In Davos this year, things were different for me. In previous years delegates had looked confused when I explained I worked on currency innovation for sustainable development. This year, all I had to say is “I work on things like Bitcoin” and the conversation would flow. After all, people come to Davos thinking they will hear about big interesting things, and Bitcoin has some of that mystique now. Although the topic wasn’t on the official agenda, two big hitters brought it up and the media immediately conveyed their musings. Richard Branson said it was incredible.. while Shiller said it was probably a bubble. A case of seeing what you look for, perhaps, as Branson is the expert in looking for media savvy opportunities to make money, and Shiller is an expert in bubbles.
I was in Davos as one of their Young Global Leaders. I’m a critic of the Forum, but recognise its unique role as a meeting place and have benefited. By the end of Davos, Id given two media interviews about it and organised a Digital Currency Roundtable at the Hub Culture Pavilion. I even started to be introduced to people as Professor Bitcoin, so found it difficult to talk about anything else! The useful thing about such conversations is they help you to realise what people’s issues are and how to explain things in simpler terms. It was also good training for then going on ITV, RT and BBC to discuss Bitcoin. So here are the main questions and my typical answers.
What is Bitcoin?
It is best understood as two things. First, it is a big database of all transactions in the world using the bitcoin system, which any computer running the bitcoin software interact with. That’s called the blockchain, and it records who has got what and who is paying whom. This is effectively what the banks do for us already, but with bitcoin people can do it peer to peer via computers.
Second, is the bitcoin unit, which is traded for about 500 pounds per bitcoin at the moment. These units are what computers are rewarded with for maintaining that global database of transactions. The bitcoin unit is divisible by many decimal places, the smallest being called a Satoshi. That the bitcoin unit has increased in price so much has made bitcoin famous, but the real innovation that can transform payment systems and monetary systems in future is that global database.
The software that is behind the system was designed to only issue 21 million bitcoins. About 12 million of these are “mined” already. It is no longer possible for us to mine them without specialist computers running the fasted microchips. There are concerns that this form of issuance is neither fair nor very useful.
Is it really money?
Money is a claim of future value from those who will accept it. So it is a unit that enables exchange, within a system of assumptions, norms, agreements, and beliefs. “All money requires belief” said Adam Smith. Per day, there is more money being transferred around the world via bitcoin now than by Western Union. Millions of users and tens of thousands of firms now accept it. So it appears to behave like a form of money. However, many governments are treating it like an electronic asset, rather than a currency.
For me, a currency is any metric denoting value in ways that enable exchange. Reputation points are a currency, for instance, as they can help you transact. Therefore in this way, bitcoin is also a currency.
If you hear anyone saying “it isnt money” that’s a great chance to ask them “where does money come from” – if you know the answer, then you can help them realise their unfounded assumptions of the nature of our current money system. If you don’t know what Im talking about, see my 18 minute speech on the topic from a couple years back: http://www.youtube.com/watch?v=vWeQfNpW9sQ
Is it secure and safe to hold?
The global database or ledger is cleverly designed to be a secure system. It uses cryptography to prevent hacking. 51 per cent of computing power using that global database has to agree on transactions for them to be confirmed. This is meant to stop double spending of the same coins.
If you are storing the bitcoin on a physical device then that could be lost or stolen. Therefore some are using safety deposit boxes or offline storage services. The same goes for cash or precious metals.
(In future we will likely see systems where you could register your own wallet with your personal ID and sign up to a service that would help you trace it, if stolen. There are opportunities for banks and others in this area. Law enforcement would also need to begin to recognise theft of bitcoins as something important.)
If you store it on a service provider then there are other issues. Access depends on you maintaining your password and key, and the quality of the company behind it, where it is based, how solvent it is, how sophisticated it is to protect against hacks. This is the same for your pounds in a bank account – where actually the pounds aren’t even yours (they are the value of the banks promise to you).
Some computer specialists believe that hacking of the global blockchain is inevitable as computer systems improve. Or, that if it’s not inevitable, there is still a risk at some point in the future. I do not know enough about cryptography and computing power to make an assessment of this. The idea that it could be hacked one day would suggest that a future version of bitcoin might have trusted well-governed and well-regulated institutions that regulate access to the global database in the interests of the users. Some would doubt our banks fit that profile at present, and so other organisations might need to be trusted guardians. Others might suggest other means of adding additional security, and spreading risk by using multiple currencies, or agreeing systems for how to recover from hacks.
