The Next Step for Digital Currency

“Today’s national and supranational currencies have become a blight on this planet. Created through interest-bearing debt, controlled by financial elites, tracked by the surveillance state, and necessitating endless growth, money as we know it is a primary agent of inequality, injustice, and ecocide.

What to do? One response is to attempt to transform the money system; another is to create alternatives that may supplant it when, as is inevitable, the present system stops working.

The most famous of these alternatives is the digital currency Bitcoin. It was designed to mimic gold in both its sourcing and its anonymity. To “mine” the bitcoins, one must solve computationally demanding numerical problems. This makes bitcoins hard to get, just like gold; total supply is limited as well. Also like gold, bitcoin transactions are designed to be anonymous: one can verify the authenticity of a bitcoin, but cannot trace its transaction history to an identifiable person.

The modeling of Bitcoin on gold was done for at least three reasons:

1. To separate money creation and the regulation of the money supply from politics. In theory, no interested party can manipulate the creation of currency for its own political or financial benefit.

2. To ensure it is non-inflationary. A limited number of bitcoins can be mined, limiting the money supply and making long-term inflation impossible. The hope was that the value of bitcoins would be stable.

3. To allow users to be independent of government control in their economic lives. The creators hoped that “no government will be able to control Bitcoin.” Collection of taxes and the tracking of citizens’ purchases and income would be impossible – a blow to the surveillance state. Furthermore, as with gold coins in the basement, there is no way short of stealing passwords for a third party (such as a government) to know how much bitcoin wealth someone possesses.

The results have been mixed. First let us congratulate Bitcoin on its success. Out of the hundreds of new currency models that have been proposed, Bitcoin is among the few actually in wide use. Some of this success might be attributable to its novelty and to its ideological associations with libertarianism, which encourage people to use it as a statement of political and personal identity. Nonetheless, one can make relatively bug-free, secure transactions with it, totally independent of any national currency. That is quite an accomplishment. If nothing else, Bitcoin has expanded our vision of what is possible. I hope you share my gratitude for these brave and visionary inventors.

Bitcoin has also experienced its share of difficulties, some of which are well-known. For one thing, it is not as immune to government interference as its designers had hoped. Even if it would be hard to enforce tax laws on bitcoin transactions, it isn’t always impossible either when physical or virtual goods are delivered, and in any event, any doubts about its legality drive away many potential users and consign Bitcoin to a marginal status. Indeed, when governments began issuing rulings against Bitcoin, its market value plummeted.

That leads to a second difficulty. Bitcoin’s value has been anything but stable: it has in fact exhibited dramatic fluctuations and commodity bubble behavior. This makes it a questionable as a currency. The fluctuations are mostly due to speculation, which is quite natural when supply is fixed and demand is upredictable. A related and more serious long-term problem is deflation and hoarding. When the supply of money is fixed, it is unable to respond to the economy’s demand for money. If demand for money increases, so does the value of the currency. Goods become cheaper and cheaper. You might think that is a good thing, but the problem is that money becomes correspondingly harder to obtain. People with money hoard it, expecting its value to rise. The result is a slowdown in economic activity and the concentration of wealth in fewer and fewer hands. In a system with a central bank like the Fed, the monetary authorities can respond by adding money to the economy. Alternatively, the government can redistribute wealth away from those who are hoarding it and to those who need it through taxation and stimulus spending. Neither of these options is available to Bitcoin. The system is designed to make that impossible.

One of the alternatives to Bitcoin, Freicoin, has an anti-hoarding mechanism built into it. In the Freicoin system, money is subject to a negative interest or “demurrage” charge, so that the nominal value of currency decreases by 5% a year. For example, if you have 100 freicoins in your virtual wallet, in a year’s time you will have only 95. This creates an incentive to spend them rather than hoard them.

This feature makes Freicoin quite different from gold, which unlike nearly any other metal or commodity does not decay with time. Indeed, gold-based currencies suffer many of the same problems that Bitcoin does, including hoarding, deflation, and concentration of wealth. Perhaps Bitcoin is too much like gold. One unintentional parallel is that Bitcoin (and Freicoin) is generated with great computational effort at a high cost to the environment, just as gold mining requires huge mechanical effort and is perhaps the most destructive form of mining on the planet. We don’t really need that gold: some two-thirds of all gold every produced is sitting in vaults. Another huge amount sits in jewelry boxes, worn on rare occasions or not at all. Yes, gold is useful for non-corroding electronics and other things, but at present only about 10% of gold production goes toward industrial uses. With great effort and pollution, we dig gold out of holes in the ground and bury it in other holes in the ground called vaults. Why would we want to model a currency on gold? In an age of climate change crisis, isn’t there a better use of electricity, computer power, and smart hackers than the computation of useless procedures, all to create digital currency that could be created much more easily by some other process?

The reasoning behind the computation-intensive “proof-of-work” process for creating Bitcoin, Freicoin, and others is that it keeps the currency scarce. The thinking goes, there must be some limit on the amount of money created or it inflates and ultimately becomes worthless. Because it is hard to create, the supply of money has a natural limit that politics cannot alter. Or can it? After all, a community of human beings decided on the generating process and upper limit on the number of bitcoins, and that community could also change its mind.

In gold mining, those who, through whatever accident of history or fate, control the gold mines have inordinate wealth and power, power that far exceeds their contribution to society. The same is true of the computational mining of digital currencies. While in theory anyone can do it, in practice it is only people with considerable technical know-how and the means to acquire computing power. Now, I admit that if anyone is to have disproportionate wealth and power, I’d rather have it go to computer hackers than to land barons and mining companies, but I ask, “Why should the money creation process have, at its very outset, disparity of access to wealth built into it?”

