From Brixton in the UK to Nantes in France and Mombassa in Kenya, local currency schemes are growing. In the face of the financial crisis and changing technology, PCM investigates what communities are creating for themselves, and why. And what this can tell us about the future of money.
Contemplating the future of money is like a police detective working a cold case. It involves patiently challenging the received wisdom of decades, centuries even. It involves re-examining the significance of historical ideas, textbook definitions and social conventions. Sometimes it is necessary to go back to move forward. Particularly because in this case the origins of money are seldom far from discussions about its present and future state. We consider what money has been, what it is and what it will be.
IN THE MONEY
Money is physical in the form of notes and coins. However, jade, bronze and cowrie shells have all been used as money throughout the ages. Air miles, retailer loyalty points and live streaming service credentials stand as forms of money today. They are all redeemable for value, if not directly for cash. As if to underline this, hackers are targeting these modern-day monies and using them in the underground economy.
The textbook definition of the functions of money are a medium of exchange, a store of value and a unit of account. Some definitions also include a means for deferred payment, or making a final payment or settlement. The future of money may involve separating these functions, enabling each to be performed by a different means. Some functions may also be redundant in certain scenarios, so why not exclude them?
There is clearly more to money than its form and its functions. So, what is the idea behind the idea of money? According to Adam Smith, the 18th century moral philosopher and economist, “all money is a matter of belief.” Georg Simmel, the German sociologist and philosopher, described money as “a claim on society.” In so doing, he captured the sense in which money is underpinned by trust, not only between individuals but also across the society as a whole. American economist, Hyman Minsky, combined both ideas, claiming that anyone can create a currency, it is getting people to accept it that is hard.
There is more to money than its form and its functions, but what? What is the idea behind the idea of money?
In his book The Social Life of Money, Nigel Dodd summarises various ideas around money as a social form. Money is variously “a universal commodity form, a claim upon society, a social technology, an instrument of collective memory, a generalised symbolic medium, a social process of commensuration and a communal illusion.” Money is all of these things and more, which is where it starts to get complicated – and interesting.
CARE IN THE COMMUNITY
Community and complementary currencies as alternatives to fiat currencies have a rich history. Indeed the rise and use of such currencies has often coincided with periods of economic hardship. Various scrip monies were used in Europe and the US, particularly during the inter-war years and the Great Depression. The economic downturn of the 1970s as well as developments in IT helped spawn modern community currencies.
Local exchange trading systems (LETS) originated in 1983 in British Columbia, Canada alongside the enabling computer software. This allowed members to advertise and exchange their skills and services with others in the community in return for credits. This was the forerunner to timebanks and time-credit schemes. Closed-loop mutual-credit networks and do-it-yourself paper and digital currencies are other types of community and complementary currencies.
Brixton is a community of approximately 80,000 in south London, UK. Since 2009, it has had its own paper currency – the Brixton Pound (B£) – as an alternative to pound sterling, and a digital currency since 2011. “The Brixton Pound was set up after the financial crisis. The idea was to have a community response to a global issue,” explains Tom Shakhli, general manager, Brixton Pound. “The financial crisis of 2008 wasn’t something that happened in Brixton, however the way the economy is set up, shocks that happen elsewhere ripple into small communities,” he says.
It was a time when people wanted to engage more with the idea of the economy. So, creating a local currency had multiple angles to it, as Shakhli explains. Firstly, to make sense and raise awareness of what money was and where it came from. Secondly, to support small businesses locally by creating a ring-fenced paper voucher that could only be spent in those businesses. Thirdly, to create pride in the area.
Dubbed ‘the money that sticks to Brixton’, the Brixton Pound has been designed by local people for local people. It also features local residents past and present on the notes. Musician David Bowie features on the B£10 and Second World War secret agent Violette Szabo on the B£20. The Brixton Pound is backed one-for-one by pound sterling and accepted by 150-200 local businesses. Lambeth Council also accepts the Brixton Pound for payment of business rates. It pays council workers a proportion of their salary in the currency, if they wish.