By the way: are national currencies secure and safe? It depends where you are storing them, and all of the issues Ive described above apply to them as well. To some, the inflation associated with national currencies at a time of low interest rates is a form of ongoing theft.
Is it the future?
The internet changed the business of music firms, video stores, newspapers and publishers. Why would banks and currencies not be next? The implications here could be huge, so we need to study it, and bring more people to understand it, and help shape things for the better.
I think the concept and the technology of a global distributively-maintained database or ledger, enabling transactions peer-to-peer without the traditional banking sector doing that for us, is here to stay. Whether it’s the bitcoin system or not, we don’t know. Bitcoin is just the first application in a whole new generation of technologies which are going to decentralise trust mechanisms and disintermediate a whole class of institutions. I have listed a number of limitations of the bitcoin system on my website, and so we can look to see whether the new innovations in cryptographic currencies improve on that system. Some of the new initiatives that take inspiration from bitcoin appear to have massive potential, such as Nextcoin, Etherium and Ripple. Other initiatives, like Solarcoin, could also be very interesting, as they connect issuance to activity that we want to support, such as renewable energy generation. Some other innovations appear to not progress the technology significantly and instead seek to cash in on interest.
For the bitcoin unit, we don’t know what the market price will be whether it might settle to some price range and therefore be more useful as a currency, providing a unit of account, a store of value, and a means of exchange. But it is also here to stay and play a role.
Ultimately we need currency systems that are more connected to communities issuing the credit to each other, rather than a fixed amount of currency being issued to fortunate people. Such credit currencies will be possible with the newer designs of blockchains. In the meantime, the open source non blockchain software for community currencies, from Community Exchange Systems and Community Forge, the most exciting community level initiatives, and the TradeQoin system based on the latest Cyclos software is the most exciting b2b real economy mutual credit system.
The most important thing for people to understand is the difference between currencies that are “things” issued separately from a community agreement about extending credit to eachother, and those that are simply metrics for accounting of promises between members of the same system for exchange. For anyone who has studied the history of currency, in books by Graeber, Greco, Lietaer, Riegel, or Zarlenga, then this difference is clear, and credit currencies are the key. I explain this with Greco in our joint paper, Currencies of Transition: http://base.socioeco.org/docs/tnt_bendell.pdf
Is it a bubble?
We should separate the two things that bitcoin is when discussing if it’s a bubble. The global database of transactions, maintained by many different computers, that bitcoin blockchain, that’s a new technology that has incredible potential. That’s not a bubble.
The bitcoin unit, how much people are buying it for, it’s a matter of opinion on whether it’s a bubble. We will see more facilities for people going short on bitcoin, at which point doubters can come in and if right they can make money from their bets against bitcoin if it falls. But its early days of its adoption so the price could also go far higher.
Some people who are saying it’s a bubble don’t understand the value of the technological innovation, the new functionalities it offers, and the multiple intentions of the user. Some are interested in it for remittances, some as a new way to receive payments quickly and cheaply especially from abroad, some as a hedge against the next financial crisis, some as a quick way to speculate to make money, some as an experiment to understand and adapt for better things to come, some to generate interest in their own activities, while others see it as a protest vote against the current banking and money system, a small peaceful act in line with the kind of revolutionary change that Russell Brand has caused some buzz about recently.
Speaking about bubbles is popular right now due to the last Nobel prize for economics going to researchers who analysed why bubbles occur. Im not a monetary economist but any economic analysis of asset price inflation that doesn’t examine the key role of credit creation, for those assets such as housing, is completely flawed.
Why is it useful?
It is very fast, very cheap (almost free), global, can serve the unbanked (as many people in the world don’t have a bank account), as well as offering a platform for innovation of new payment, accounting, and financial applications. Its success in the past year also has led to the early adopters now being able to fund new innovations, such as Ripple.
The reason I presented about Bitcoin to Oxfam last year is that I think that it has major potential for cheap cash transfers. The impact on the remittance business could be huge, and the start ups in Kenya and Philippines on this show the way. That bitcoin can also be integrated into sms payment systems mean this could be useful on the street in low income countries. If interested, check out things like Pikapay and Bitpesa.
