Guillaume's blog

Thoughts on the future of money

BitCoin, the BlockChain and the Internet of Things

Posted on November 26th, 2013

Just re-posting it from Twitter:

I think what people should be really excited about is the blockchain. BitCoin just an app.

Exciting: having the ownership of every single real/virtual object in the world recorded on the blockchain. [Transferrable to anyone in real-time.] Cars, houses, hotel rooms, airbnb stays, IOUs, store credit, stocks, art, etc. all recorded on the blockchain. In the future your car may connect to the blockchain to check that you own it and can start it, for instance.

These myriad of claims on assets with the Internet acting as global router will cause the banking/commerce convergence. once banking/commerce converge we’ll pay in our currency and vote by accepting others. #politicalaspects

 

The future of money is less money

Posted on October 5th, 2013

This is a piece I originally posted 2 years ago as a comment on emergentbydesign.com.

The money we use is Government money or levered Government money (bank credit). Government money is backed by legitimate force. The question is: what do this money become when force becomes not only illegitimate, but ineffective?

I think that we may have or be closed to have reached the limit in using legitimate force (Government) to back our money.

There are several reasons for this evolution: dwindling returns on the use of force in driving the success of large organizations, gridlocked political processes, environmental limits, difficulty to monetize the growing immaterial economy, and many more.

If so, the current monetary system used is likely to continue to deflate, as debts are paid or defaulted on, with regular bursts of inflation by fiscal/monetary authorities but with decreasing marginal returns.

The good news is: we are bound to continue to grow, to pursue Happiness, and we will need systems to continue our growth. But more likely around “soft power” systems, where reputation plays an increasing role.

In other words, the future of money is less money and more not so random acts of kindness. In other words, we can deflate in monetary terms, but inflate in terms of social currency.

There is a lot for bankers to do here. Banks are not going to go away. As trusted intermediaries, they will likely play an increasing role in providing us with convenient, actionable and reliable access to data about other people and organizations, not just the money we owe or are owed.

This evolution will take time. Money is here to stay, but over time, it may decrease in relative importance to social currency. It’s time for banks – big and small – to leverage their assets and position themselves in this space.

And a bit more on why there may be less money in the future:

Most of the money we use is already bank-issued checking money in the unit of account of fiat money. Deposits are IOUs of the bank, regulated by the Govt. The demand for most of the checking money we use is not driven by fiat but by the fact that some people want to get in debt and then have to find the money to pay it back. So banks have already put their weight here.

What I am saying above is that there is a shift in people’s willingness to borrow on the basis of secured IOUs, that is secured by the use of legitimate force to liquidate their assets should they not be able/willing to pay back. Most checking money in the US are backed by mortgages (60% I think), which means that ultimately most dollars are backed by the right of a Sheriff to come to your house, throw your stuff on the street, change the locks and tell you “sorry just doing my job”, then auction off your house.

Having such potential violence backing our everyday’s transactions is not a necessity, and one could argue that it may be counter productive.

Now, people may not be willing to borrow and pay with checking money backed by legitimate violence, but they may still be willing to pay with unsecured IOUs backed by their own productive/creative capacity. So if I’m a programmer, I’m willing to pay with $ backed by my programming skills. Of course, these will not have the same liquidity as $ backed by secured IOUs, but may go a long way in some cases (see [1]). In this model, Banks could play the role of IOU routers in the network of participants, not issuing IOUs of their own and discounting people’s, but merely helping the IOUs flow.

At the extreme, why even give unsecured IOUs, why not just publish for everyone to see that you receive goods/services of a certain $ value on the Web, without any explicit contract to reciprocate, only a social pressure to. Over time, those who reciprocate would certainly receive more goods/services than those who don’t. In this model, banks could play the role of trusted repository of reputation data about participants, making sure your reputation is correctly accounted for and not tarnished/spammed.

In conclusion credit money is just reputation turned into commodity through the use of legitimate force. There is a limit to it though and just as we have experienced a resurgence in commodities as store of value, we may see a resurgence of peer credit as medium of exchange.

IMO, none of this will replace fiat money or bank money, but we will expand the spectrum of possibilities beyond what is currently available.

[1] Liquidity in Credit Networks: A Little Trust Goes a Long Way http://arxiv.org/abs/1007.0515

Electronic money and #sandy

Posted on October 31st, 2012

As we mediate on the devastation of hurricane Sandy, one thing to consider is the usefulness and the resiliency, if any, of the new money technologies, during such a disaster. Here’s a collection of tweets related to payments and #sandy that gives a taste of where we are.