“One of the things about the Brixton Pound that is different is it’s explicitly social. It encourages conversations,” says Shakhli. Most payment technologies are doing the opposite, namely closing off conversations to the point where people may not actually be dealing with a human when they pay. “The Brixton Pound gives people, who want to engage in a social economy, or engage in their local economy in a more sociable way, a means to do that.”
Community currencies are an attempt to redefine money and its purpose on a more human scale. They are social as well as sociable. “When you spend the Brixton Pound, you’re spending it in a business which says that I am part of this community, whilst identifying yourself as part of the community. It creates that connection between people,” says Shakhli.
THE SOCIAL LIFE OF MONEY
It is precisely this connection between people, social values and money that economics seems to be missing. In 2001 before he took up the governorship of the Bank of England, macro-economist Meryvn King reflected on the fact that most economists held conversations in which the word ‘money’ hardly appeared. “My own belief is that the absence of money in the standard model which economists use will cause problems in the future.” This was prescient.
More than a decade-and-a-half and a global financial crisis later, there is a growing sense that current monetary models are broken. Or not correctly calibrated at the very least. Community currency initiatives are emerging to address these shortcomings. For example, the very thing that money is designed to do, namely stimulate trade between people and businesses, it often fails to do.
People buy from chain retailers and less money is spent in independent, local businesses. This creates a vicious circle whereby businesses struggle and may eventually close, contributing to homogenised high streets. Community currencies act as an antidote. They are a socio-economic tool, allowing businesses and communities to support each other.
The circulation of money is kept closer to home with shorter supply chains and loyal, local customers. Indeed money spent with independent businesses circulates within the local economy up to three times longer than when spent with national chains, research by the New Economics Foundation has shown.
There is growing momentum behind the desire to create better money. A type of more-than-money or money-plus. Sometimes this means money embedded with values — explicitly social values. In this way, community or complementary currencies can act as a community response to social issues. This includes helping to address a public spending deficit, social exclusion, inequality or negative environmental impacts.
For example, the Swiss city of St Gallen launched a scheme for retired and generally fit senior citizens to save time-credits by helping those in need of basic care. The city acts as a guarantor for the Zeitvorsoge time-credits. This ensures that credits can be redeemed in the future for similar care services should the earner require them.
This idea of involving the local community in the commissioning, design and delivery of local services inverts traditional top-down thinking. Users are no longer passive recipients of services. They are actively involved in the design and delivery of them. There are obvious parallels with community currencies and money creation.
For centuries the state, central and commercial banks have had the monopoly on money creation. But now communities are taking the bottom-up rather than top-down approach to money. They are creating their own and offering an alternative to mainstream thinking. Shakhli from the Brixton Pound picks up the story.
“There’s a temptation to mimic what’s already out there. How we can be a local example of Apple or a local PayPal,” he says. “I don’t really think that that’s our purpose. What we like to do is challenge what is happening in mainstream payments. How can we do something which critiques that, offers something different and taps into something that people want?”
There is an extent to which community currencies help address the parts that mainstream money cannot reach. These are frequently social and values-based in nature. What about the functional shortcomings of mainstream money?
Cash works fine if the parties are face-to-face. Similarly, mobile and card-based contactless payment is a beautiful way to pay for a bus fare, a coffee or a lower-value purchase in the physical world. It is quick, simple and secure for both the customer and the merchant. But there are a number of use cases where current money either does not work well or at all.
“The missing gap is that we need the equivalent of cash or electronic cash that you can use in the online space,” says David Everett, CEO, Microexpert. Credit and debit cards were never designed for the internet, which is where the majority of card fraud now occurs.
