Aaron Fernando


Everyone's Wrong About Money: an informed framework for understanding currency

Part 1 of a series deconstructing currency into its component characteristics and analyzing when and why currencies fail

Active local currencies around the world, including ECOs, Calgary Dollars, Bangla-Pesa, BerkShares, Baltimore BNotes, Sarafu-Credits, and K’Mali. Photo courtesy of the Schumacher Center for a New Economics.

Almost all the theories and philosophies I’ve read about currency — especially recently — are functionally wrong. That is to say that there are many tidy and seemingly-intuitive theories, but when observing and analyzing how currency systems operate in practice and how people actually have used currency over the past few centuries, these theories don’t measure up to reality.

Most often, these theories fall flat because they neglect the perceptions, incentives, complex social psychology, and social signalling that affect currency adoption and usage, as well as the ways in which the real administrative actions around a currency differ from idealized hopes of how a currency will be administered.

There has been long history of currency experimentation that existed long before cryptocurrency and although much of it is still under the radar, all of it can offer valuable lessons. Still, to be able to comprehend these lessons, it can help to have a kind of framework for understanding and analyzing currency systems and the behavioral incentives and disincentives that shape how they’re used.

So here, in this series of Medium posts, I will be putting forth and expanding upon a framework with which to deconstruct and analyze a currency by its characteristics, and to understand how a currency’s behavioral incentives and social adoption are shaped by those characteristics.

Learning from Other Currency Initiatives

But who am I, anyway? I’m a writer who covers currency initiatives and banking from time to time, including blockchain initiatives. Aside from writing, my background includes working directly as an administrator for local currencies, which are also called “community currencies” or “complementary currencies” since they are intended to complement the US dollar and fill in where it falls short, rather than compete with it.

Through working with three of these currencies around the US — Bay Bucks in the Bay Area, Ithacash in Upstate NY, and BerkShares in Western MA— I’ve spoken with users of these currencies, tried to convince skeptics why non-national currency was a fine idea, and continuously thought about why or why not people choose to adopt alternative means of exchange. I’ve also met with and discussed local currencies with those implementing these initiatives around the country and the world and saw a lot of interesting innovations, but also some mistakes. And now, I’m seeing a lot of mistakes about to be made by crypto-enthusiasts who misunderstand currency.

To be clear right at the beginning, I’m not against crypto or blockchain. On the contrary, I’m quite enthusiastic about a few select projects and I’ve been immersing myself in reading about different efforts, playing with every dApp that seems to hold potential as they crop up, and have been peripherally involved in a couple projects.

I am, however, concerned (and a little annoyed) with how frequently people pontificate lightly-informed opinions about currency, especially with regards to a certain crypto becoming the dominant global currency. A large part of this is due to self-limiting regarding the scope of projects that are being surveyed: by only looking at currency projects with a crypto component, the vast majority of currency experimentation throughout human history gets left out, along with the vast set of lessons learned from this experimentation.

But this lack of understanding is also largely because a lot of information about what’s been learned from currency initiatives has not been shared freely.

There is at least one extremely good reason why no one wants to admit when they have made errors in designing or operating a currency system: doing so necessarily means that you have made an error in ascribing value to something. Since currency is used in trade and commerce, making these kinds of design and operational errors also means that you have inadvertently facilitated the transfer of real wealth from those who generated that wealth to those did not generate that wealth, and have done so in an unjust way.

Furthermore, if you’ve ever discussed money and currency with people, you will have noticed that these topics are extremely emotionally- and morally-charged. If you’re not careful, you can easily whip someone up into a ethical fury about right and wrong, just moments after explaining how debt owed to banks is completely different from debt owed to individuals and thus, defaulting on bank debt is a necessary part of the monetary system.

As such, I don’t think I’d ever be able to publish this series under the banner of a currency-administrating organization I worked for, without being forced to compromise and bias my analysis and information.