I also see how bitcoin is having a positive educational effect, encouraging more of us to think about basic questions like what is money and currency, and why does it have to be this way? As I explain in my next book, Healing Capitalism, we need to change the monetary system to achieve a fairer, more stable and more environmentally sustainable economy and society: http://www.greenleaf-publishing.com/add_getquantity.kmod?productid=3799
We often think that money is wealth. But let’s not forget that we are the real wealth – our communities, technologies and the environment. Currency and money are actually just a way of keeping score. The current economic difficulties started out with a credit crunch. That meant less money or currency in our economy. Is it not odd that with less ability to keep score of our transactions, we had less ability to transact? Seen that way, it does seem odd. So some are waking up to this reality and thinking, why not create a new scoring system, a new currency, so people can transact? I sometimes say money is like the speedometer not the petrol, yet we treat it like the petrol, and slow down when suddenly there are less miles per hour on the clock, rather than miles in the tank. Keynes knew about this, of course, but his solution was to get the government and tax payers into debt. It doesn’t have to be that way.
Is it criminal?
All currencies and payment systems can be used by criminals, as the recent settlement by HSBC on money laundering shows. All technological innovation poses new challenges. Bitcoin presents new regulatory and law enforcement challenges.
Some think bitcoin provides anonymity, and therefore could enable crime. Yet it doesn’t easily provide anonymity. The blockchain is public and it would be difficult to remain anonymous once transacting regularly. That is why law enforcement agencies have been able to prosecute people associated with the website Silk Road.
In the UK, we need the Senior Fraud Office and the Financial Conduct Authority to be able to enforce existing laws on all our financial service providers. Bitcoin is no different in that respect.
There are broader issues of what is an appropriate level of privacy and anonymity at the individual level. Cash provides anonymity, for instance, and many consider it important for individuals to maintain some privacy of their financial transactions, whereas organisations should not have such privacy. These issues need to be examined from various perspectives, and that is not helped by incorrectly simple associations between bitcoin and anonymity.
The arrests of some people running bitcoin firms in connection with money laundering has been represented in some media as suggesting bitcoin is itself illegal, even though the law enforcement officials have made a distinction between criminal activity and bitcoin. Such reporting is unprofessional and misleading.
In some countries, however, government officials are communicating that they think bitcoin might be illegal itself, or at least that financial firms should not be using it. Recent communications from India, China, Thailand and Russia, are examples. However, other countries have provided guidance on how it is legal and how it will be regulated and taxed, such as Finland, Germany, Singapore and USA. My view is that many government officials sound very confused and therefore need better information and advice in providing guidance or future regulation on currency innovation. For instance, many alternative currencies are already in operation for decades in countries where officials have suggested that non national currencies might be illegal. Infact, I reckon many such officials have even used or benefited from such currencies… airmiles, for instance.
Some are concerned bitcoin might enable tax evasion. Clarity is required on tax, and is something being worked on right now by the UK government. Some other countries have clarified it will be treated like gold, and therefore be exempt from VAT if you buy it, but if you profit from it you will need to pay capital gains tax. Ultimately regulation should occur through global collaboration, so that we don’t have bitcoin firms seeking out the most lax regulatory and tax environment. However, most merchants that accept bitcoin receive it as national currency, and declare the national currency income.
Is it environmentally friendly?
Is the current banking system environmentally friendly? Via its carbon footprint or via the effect it has on society? The carbon footprint of all the computers, the transportation of cash and metals, the physical buildings and the staff, and their profligate lifestyles, is huge. In addition, the overall effect of current banking on the environmental is problematic.
If we look at the direct footprint of the bitcoin database system, then the energy consumed is quite high, and the system could be improved with new adaptations of the code. However, I met some bitcoin transaction processers, or miners, who are now off grid, to save electricity, having bought their own solar panels.
Do we assess wind turbines on the basis of the carbon footprint of their manufacture? No, we look at their lifecycle. That’s a difficult thing to assess for bitcoin, because it is unclear what influence it will have on the banking system. Many people are into currency innovation because they want to change the dominant position of banks in our economy. My research has led me to conclude that the current banking and monetary system is not conducive to fair, stable, and sustainable societies. It took me sometime to understand that academically though it may seem quite obvious, what with all the scandals, the boom bust cycles, the gross inequality and the inability to invest in shifting quickly to a more climate friendly economy.
So for social progress we need more monetarily literate people, who then may choose to say to central bankers they don’t like the monetary system and want something better or they will use alternatives.
The recent creation of SolarCoin, which uses a blockchain but where 99% of coins are premined and awarded to those creating solar generated power, is another interesting innovation.
Ultimately for as fairer and sustainable economy we need to restore the credit commons we had many centuries ago, where we issue credit to each other, and so we as communities decide who gets to realise their dreams and who can be trusted, not the bankers. Those environmentalists who then question whether we want to make it easier for people to transact, are making a category mistake, thinking that our ability to transact will necessarily mean more consumption of natural resources – the key difference is that if we create credit for each other, what is funded is more likely to be what communities want.
