved look-and-feel inc. media players, photo and document carousels, and simpler navigation – ready in a week or so.
The idea is for people to create their own secure member intranet with search engine, trading bays, skills exchange, projects, social networking, communications and interactive community TV channels – like a local Ebay, Tesco-online, MySpace and Youtube rolled into one for the benefit of humans being. No doubt, communities can begin to attract the advertising revenues currently wasted on 100s of TV channels full of the same old programming and false values.
In the process, as people receive the L currency, new cycles of debt-free liquidity can enable untold interactions using combinations of ‘old’ debt-loaded money and the new debt-free. As the penny drops, we will realise that the process can become real ‘money laundering’ because we can wash away the debt-money and replace it with debt-free cycles. By ensuring that these cycles are adequate to support exchanges of the growing range of goods and services available for L and other alternative currencies (e,g, LB) – i.e that there is sufficient L (and/or any other alternative currency) available – the fractional reserve system can be reversed. In other words, the faster debt-free currency cycles, the less of it is required in the database – after all, a Bank is simply a database with names in.
Membership of tgl (www.tgl.tv) is free, with fees payable only when you choose to trade goods and services in the shopping village or skills exchange. Currently, after our ongoing pilots, we propose £15 a month to open a shop or offer a service, £10 a month to offer a course and £5 a month to exchange in swap shop. The fees can be calibrated and evolved as the service grows in any location. Our free franchise gives the administration and moderation systems to a local hub and the fee income is shared between us and the hub. In UK, we are using the UK model of CICs – community interest companies – as hub owners because they can have unlimited numbers of members as owners. Cooperatives and other forms of multi-stakeholder bodies are equally viable.
To augment the processes, we developing a concept called civic universities (original brainchild of Professor Powell of Salford University). The basic idea here is for students to collaborate, and learn-and-earn L, while gaining experience within communities of all types – actual by location and virtual by interest group. Essentially, the resources of the university are made available to enable and support the students and their communities of collaboration? We are developing this concept with a university in Liverpool and hope, in time, to link universities globally in the process.
To summarise our current situation:
* over the last few months we have launched a brand new software package called tgl – teaching, giving, learning
* members are paid on-line in a brand new currency called L (L1=£1) when they choose to ‘learn-and-earn’
* L stands for for local, loyalty, learning, liquidity and leisure; it is generated in our database only when people choose to collaborate and act creatively
* members can earn L in many ways, such as volunteering to work with charities, developing local projects, studying courses and learning new skills.
* tgl software provides the hosting and functionality required for members to find how and where to earn and spend L
* also, it provides on-line shops where members can offer goods and services for sale; so it is like a local E-bay or Tesco on-line
* all members agree to a Charter on sign-up by which they pledge to act like decent human beings
* so, it creates a secure member intranet in which members who abuse the system will be suspended and have their L account closed
* each member has an on-line L Bank account and a swipe card. They can make payments in the following ways:
o on-line by computer
o by mobile phone
o using their swipe card in retail and other outlets
* we have developed our own EPOS – electronic point-of-sale – systems and, to date, we are installing our card readers in 22 retail outlets across Wirral and Liverpool (their L Bargain offers can be seen on the site)
* our membership stands at around 700 and, assisted by ongoing marketing, we envisage it will grow quickly through the diverse local communities – residential, leisure, sports, educational, business and so on
We’re working with local universities, charities and other bodies to explore the concept of developing a civic university as an example of how higher education and communities can collaborate to contribute to a collaborative world founded on love of life-long learning.
We welcome like-minded people anywhere to collaborate with us to develop a network of local hubs and associated projects.