As to other use cases, cross-border payments, low-value or micro payments, high-value, business-to-business, regular and instalment payments are also somewhat of a hack today. They work superficially. Either because the conditions or circumstances of use are quite specific. Or because the costs are diffused on to others. For example, on to the merchant and acquirer in the case of card data security (PCI DSS) costs.
There are a number of use cases where current money is broken. Yet the money of the future does not necessarily have to act as a panacea to cure all functional ills. As today, there will be trade-offs around where it will work, but also how. It may work domestically or among a smaller sub-set of a national community, but not internationally. It may work for transactions up to a certain value, but
New money may also separate the traditional economic functions of current money. It may serve as a medium of exchange but not as a store of value. It may also be more or less liquid than current forms of money. Just as cash is more liquid than money tied up in stocks, shares or a pension plan. This points to a multi-currency future.
However, despite the many potential monies of the future, the principles behind them are similar. “What you come down to in every case is a community. Money is all about an asset within a community. It’s just that the communities change,” says Everett at Microexpert. “If you define the community, you can then define the payment instrument and what it means. The product will only thrive if it has the characteristics that suit that community.”
Naturally, one of these characteristics is trust. “People in the community have to trust each other, or they have to trust that part of the community that underwrites the asset,” says Everett.
NO SMALL CHANGE
Community currencies may yet foreshadow the future of money, in that money will be located in communities, challenge traditional thinking and offer something more than money.
In his book Before Babylon, Beyond Bitcoin, Dave Birch argues that in the future all money will be local, belonging to the community in which it is used. It is just that ‘community’ will mean something different in the connected world. Just as we belong to different communities today, based on where we live and work, our hobbies and interests, so this will continue. The future of money will be a future of monies.
“We’re looking to refresh our currency with a new purpose that challenges what digital money can be like in the next five years.” Tom Shakhli, Brixton Pound
Communities will play a role in the creation of these monies. Birch describes the future money makers as the five 5Cs: central banks, commercial banks, companies, cryptography and communities. In fact, the future is here already or at least in sight. Companies, cryptography and communities are already making their own monies – and getting others to accept them.
Companies are creating their own money in the form of initial coin offerings (ICO). Nearly $1.3 billion has been raised so far this year by start-up technology companies using this crowdfunding approach. Companies sell virtual tokens or coins to investors as a type of claim on their future success. Buyers invest, hoping to be able to use the software or service that the start-up will launch.
Local currencies are currently issued and accepted. However, they are not legal tender, rather local vouchers backed by fiat currency. The only way to get them is to buy them. But in the future it could be different. “It would be good to set up a currency that doesn’t rely on being backed by sterling,” says Shakhli. “We’re quite interested in how you could earn Brixton Pound, so it’s a new money supply as opposed to a replication of what is already out there.”
Money may be more radical than what we have at present or what we can imagine. As ever, it is helpful to look back to the past to understand what the future may hold. “Before you had money, you had memory,” says Dave Birch, director of innovation, Consult Hyperion in conversation with PCM. “When we all lived in a Neolithic clan, everybody knew everybody else. Whether or not I’d lend you money depended on what I thought about you and what other people thought about you.”
“Once things began to scale, those memories didn’t work any more and that’s why we needed some type of intermediary instead,” explains Birch. In this way money was a very primitive form of memory. Instead of trusting one another, because people simply did not remember whether they could or not, they trusted money. Money could not embody all the facets of human memory. Hence why it was a primitive form of memory.
“If we could go back to remembering everything about everybody, then we wouldn’t need money as an intermediary any more. It’s an interesting speculation: that might well be the long-term future,” suggests Birch.
“£5 notes can’t remember where they have been or what they have done, but Bitcoins can. So we are shifting to a different kind of money.” Birch envisages a future where technology will help make money smarter. We will move from money that we understand to money that understand us.
TECHNOLOGY-ENHANCED, SMARTER MONEY
Future money will be digital. This builds on what is already happening today. Only around three percent of the total stock of money in the UK is physical cash. The remaining 97 percent exists digitally. This raises interesting questions about the use of money within and across trust groups. Additionally, about how trust mechanisms work and scale, and the role of technology.
