"Smart money" needn't only be an idiom. In the future, money could help you decide how to spend—and to make the world more ethicalby Eric Lonergan / May 17, 2018 / Leave a comment
Published in June 2018 issue of Prospect Magazine
What would it be like if money had a mind of its own? What if instead of notes in your wallet, guaranteed by the Bank of England, you had digital “coins” that prohibited you from buying cigarettes? What if this intelligent money could tell you whether the shop you were spending it in was paying its taxes, or reveal the working conditions in the factory that made the clothes you are about to buy? What if the pound in your pocket regulated itself, by multiplying during a recession, to increase your spending power?
We use our existing money to pay for our essential needs, for schools, hospitals, charities and the arts. But the same money finances pollution, crime, human trafficking, even violence and warfare. If money could think for itself, if it could decide what it wanted to be spent on, it might well conclude that it didn’t want to get its hands dirty.
In the distant past, different mints and different banks would vie with each other in issuing forms of money. And with the advance of technology this is happening again, as we have seen with Bitcoin. My contention, however, is that whereas in the past it could be said that the bad money would drive out the good, we are entering an era of real smart money, where the good just might be able to win out. Instead of corrupting everything it touched in the time-honoured fashion of money of old, a new generation of currency could, I believe, enable us to clean society up.
Is the idea of money as a tool of social policy absurd? Assuredly not. After all, money is, and always has been, a social construct. For the philosopher David Hume, the nearest thing to it was language. Why? Because like language the value of money depends on how many people use it. There are far simpler and more consistent languages than English, but we use it because everyone else does. Money is social in the same way—we’re all prepared to accept it to settle accounts because so is everyone else.
A tool of social policy, however, is one thing—an agent of social policy is quite another; for agency implies a mind. Coins and banknotes are, of course, strikingly simple things, with none of the complexity that might lead you to ascribe acumen to a calculator or, at a push, a car. But bear with me. Bitcoin, the digital currency that became a great talking point around Christmas, as it blew up into a bubble and then burst, has given us an intriguing taste of what truly smart money could look like. It might sound paradoxical to bring it up in the context of nudging people and businesses into better behaviours, because if you’ve read about Bitcoin, it is probably in connection with the Silk Road on the dark web, where people can trade drugs and guns. My argument, however, is that the same sort of technology that was first put to use in evading the law and dodging taxes might in the future be used to make society more orderly and ethical instead. Bitcoin embodies innovation that is not going away, and which will soon lead us in some very different directions.
So what, exactly, was new about Bitcoin? It is not the first private electronic money, nor the first to have sustained value. Digital currencies have long existed in video games such as Second Life, and it has been consistently possible to sell these for real money.
But Bitcoin does embody two real breakthroughs. First, the Bitcoin system is autonomous. A unit of the currency is “minted” when a “mining” computer identifies a number which is encrypted in its own codes; that system of codes therefore determines how many Bitcoins exist. I’ll come back to the important economic implications of this. But secondly, and even more pertinently for my purposes, is that Bitcoin is the first money on Earth to possess the great pre-requisites of real intelligence—memory.
The defining technology here is called “blockchain.” This is a canny new way of keeping count of who has spent what. It was indispensable in getting Bitcoin off the ground, because in a world of disembodied coins, there has to be a way of verifying payments—ensuring that electronic money is genuinely coming from me and has actually been transferred to you. One solution might be a central exchange, like a clearing bank. But setting one up from scratch, secure from hackers, is a formidable task. Blockchain solves the problem a different way, using what’s called a “distributed ledger.”
This is an electronic system where identical records of all transactions are maintained (or distributed) right across the entire system. Every wallet knows what every coin in it has ever been spent on, and what every coin in the whole system has ever been spent on. The upshot is that if a fraudster wanted to cheat, he’d have to change everyone’s individual ledger, which would involve tampering with millions of widely-dispersed nodes. In principle, that is much more difficult than fiddling with a single book-keeping ledger, or even bank. This is how Bitcoin establishes trust.
What few of Bitcoin’s libertarian advocates understand, however, is that the same property actually makes the currency much more traceable than cash. Outlaws have rightly clocked that Bitcoin allows them to make cross-border transactions outside the banking system, in the way that suitcases of cash have traditionally done, while freeing them of the need to haul those suitcases about. What fewer have noticed however is that—as an inherent feature of the distributed ledger—every Bitcoin is effectively marked with a “stamp” that details where it has come from, and everyone who has ever held it.
For those of us who don’t wish to be outlaws, that’s really no bad thing. We don’t exploit—or particularly want—the clandestine potential of cash. Indeed, we might well want more information about where money is coming and going. We might, for example, want to know if the companies we spend it with pay their taxes, or treat their employees properly. Or we might want to be reassured that the supply lines in the shop we are in don’t trace back to factories that run on child labour. At the very least, money with a memory could be a way to shine a light on the dark side of the economy; with the right rules encoded about where it could be spent, it could even redirect purchasing power away from harmful things.