With these learnings from the Bitcoin experiment, I would like to propose a new model for digital currency. The question is how make the issuance of and access to money egalitarian on the one hand, yet also regulate the money supply in an organic, decentralized way.

First let us consider the issuance of money. The simplest way to make money creation egalitarian is to issue it in equal amounts to each citizen. To draw on the analogy of gold mining, that would be like sharing the total output of the mines equally among all citizens. There is indeed a strong argument to be made that Earth’s mineral wealth, its forests, oceans, and biosphere should be a commons, and that wealth distributed as a social dividend or universal basic income. By the same token, no privileged minority, whether of bankers or of computer specialists, should be able to enjoy exceptional benefits from their ability to create money: that function should be, perhaps, the “financial commons.”

A digital currency could simply be issued in equal quantity to each user. The technical difficulty is to ensure that each person can register only once – some kind of unique identifier is necessary. This is feasible for a government, more difficult for a private or peer-to-peer organization, especially when dealing with multinational users (U.S. users have unique social security numbers).

Alternatively or in addition, selected organizations could become “backers” of the currency by pledging to sell a certain quantity of goods or services for the currency at a certain price. In return, the issuer would create that quantity of money as a zero-interest loan to the backer. These loans would be a way to finance the development of deserving enterprises; perhaps they might be chosen via a democratic process among the user base. When the loans are repaid, that money disappears; what influences the total money supply is the ongoing level of new lending.

Finally, money could also be created by gift. Digital coins could be issued to volunteers, charities, open source software firms, ecological and social justice organizations, and other people and organizations deserving support. So much important, socially necessary work goes unrewarded today. Issuing an alternative currency via such groups could remove some of their financial hardship once the currency becomes well-established. The recipients of newly issued money could be crowd-selected by the existing user base or some other voting system.

Whether issued to all users or to selected people and organizations, once issued the digital money works just like Bitcoin or Freicoin. Anyone who has set up a digital wallet can use it. The next question is how to regulate the money supply over time.

Ideally, a money system should allow the supply of money to organically grow or shrink in relationship to the economy’s need for money. In our current system (in theory), central banks do this by buying or selling debt instruments, mostly government bonds, on the market, thereby creating or destroying base money. How do they decide how much to create or destroy? They (again, in theory) monitor economic activity, lending conditions, inflation, and so forth to determine whether tighter or easier access to money will serve society. The central bank is supposed to be first and foremost a listening organ that responds to a collective need for greater or lesser flow. As I argue in Sacred Economics, this function is similar to that of a heart.

In practice, of course, this principle is fraught with abuses, but the beauty of the principle suggests that a next-generation digital currency should have a more flexible, organic way of regulating money supply than the simple formulas used by existing digital currencies, which lay out in advance how much money will be created in a given time period. (Most set an absolute limit as well; in the case of Bitcoin, a decreasing amount will be mined every four years until a final limit is reached in 2040.)

How can we design a digital currency to be more like a self-regulating, homeostatic living organism? One way would be to use a more sophisticated kind of formula, one that contains among its parameters feedback from transaction metrics. For example, more new money could be issued as its value relative to goods and services rises, and less could be issued (or some removed) in the opposite, inflationary case. Or perhaps an even better parameter would be the velocity of money. If the number of transactions per “coin” per month falls, indicating deflation, more money could be created. If economic activity starts overheating, money could be removed.

I think, however, that any formula will bump up against real-world exigencies that will create a need to make exceptions and adjustments. This necessarily involves some kind of political process, which is exactly what the designers of Bitcoin hoped to avoid. They wanted money free of political interference, even of their own political interference. This freedom from politics is always an illusion, because money is ultimately an agreement among human beings. Even gold-money exists, in large part, by sociopolitical fiat: societies can shut down gold mines, confiscate gold, or declare something else legal tender. Similarly, Bitcoin could change its rules, increase its money supply, change the process by which new coins are created, and so on. Even the choice to change nothing is a political choice within the Bitcoin community. Politics is inescapable, and we pretend otherwise to our peril.

Granted, the necessary sociopolitical process of money creation and regulation need not be hierarchical or centralized. The dominant money system is, and at the top of the hierarchy are the established elites, themselves beholden to an increasingly desolate ideology of endless economic growth and to the relentless dynamics of debt-based capitalism that enforce it. New digital currencies offer an opportunity to explore new modes of organizational and political decision-making.

To sum up, a next-generation digital currency should have the following features:

It should be issued in an egalitarian way that doesn’t give undue advantage to any elite, whether political, technological, or financial.

It should of course be simple to use and secure. Anonymity is probably also necessary in the present milieu of an undemocratic surveillance state. In a more beautiful world, I think all wealth and transactions, especially those of government (whatever that looks like), should be completely transparent.

It should, like Freicoin, bear a demurrage charge to discourage hoarding and counteract the tendency toward concentration of wealth.

– The addition or removal of money from the system should respond to its need for money, through some kind of homeostatic negative-feedback formula or process based perhaps on price fluctuations or the velocity of money.

The whole thing should be embedded in a democratic, peer-to-peer political process by which the rules can be changed.

Such a system need not be created from scratch. One of the existing systems, perhaps Freicoin or even Bitcoin, might evolve in this direction. After all, Bitcoin describes itself as an experimental currency. The purpose of experimenting is to learn. The next step is to integrate that learning into a new and bolder experiment.

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