Still, I believe that the problems of not communicating mistakes and learning experiences from currency system design will only lead to repeating those mistakes in new and exciting ways. I believe that this is a defining time — a time when people are becoming cognizant of the flaws of national currency and are starting to understand, as a society, that the monetary system is changeable. So it is of utmost importance for people to be informed in how they think about currency.

I do not purport to be able to understand currency from all angles and only barely studied Economics (formally, at least) but I can bring in a much-needed perspective informed by my familiarity with behavioral economics research, anthropological understanding, and my on-the-ground work and analysis. When it comes to currency and how to think about it, there can be no one correct framework — but the nice, simple dichotomy that currency is either “fiat” or some representation of a scare asset couldn’t be further from how things actually operate.

“Essentially, all models are wrong, but some are useful.”
— George Box

I’ve seen first hand a wide range of currency characteristics that are useful for certain functions or types of user and, likewise, have had to work around characteristics that prevent a currency from working well. For instance, Bay Bucks is a digital-only ledger and mutual credit system (which will be explained later); Ithacash exists on a digital currency app, and BerkShares consists of dollar-exchangeable notes.

Bay Bucks and Ithacash have digital “units” recorded on servers, while BerkShare units are physical notes printed on Crane paper. Bay Bucks and BerkShares are user-issued, where Ithacash is centrally-issued. BerkShares and Ithacash function best as B2C currencies, while Bay Bucks was primarily B2B. In all three of these currencies, usage rates surged and stagnated from time to time and certain users saw the real utility of a currency, while others did not.

From all of this, I learned one thing: there will never be a one-size-fits-all currency solution. Different currencies serve specific needs and can solve specific problems. By attempting to create and force usage of one currency that solves all currency problems, you wind up with what I call an F-35 currency: just like the fighter jet, it consumes an immense amount of time, money, and energy while you try do design it to do everything. Yet in reality, it is impossible to everything — and as a result, it winds up doing nothing at all. This framework is about how not to create an F-35 currency.

The Characteristics of Currency: A Three-Tier Framework

Throughout my work and often out of frustration or an attempt to solve a problem, I frequently asked myself, “What would I do if I could go back and start this currency from scratch?” To answer this question better, I began creating a mental framework for myself — a currency taxonomy, really — which eventually become more clear and well-defined, and has now become the outline below.

I will be publishing ongoing, deep dives into each of these currency characteristics here on Medium.

These characteristics have been organized into three tiers. The first tier, Elementary Characteristics, is made up of characteristics that are at the very core of what a specific currency is, and these characteristics create ingrained behavioral patterns, path dependencies, and are most difficult to change. To use an analogy, these characteristics are those that would differentiate a housecat from a lion or a sculpture of a cat.

Secondary Characteristics are those but have a significant impact on how, why, and by whom a currency gets used and these characteristics greatly influence whether a currency gets adopted at all. Going back to the analogy, these characteristics determine if a person chooses to foster the cat: It is an indoor or outdoor cat? Friendly or not? A kitten or an old cat?

Tertiary Characteristics can change organically or change because be tweaked by issuers or certain types of users. These changes and tweaks can have influence on how people use the currency, but (in my analysis of it) will not change the core uses and users of the currency, but will change the extent to which it it gets used. Is the cat declawed?

There’s a good, relevant cat. “A tabby cat sleeping on an a couch armrest” by Sabri Tuzcu on Unsplash

These divisions are somewhat arbitrary, but I had to draw the lines somewhere because adding expiry dates to notes is not nearly as important or difficult to change as backing, yet both influence behavior around a currency.

These characteristics are different from the functions of money (store of value, medium of exchange, unit of account, vote, etc.) and the many attributes of currency (fungibility, divisibility, durability, portability, transferability, relative scarcity. etc.) although these characteristics affect those functions and attributes.

Elementary Characteristics

Issuance Policy: How does the currency come into existence in the first place?