Cryptography, connectivity via the internet, mobile devices and social networks may facilitate new and different ways for trust to work and scale. Then there is Blockchain, which brings together four concepts: the distributed ledger, cryptography, open source software and a ‘proof of work’. This may be a way of replacing trusted third-party intermediaries in a transaction altogether.
“Because I’m obsessed by identity, reputation and trust, I have a feeling that ultimately there is a relationship between the new forms of money and community.” Dave Birch, Consult Hyperion
The technology of money continues to evolve. Future money will be born out of technology but also requires technology to work. If money is digital, this means more and more data will be produced and can be appended to the transaction. Early experiments with Blockchain and smart contracts foretell a future of smart, programmable money.
Smarter money will need an interface to manage the programming, permissions and privacy. Mobile devices are obvious possible candidates, although the future may yet be more radical than we can imagine today. It may involve machine-to-machine or Internet of Things negotiations between buyer and seller devices without explicit human input.
If it is driven by and generates data, new money will invariably require data analytics technology, such as artificial intelligence and machine learning. This not only analyses the data but also detects and prevents fraud and so on. Technology will also be necessary in tackling perennial hot-button topics within payments, such as trust, reputation, identity, verification and authentication.
There is a back-to-future aspect to the money of the future. Writing in Before Babylon, Beyond Bitcoin, Birch argues that the newest technologies will take money back to where it came from. This is a substitute for memory to record mutual debt obligations within multiple overlapping communities. This time, however, the money will be smart. It will reflect the values of the communities that define it. It will know where it has been, who has been using it and what they have been using it for.
How far away the future of technology-enhanced, smarter money is, is impossible to say. The barriers to technology adoption, which may delay adoption are easier to identify. Legacy infrastructure, business models and revenue streams are typical barriers. Payments industry infrastructure is costly to replace. It also preserves interoperability and customer choice. Disrupting and cannibalising existing business and revenue is another common inhibitor to innovation for larger companies.
Money sits on a continuum. It changes to suit the needs of the communities, societies and economies around it. Following the 2008 global financial crisis, there is greater recognition that the economy is not separate from the community of which is it part. On the contrary, communities, local and national economies are a series of interconnected systems reliant on one another. If something is wrong in one part, the whole will suffer.
Momentum behind community currencies has been growing since the crisis. This foreshadows the future of money in various ways. Community currencies prove that money does not need to be created or backed by political authorities to be trusted by its users. This has implications for money creation in the future.
Community currencies prove that people do not always act in their rational self-interest when making payments. “There are other reasons that motivate the way we spend money. A lot of people who use the Brixton Pound don’t do it because there is an offer they can qualify for. They do it because they want to feel part of their local area and engage in a concept that champions community,” comments Shakhli.
Money is not perfect today. But new money will have to offer something more-than-money, or offer it in a new way. It will have to reflect value (amount) as well as values (moral principles or accepted standards). As money is located in communities, it will likely reflect community values. And as we are naturally members of multiple communities, our worlds will be multi-currency by default. The future of money will be monies.
The technology of money is also changing. The technology we can see at the moment — Big Data analytics, IoT and mobile devices in particular — has the potential to change money even further. Technology has the power to bring the various monies together in one device, but also separate their functions. This may mean that the future of money is more radical than we can imagine.
“There are different kinds of money for different purposes. One of the things that technology might do is to separate those things,” says Birch. “You’d have to suspect, therefore, that there would be a lot of innovation and experimentation in different forms of money. In time, whatever types of money get invented, taken up and used might be rather different from the type of money we have now.”
The future of money opportunity is huge. To paraphrase Italian writer and philosopher Umberto Eco, the objective is not to create virtual money — an electronic version of money as it is — but hyper money, an electronic version of money as it should be.