 

Multidimensional value and the future of transactions

Posted on April 30th, 2012

I was talking recently to people who have been using our neighborhood rewards debit card in Bernal Heights, and they mentioned:

Something we are striving more and more to do is to be considerate and conscious of supporting our neighbors. Sometimes, I could go find something cheaper, but then it wouldn’t support the merchants on the hill who are making Bernal what Bernal is. Each of these merchants are daily stops. Maybe economically it does not make much sense, but it feels more involved to see people everyday and say hi, have that process.

Why is it that something that feels like it makes sense may be said to not make much economic sense? What if it is not making economic sense only because we have impaired economic sight, because we are only measuring the transaction in one unit – financial capital, but are missing measurement of the same transactions in other forms of capital.

I recently met Alexandro Lazlo, a system scientist, who shared with me his typology of capital. According to him, there are 10 dimensions of capital, financial capital being one of them. I thought it would be interesting to think about the kind of measures that we could come up with for any given product or service purchase.

While our Bernal Bucks rewards card focuses only on two dimensions: financial and social (building relationships with businesses), it’s interesting to thing about the consequences of having a mobile point-of-sale device in your hand able to not just scan barcodes to retrieve its price and keep track in a shopping cart, but also to retrieve information related to all of these capital dimensions and helping you make a very different economic calculation.

We may soon realize that the things that didn’t make sense economically only didn’t because we were making economic calculus with very limited information.

Here are Lazlo’s 10 dimensions of capital.

  1. Natural capital: the raw materials we use as input in our industrial processes and the affordances1 they provide
  2. Manufactured capital: the finished products to which we ascribe market value
  3. Financial capital: the monetary repre- sentation of market value
  4. Technological capital: the implements and methods of doing or making that extend human capability
  5. Intellectual capital: the knowledge and know-how that support human activity and innovation
  6. Human capital: the health and well- being of a productive and creative population
  7. Social capital: the coherence and func- tionality of relationships in a commu- nity and the foundation of trust that underlies them
  8. Cultural capital: the lifeways and tradi- tions that characterize a society or social group
  9. Ecosystemic capital: the biodiversity and biotic robustness of a bioregion
  10. Evolutionary capital: the potential for a course of action to be ongoingly emer- gent, regenerative and opportunity increasing

Here are the corresponding 10 dimensions of a purchase transaction for a product/service:

  1. Natural capital: how much energy was consumed to produce this product, what type of energy, how renewable, what raw materials were used, in what quantity, how much was wasted or actually ended up in the product?
  2. Manufacturer capital: how many products/services like the one I purchased were manufactured or serviced? where are they located?
  3. Financial capital: not just how much it cost to purchase, but how much it cost to produce. Also, how much will it cost in the future to maintain or recycle.
  4. Technological capital: which technologies is the product or service advancing or making available to a wide number of people at a lower cost?
  5. Intellectual capital: what patents were involved, which were created as part of the process, how many?
  6. Human capital: who are the people who manufactured the product, how did the production of this product contributed to their long-term well-being. Which communities of people does owning the product or using the service grants access to?
  7. Social capital: which connections the purchase of the product or service created. The retailer, the designer, the workers, the suppliers, etc. Are these people accessible to converse with as a result of the purchase of the product/service.
  8. Cultural capital. Which values and culture does this product or service supports. Which communities is it linked to.
  9. Ecosystemic capital. How does the purchase and use of the product or service contribute to the biotic robustness of the region I live in, or the regions I care about. How does the product/service contributes to my long-term heath and those of the people I interact with.
  10. Evolutionary capital: How friendly is the product open to mods, user-generated improvements, what user/hacker communities exist, how available are development kits and resources to innovate on the product or service as a platform.

What drives demand for money?

Posted on February 8th, 2012

John Carney at CNBC tells the fascinating story of a college currency called the Buckaroo and asks the question: is the demand driven by the community service taxes that the college only collects in Buckaroo, or is it driven by what goods/services these Buckaroo can be traded for from students. John argues in favor of the latter.

This has implications for real world economics, of course. It demonstrates that taxes are not sufficient to give money value—at least, not beyond the level of near-term anticipated taxes. What is required first is the creation of wealth, or genuine economic output.

The desire for the products of our economic output drives money. If productivity collapses—or if it is anticipated that productivity will collapse—the value of money will collapse right along with it.

I tend to agree with John. Here’s my comment, based on my practical experience with rewards systems and simply looking at young gamers:

There is no need for coercive tax to assign value to the unit in a credit system. All is needed is that the units be accepted/ recognized by those with the products/services people want, and people willing to get in debt measured in such unit b/c they know they will be able to earn/repay later.

Case in point: kids spend enormous amount of time earning points in their virtual games, only because they can buy virtual goods that they value from the game’s marketplace. No taxing authority here drives the demand for the virtual currency.

Another example are rewards currencies. Hoarded and desired enough that they are used by some as pseudo-money, not b/c of taxes, but b/c they are redeemable for travels.

