Part 1 of a series deconstructing currency into its component characteristics and analyzing when and why currencies fail Almost all the theories and philosophies I’ve read about currency — especially recently — are 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. functionally 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 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. cryptocurrency 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 , . 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. from time to time including blockchain initiatives Through working with three of these currencies around the US — in the Bay Area, in Upstate NY, and 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. Bay Bucks Ithacash BerkShares 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. To be clear right at the beginning, I’m not against crypto or blockchain. I am, however, concerned (and a little annoyed) with how frequently people pontificate 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: lightly-informed 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 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 from those who generated that wealth to those did not generate that wealth, and have done so in an unjust way. necessarily real wealth Furthermore, if you’ve ever discussed 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 and thus, defaulting on bank debt is a necessary part of the monetary system. money debt owed to banks is completely different from debt owed to individuals 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 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. not 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 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 to create an F-35 currency. F-35 currency: not 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, “ ” 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. What would I do if I could go back and start this currency from scratch? 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, , 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 . Elementary Characteristics that would differentiate a housecat from a lion or a sculpture of a cat 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: Secondary Characteristics It is an indoor or outdoor cat? Friendly or not? A kitten or an old cat? 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 change the core uses and users of the currency, but will change the extent to which it it gets used. Tertiary Characteristics not Is the cat declawed? There’s a good, relevant cat. “A tabby cat sleeping on an a couch armrest” by on Sabri Tuzcu 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 : How does the currency come into existence in the first place? Issuance Policy Loaned or sold by the issuing entity Issued freely by the issuing entity (includes QE; helicopter money; airdrops; etc.) by being purchased with/ exchanged for another currency Exclusively issued Mutual Credit Mined or issued for some other form of computation Other : 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) Issuing Entity or Entities : Is the currency with a positive, a negative (including different types of ), or a zero interest rate? Interest issued demurrage : What is the currency’s relationship with value (there is a lot to this) Relationship with Value Value as access to some network utility via fees ( ) e.g. on Ethereum; on Stellar; TAXES on paying in USD gas lumens _(_e.g some crypto exchange and lending-related tokens) Value as a access to some network utility via membership Value as (e.g. MakerDao, Aragon, Civil, etc.) governance stake Value as (see below) backing (there’s a whole lot to this, too) Backing Backing as a (including commodity currencies like gold coins or cocoa beans or cigarettes where the currency the thing of value itself; the US dollar pre-1933; etc.) guaranteed, redeemable claim upon x is Backing as a (time-backed currencies & timebanks; mutual credit systems;commodity-backed currencies; etc.) limitation on issuance Backing as (“fiat currencies” which are, in-part, backed by force if you don’t accept them) enforcement, force of law, or guaranteed acceptance Secondary Characteristics : What form does the currency take? Form 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? : (agent-focused; identity) Is a person’s identity linkable to accounts or units? To transactions? Visible to all or just certain types of user? Anonymity : (account-focused or unit-focused ) Are accounts or units publicly visible? Are transactions? Visible to all or just certain types of user? Tracking and Auditability : Security Physical or digital security features (highly dependent on above) form, Reversibility & recovery (relates to , above) enforcement (if a community is small enough, digital any physical security features don’t matter as much since dishonesty behavior is reduced) Trust : Is acceptance wide and deep enough for the currency to circulate? Acceptance Ecosystem (Can staple goods and inelastic goods/ services be acquired easily and reliably with this currency?) Redemption for Necessities (Does the currency flow sufficiently? Does it often stagnate after being accepted by certain types of user — like those who sell staple goods?) Risk of Stagnation Tertiary Characteristics : Instant, like cash? 10 minutes? Takes forever (e.g. 3–5 business days)? Clearing Time : What does the issuing entity signal publicly, regarding issuance policy? Issuer Signalling : Can it be exchanged quickly to “fiat” and commonly-used currencies? This helps drive adoption and increase acceptance in the early days. Ease of Convertibility : Is the currency supported by a power structure? An organization? An ecosystem or community? Support : 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) Intended Use : dis/incentives for joining or leaving the currency ecosystem Penalties, Bonuses, and Fees : mostly planned demonetization — think expiring notes and vouchers valid for a limited time which circulate like currency Future Demonetization, if any : Yep, that matters! Aesthetics/ UX 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: out of Community Currencies in Action (CCIA) and the New Economics Foundation (nef) People Powered Money by Bernard Lietaer and Jacqui Dunne Rethinking Money: How New Currencies Turn Scarcity into Prosperity by David Graeber Debt: The First 5000 Years - the blog of researcher JP Koning Moneyness