In a world where coins have memories, knowledge and information, we need to decide what we want to know. The old primary school game of imagining “a day in the life of a 50p coin” will soon be overtaken by reality—the next generation of pupils will be able to ask the coin. Already, with Bitcoin, we could in principle open a digital wallet and witness a verified history of the money’s use. Whereas for Bitcoin, the great leap of giving money a memory was a precondition to it being used as money at all; with future currencies, the same technology might now be used much more ambitiously—to change the world.
An ethical currency could in principle be a force for an economy more consistent with our values. But smart money could also help us run the economy better as well. More specifically, it could help us tackle slumps, and ameliorate inequality.
Here Bitcoin’s other technological breakthrough—autonomy—comes to the fore. Like something that is almost alive, Bitcoin self-propagates. Just as life is encoded in DNA, Bitcoin is governed by complex codes which define the numbers that have to be “mined” to create new coins. As with the memory, this remarkable feature was not an optional extra—it was essential to getting the currency off the ground.
That is because one of the defining properties of any decent money is scarcity—it retains value because people always want more. In times gone by, scarcity was imposed by the difficulty in mining gold; more recently, by the discipline of the governments and central banks that control the printing presses. Bitcoin imposes the same restraint without the need for similar human discipline, through self-regulating cryptography. Bitcoins are created when very large numbers, defined in these codes, are identified. The codes are set up to ensure that these numbers become scarcer as the “mining” continues, requiring ever-more computing power to dig them out. Like the real mining for gold in the past, as easier seams are exhausted it gets progressively harder to extract. There is no need for a central bank to switch the printing presses on or off; the rule governing the rate at which Bitcoin grows is built into its DNA.
The rules of self-propagation, however, are still pretty “low IQ.” It is written into its very structure that after 21m Bitcoin have been created, no more will be producible. That is a great rule if you want to puff up a bubble, but would be an entirely dysfunctional one if you were seeking to run an economy with Bitcoin as the main currency. As its value soared, prices of everything else would fall, setting in train a nasty deflationary cycle.
A truly smart money, by contrast, would have different codes. It would be designed to expand, and contract, in response to changing economic conditions—picking up from the task of smoothing out the cycle from the central bank. And it could see off at the pass the great economic curse of recession. Recessions cause an increase in unemployment and a great deal of damage to the social fabric—with poverty, homelessness and family breakdown. Smart money could help to prevent all of this.
Slumps hit when people and businesses are fearful and stop spending. Central banks try and counter them by cutting interest rates. But a seriously clever money—which could make full use of the memory and surveillance, and then bring the intelligence gathered to bear on the self-propagation—could spot panic on the horizon. At the first sign of spending being squeezed, it could replicate itself pre-emptively, boosting purchasing power to compensate for the reduction in spending.
But it is when the two breakthrough properties—memory and self-propagation—come together that the whole concept of what money really is opens up. We might want an ethically clean coin that reduces in value when put to ill use, or we might want one that creates incentives for expenditure that leaves a positive social impact, perhaps by multiplying itself when it is spent in such ways. Or we might want a money which, when it notices that the spread of incomes has got too skewed, decides that its next wave of self-propagation is going to be concentrated in those pockets that most need the extra money. Instead of Quantitative Easing effectively pouring extra currency into the financial markets to the benefit of owners of assets—as effectively happened after the crisis—we would have monetary creation tightly targeted on those who felt the sharpest squeeze.
It all sounds wonderful, but is this a utopian fantasy? How might this new world of money actually work? Who is going to take us there? And how?
Well, we know from history that it is perfectly possible to have more than one money at once. Bitcoin has shown that, online at least, this is a possibility. Apple Pay already offers a choice of which credit or debit card to pay with. It could integrate a digital wallet. What about the high street? Some Marks & Spencer stores already offer a choice of euros or pounds, so why not pounds or “social coins?”
We also have evidence that points to there being at least some consumer appetite for more socially-minded currencies. There have been multiple low-tech initiatives involving groups of local small businesses to achieve precisely this, such as the Stroud Pound and the Brixton Pound. These initiatives are based on the idea that by keeping money within a local community, those who spend it can be confident it will not be put to ill purposes in some far-flung place. The great difficulty in sustaining these initiatives, however, is that many traders and workers are always going to want to spend outside their locality, and will thus prefer to be paid in a conventional currency. But the great advantage—and the great opportunity—with emerging monetary technologies, however, is that we will be able to extend Stroud-pound style ethical reassurance to the world as a whole.
At the moment, however, it is not social activists, but the private sector that is engaging in an orgy of experimentation. Countless new crypto- and digital currencies are being created, some as experimental curiosities, some in the hope of making a killing. There are, if the history of money is any guide, two likely routes ahead. In one, the number of private currencies will collapse to a handful, perhaps just one or two of any significance, and these will have well-defined and coherent communities. On the alternative track, the state will intervene and create the dominant digital currency. Lots of central banks are already looking at making the digital currency they already create for banks available to the general public.