So what does the capability of forcing people to accept a computing entry in exchange for desired goods/services bring? what does the capability of taking back by force these computing entries and deleting them bring? what does the capability of arbitrarily creating these entries and buying other entries with them bring?

It brings stability of the liquidity over time and space.

I ran out of credits characters before I could finish my thought. What I describe is the very reason why Governments borrow money. They could spend it and tax it back, but instead they spend it, then borrow it, then tax it. Why? Well they borrow it as a way to show that they are not abusing their coercive spending power, while providing a risk-free financial savings assets and stabilizing the amount of liquidity available in space and time via monetary policy.

Of course one can question how well there are doing this. It seems that – perhaps because of a political process driven by money – every market-driven credit expansion comes with demand for lessened Government oversight, while market failures require massive and messy Government interventions. In both cases a more gradual counter-cyclical use of coercion might be a good idea, but somehow it never works out this way, only through bubbles and crisis.

The big question then is whether there is an alternative to coercion for keeping a credit system robust and stable. More specifically, is there a decentralized algorithm, a set of simple rules through which we can provide good enough liquidity in a way that matches the (hopefully expanding) real productivity. In other words, will banking someday shrink to a clearing algorithm, in which everyone will pay w/ their own promises and will vote by accepting others’?

The idiot and the coin

Posted on February 7th, 2012

It is said that a city inside a group of people enjoyed the village idiot. A poor man of low intelligence,odd jobs and lived on alms.
Every day they called the idiot at the bar where they met and offered him the choice between two coins: one large of RÉIS 400 and one smaller of 2,000 RÉIS. He always chose the largest and least valuable, what was the laughing stock for everyone.
One day, a group member called him and asked him if he had not realized that the larger coin was worth less.
- I know, replied the fool. ”It is worth five times less, but the day I choose the other, the game ends and I will not earn my money.”

One can draw several conclusions from this brief narrative.
The first: Who looks stupid, is not always. The second: What were the real fools of the story?
Third: Who is greedy ends up spoiling their source of income.
But the most interesting conclusion is: The realization that we can be good, even when others do nothave a good opinion about us.
Therefore, what matters is not what they think of us, but who we really are.
The greatest pleasure is an intelligent man playing the fool on a fool who plays the intelligent man (Chinese proverb).

Arnaldo Jabor, 2007

From a PhD dissertation on social money.

Money that can buy you a future.

Posted on January 5th, 2012

In Andrew Niccol (Gattaca) latest dystopian science-fiction movie “In Time”, money is time, quite literally: money is measured in seconds, minutes, hours, centuries and beyond 25, people need to earn and buy themselves time, every minute of their life, or die in an instant.

A very privileged few have enough to buy themselves immortality.

Will Salas: Quality time… There really is a man with a million years.

Philipe Weis: It’s my first million. It won’t be my last.

Will Salas: You know how much good it could do?

Philip Weis: I know how much harm it could do.

Philip Weis: Even if you give a year to a million people, you are just prolonging their agony.

Sylvia Weis: We are prolonging their lives.

Philip Weis: Flooding the wrong zone with a million years, it could cripple the system.

Will Salas: Let’s hope so.

Sylvia Weis: We are not meant to live like this, we are not meant to live forever. Although I do wonder, father, if you’ve ever lived a day in your life.

Philip Weis: Is that so? You might upset the balance for a generation or two, but don’t fool yourself, in the end nothing will change. Because everyone wants to live forever. They all think they have a chance at immortality even though all the evidence is against it. They all think they will be the exception but the truth is for a few to be immortal many must die.

Will Salas: No one should be immortal even if one person has to die.

In Time (2011)

Without having to go in a far and dark future, the connections between money and life or death are many.

  • If wealth is what sustains life, in our industrial society, money is pretty much the only way to access wealth and survive.
  • Moreover, money is already a way to prolong life. It can’t prolong it forever, but it can significantly increase the probability of a longer life.
  • Money is also a way for us to at least convince ourselves that we can conquer death by minimizing its unavoidable effects. In the past, the belief was that giving to the clergy would buy yourself a ticket to paradise “what you give in this life will be returned to you to a thousand times in paradise”. Nowadays, the belief is that the state can maintain and ever growing set of public services as well as keep financial markets stable enough that our financial life insurance products can be relied upon to provide for our loved ones in the event we die.
  • Modern money itself is backed by the sovereign’s ability to force us to accept coins, pieces of paper and bits in exchanged for real wealth, including labor and sometimes life itself. Ultimately this force comes from the legitimate use of the threat of death.
  • Last, money like death, is something that our society tries to hide. We no longer use envelopes to wrap dirty cash, and don’t even need to pay with a cold, business card-like plastic card, we can just say hi and act as if what we just ordered we got for free. Death is just like that, something terrible that no one should talk about anywhere, as if it’d never happened, and instead revere youth.