I discussed this in some detail on Sea Change Radio.
What are you learning by accepting it at the University?
The conversations across different departments were really helpful to understand how larger organisations relate to this innovation. For instance, our finance team needed to look at how to make sure our acceptance of bitcoin aligns with our compliance with anti-money laundering laws.
We have also discovered how different people respond to unusual innovations. Some are excited, some confused, some sceptical. The nature and content of those responses is important. We will see if there is uptake of the new payment service, and we will write it up at the end of the year.
Most entrepreneurs and management gurus say that to learn something new in life you have to be prepared to make mistakes. Yet most managers don’t approach their work like that at all, and focus on being as cautious and boring as possible. We need to innovate in ways where we seek to minimise risks yet not avoid all risks. Universities shouldn’t just be museums of old ideas but actively engaged in the challenges and trends of our time. Newer universities can and should innovate, not just emulate.
We have also discovered that there is interest in this topic worldwide. Our acceptance of bitcoin payment has been covered in mainstream news in Australia, Philippines, France, Hungary, Singapore, Indonesia, India, USA and Latin America.
What should my company do, and what should I do?
For an individual, how to respond to currency innovation depends on your risk tolerance, how tech savvy you are, how politically engaged you are and whether you might benefit locally. I recommend we all look for local mutual credit currencies, whether time banks, or mutual credit systems. Some may wish to earn, buy or mine crypto currencies, and I think it important to experiment but not to risk too much.
For organisations, then accepting alternative currencies is useful marketing, as we have seen with the Brixton Pound, Bristol Pound and now Bitcoin. In addition, for some institutions that expect another financial crisis soon, then crypto currencies can be a hedge, in terms of asset value, but also an alternative means to make payment if there is a freezing up of the banking systems. Its part of their business continuity planning.
Some sectors, like financial services, telecoms and software, firms would be almost negligent not to actively experiment in this field. At Davos I spoke to the CEOs of two of the world’s largest software and web firms, and they confirmed they weren’t looking at this. In Summer Davos the boss of Western Union said they aren’t either. Bad mistake, but fairly usual for incumbent organisations.
For other firms, becoming actively engaged in currency innovation can be part of their corporate responsibility and sustainability activity. To understand why, managers need to understand the role of monetary systems in causing so many problems in environment and society. Ive got bored of explaining why that is, so I recommend my TEDx which is only 12 mins long: http://www.youtube.com/watch?v=X5uGLbV5zVo
There is a lot of misunderstanding. So we need to professionalise. It is also massively important, so we need to pluralise the stakeholders involved in the conversation about its future, its role, and regulation. We can’t leave this field and it’s regulation to leave it to bankers, techies, telecoms, treasury departments and traditional economists.
Therefore, at IFLAS we’ve launched a course, we are supervising research, and planning with UN agencies to host a second event on the question of the potential and limitations of currency innovations for sustainable development.
Interested people can follow developments by reading CoinDesk or the Bitcoin Magazine.
When did you get into this topic, why and are you an economist?
I consider myself a currency sociologist, who is studying this area through both action research and discourse analysis. I began working on this at the end of 2009, when I outsourced myself to India to learn about currencies with the team of programmers working for Community Forge to create free open source software for communities to create their own exchange and currency systems.
My work on corporate responsibility and sustainable development since 1995 led me to understand that our current monetary system is a barrier to social and environmental wellbeing, and that incremental change or political representation wouldn’t encourage the level of change needed. Instead, I turned towards what technological innovation could do to encourage change. Im hoping to help a peaceful incremental revolution in our monetary and exchange systems, so that monetary systems serve us not dominate us. That is an essential part of the design challenge for economies to thrive for all for the long term. I describe this in my book Healing Capitalism.
I’m not an economist. I take my monetary economics lessons from the writings of economics Professors Steve Keen and Professor Richard Werner as well as the brilliance of Dr Bernhard Lietaer, EC Riegel, and Thomas Greco. It is funny how economists think they can talk about any subject but if someone speaks about an issue of economy or money, many economists prefer to doubt arguments on the basis of whether one claims to be an economist. That leads to massive confirmation bias amongst the economics profession.
Do you have bitcoin?
I’m not investing in bitcoin. I like having my money in the local Cumberland Building Society, which lends it to local businesses. I see bitcoin as part of a broader area of promoting more sustainable exchange, and for me the best approach is to put what money we have into activities we want to see happen, and to support more community-owned approaches to currency innovation, such as that by CES, Community Forge and Timebanks.