  • Loaned or sold by the issuing entity
  • Issued freely by the issuing entity (includes QE; helicopter money; airdrops; etc.)
  • Exclusively issued by being purchased with/ exchanged for another currency
  • Mutual Credit
  • Mined or issued for some other form of computation
  • Other

Issuing Entity or Entities: Is the currency issued by a power structure? an organization? An ecosystem or community? (Related to de/centralization; certain things can and can’t be done if there is a monopoly on issuance)

Interest: Is the currency issued with a positive, a negative (including different types of demurrage), or a zero interest rate?

Relationship with Value: What is the currency’s relationship with value (there is a lot to this)

  • Value as access to some network utility via fees (e.g. gas on Ethereum; lumens on Stellar; TAXES on paying in USD)
  • Value as a access to some network utility via membership (e.g some crypto exchange and lending-related tokens)
  • Value as governance stake (e.g. MakerDao, Aragon, Civil, etc.)
  • Value as backing (see below)

Backing (there’s a whole lot to this, too)

  • Backing as a guaranteed, redeemable claim upon x (including commodity currencies like gold coins or cocoa beans or cigarettes where the currency is the thing of value itself; the US dollar pre-1933; etc.)
  • Backing as a limitation on issuance (time-backed currencies & timebanks; mutual credit systems;commodity-backed currencies; etc.)
  • Backing as enforcement, force of law, or guaranteed acceptance (“fiat currencies” which are, in-part, backed by force if you don’t accept them)

Secondary Characteristics

Form: What form does the currency take?

  • Is it a bearer instrument or ledger?
  • If it is a ledger, how centralized is this ledger? Is it even a formal ledger?
  • Is it a physical note or coin? a digital record? Both, yet interchangeable?

Anonymity: (agent-focused; identity) Is a person’s identity linkable to accounts or units? To transactions? Visible to all or just certain types of user?

Tracking and Auditability: (account-focused or unit-focused ) Are accounts or units publicly visible? Are transactions? Visible to all or just certain types of user?


  • Physical or digital security features (highly dependent on form, above)
  • Reversibility & recovery (relates to enforcement, above)
  • Trust (if a community is small enough, digital any physical security features don’t matter as much since dishonesty behavior is reduced)

Acceptance Ecosystem: Is acceptance wide and deep enough for the currency to circulate?

  • Redemption for Necessities (Can staple goods and inelastic goods/ services be acquired easily and reliably with this currency?)
  • Risk of Stagnation (Does the currency flow sufficiently? Does it often stagnate after being accepted by certain types of user — like those who sell staple goods?)

Tertiary Characteristics

Clearing Time: Instant, like cash? 10 minutes? Takes forever (e.g. 3–5 business days)?

Issuer Signalling: What does the issuing entity signal publicly, regarding issuance policy?

Ease of Convertibility: Can it be exchanged quickly to “fiat” and commonly-used currencies? This helps drive adoption and increase acceptance in the early days.

Support: Is the currency supported by a power structure? An organization? An ecosystem or community?

Intended Use: What is the currency’s intended use? (Different from if it did/ will it actually be used this way but still important, especially early on)

Penalties, Bonuses, and Fees: dis/incentives for joining or leaving the currency ecosystem

Future Demonetization, if any: mostly planned demonetization — think expiring notes and vouchers valid for a limited time which circulate like currency

Aesthetics/ UX: Yep, that matters!

Up Next

This was just the first in a series, and a little bit of a teaser. I plan on diving into each characteristic and writing about what I know, including a few interesting instances when a currency did something weird or cool or downright baffling. I also plan on analyzing and contrasting the physical US dollar and the digital US dollar using this framework (They’re effectively two separate currencies with entirely different characteristics, yet we collectively maintain the illusion that they are the same.)

If you like this stuff, some of the best & most influential information on non-national currency — including historical & existing currencies which act as counterexamples about commonly-held beliefs about currency — can be found through these resources, among many:

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