What this intimate connection between money and life/death mean is that while there may be a bright future for all kinds of new currencies, there is still also a bright future for currencies that can truly guarantee you a future, and in some case help you overcome death.

These currencies will likely place a particular focus on:

  • privacy: few people other than ourselves will know, and it will not be used for daily transactions.
  • security: they will be very difficult to misappropriate.
  • high trust: they will rely on a framework that we know will survive us well after we are gone.
  • redeem-ability for goods and services that can keep you safe from harm, save your life or simply help prolong it.

For instance: healthcare savings account + life insurance policy + access to a large network of healthcare, fitness, safety/security services.

From currency of ideas to currency of exchange/reciprocity

Posted on October 29th, 2011

Repost from another list.

Starting a community currency does feel sometimes like going against the current. It’s ironic and I don’t think such initiatives should require massive exertion of will, selling, convincing, showing. To me these are symptoms of a design process that failed to progressively engage the community, starting with the very simple before moving to the ever more complex.

To be concrete, trying to replace our current medium of exchange is very complex because ensuring reciprocity is hard and I don’t think this should be the starting point.

On the simple end, I see for instance: starting a group for your community where people are encouraged to share stories, pictures for the simple purpose of seeing what they do acknowledged by others in a way that’s recorded and semi-public. Over time, these acknowledgements can be formalized from plain english comments to more formal hence accountable forms of expression such as hashtags or “like” buttons, to which the community collectively assigns meaning over time.

So how we move from the simple currency of ideas/stories to the more complex currency of reciprocity/exchange?

Reading notes on Bernanke’s roadmap speech

Posted on September 17th, 2011

Next week is an important week for the US economy. The Fed has probably its last opportunity to make bold announcements before staying mum for the presidential election. This is why it’s important to re-read the speech Bernanke made about fighting deflation years ago, which many see as the roadmap followed by the Fed Chairman in combating deflation in the US.

My conclusion at this point is that the Fed is likely to not commit on a quantity of money (as it did in “Quantitative Easing 1″ and 2) but focus on an inflation or interest rate target, leaving open the quantity and type of assets it will buy to achieve that goal. This is what will give them the most flexibility over the next year as the election unfolds. This is what analysts have referred as “interest rate caps“.

Of course, I’m highly skeptical of the actual benefits of this action for the real economy, unless it can be focused on assets that will create local jobs and restore confidence in the future, and unless it can limit the abuse of free money. But this would be quasi-fiscal policy. I also think that the Fed is experiencing diminishing returns on their actions (QE2 was less effective than QE1 from a Main Street economy standpoint), and their credibility in actually fighting deflation may start to be put into question by markets.

Noteworthy excerpts of the speech below.

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time–if it were credible–would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.

The following is interesting in the context of the recently announced collaboration between central banks to address the US dollar demand of European banks. Of course, the plan announced by the Fed is unlikely to be specifically linked to this, since this type of operation is politically difficult.

The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

This part is interesting in the context of Jobs plan that Obama recently announced. But the plan is unlikely to be in effect in time for the Fed to play its role, if it is voted at all, so it’s unlikely that the Fed actions will be directly linked to it.

the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.

[...]

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

The role of banks in the future of money

Posted on September 17th, 2011

This is a repost of a comment I posted in response to @venessamiemis post.

The money we use is Government money or levered Government money (bank credit). Government money is backed by legitimate force. The question is: what do this money become when force becomes not only illegitimate, but ineffective?

I think that we may have or be closed to have reached the limit in using legitimate force (Government) to back our money.

There are several reasons for this evolution: dwindling returns on the use of force in driving the success of large organizations, gridlocked political processes, environmental limits, difficulty to monetize the growing immaterial economy, and many more.

If so, the current monetary system used is likely to continue to deflate, as debts are paid or defaulted on, with regular bursts of inflation by fiscal/monetary authorities but with decreasing marginal returns.

The good news is: we are bound to continue to grow, to pursue Happiness, and we will need systems to continue our growth. But more likely around “soft power” systems, where reputation plays an increasing role.

In other words, the future of money is less money and more not so random of kindness. In other words, we can deflate in monetary terms, but inflate in terms of social currency.

There is a lot for bankers to do here. Banks are not going to go away. As trusted intermediaries, they will likely play an increasing role in providing us with convenient, actionable and reliable access to data about other people and organizations, not just the money we owe or are owed.

This evolution will take time. Money is here to stay, but over time, it may decrease in relative importance to social currency. It’s time for banks – big and small – to leverage their assets and position themselves in this space.