There is a powerful logic at work here. The biggest obstacle to monetary innovation is not to do with technology, but scale. This goes back to Hume’s insight—that, like language, money is useful to us because everyone else uses it. In modern economic parlance, we call this effect a “network externality”—the value to the individual user resides in the existence of a network of users. The same thing applies with telephony, social media and much else besides money. Unfortunately, when a network is the basis of value, there is no reason for assuming that the best technology wins. Ingenious new currencies may fail to get off the ground because they simply don’t have the large enough network of users they need to compete with established currencies.
Genuine innovation is all too likely to be absorbed by the existing dominant payment networks, such as Visa and MasterCard. This is already happening. But these companies are not obvious candidates for virtuous capitalism. A state that thinks lazily may assume that its only choices are taking them on and crushing innovation, or rolling over.
But the more interesting territory—surely—lies somewhere between the extremes of pure state control of the currency, and licensing one or two giant commercial initiatives to conquer the world. The more imaginative private sector experiments could, for example, be usefully adopted by the state. Even more intriguingly, what is to stop the charitable and social enterprise sector of the economy deciding to set up its own ethical currency? It already has a large community that might be able to agree on a set of shared values. If it could do that, it should not be a huge leap to agree on certain activities that should be prohibited or discouraged—environmental damage, arms trading, human-trafficking—and other, beneficial activities which smart money could reward.
The general public might prefer to use this currency. Sure, some would worry about making all their expenditure traceable—what if friends and family knew how much you were gorging on fancy restaurants and booze? In truth, however, there is nothing new to worry about here because this information is already stored (in more hackable form) in your bank. Only the minority that has secrets which it still attends to in cash has anything new to fear.
Once it was understood that there is little practical loss of privacy involved, many citizens might ask to be paid in ethical digital coins. We would store them in an app on our phone rather than in a bank. We would know that our money was “clean” not laundered. And when we go to the supermarket or out for a meal, we could use it to pay if the vendor met the currency’s criteria. If they don’t, we could pause and ask whether we wanted to do business with them.
The 16th-century financier Thomas Gresham is credited with the adage that bad money drives out good money. In the days of metal standards, coins contained some proportion of silver or gold. Gresham saw that the precious metal content would always tend to decline, as unscrupulous people “clipped” good coins and mixed in base metals to make their currency go further. In such a world, where the precious metals are routinely diluted, it doesn’t make sense to spend more valuable, pure coin, and so it tends to leave circulation.
But in my new world of upstart electronic coins, might it be possible for Gresham’s law to be flipped—for good money to drive out bad? If there were a new “good” money, which had the ability to discriminate against ethically “bad” behaviour built into its fabric, it could conquer all before it. After all, if given the choice between a money that self-regulates against tax evasion, pollution, human trafficking, and illegal arms dealing, and another currency that permitted a free for all, why would anyone choose to receive the “bad money?” Their motives would be so suspect that one can easily imagine that “bad money” could soon attract such a stigma that it could be driven out of use. “Bad money” would pretty soon cease to be accepted, and so cease circulating altogether.
The Bitcoin bubble, though it ended in a bust, could prepare the ground for this almighty change. Like many earlier bubbles, it bequeaths significant benefits. Why? Because bubbly euphoria is one reliable way to get the private sector to finance vast amounts of socially useful research and development without any likelihood of a return. The dotcom bubble in the late 1990s destroyed the value of billions of dollars of speculative capital. But it also embodied, and accelerated, the arrival of the internet in earnest. Likewise, with payments and digital money, it is Bitcoin bubble investment that has now put even “good” money within tantalising technological reach.
There is a yearning to reconnect markets with morality. A decade on from the crisis, the power of money and the value it creates remains as great as ever, but it is in the spotlight more than ever before. A smart currency—which tracks its own use, which self-propagates and which, potentially, embeds a conscience—is an idea that chimes with our era.
A great deal of democratic debate will be required, to be sure. When money comes with a memory, for example, obvious issues about the authorities’ access to that information arrive. There will also need to be all sorts of arguments about what should or shouldn’t be banned, encouraged or penalised. But, of course, social policy already has to reckon with all of that in spades. Too little thought is given to the vast quantities of data that our banks already hold—covering all our financial activity—even before we get to the information that the internet giants hoard on every last part of our lives. Discussion about the ground rules for establishing a smarter money would do valuable work in waking up the world to the surveillance that already exists.
And if new digital “coins” allowed us to access their detailed histories, we would surely cease to treat all money the same. At that point, the proper hierarchy would be restored—humanity would cease to feel like the servant of money, and might again feel that it was the master, and money was its tool. At least, that is, until the point where the money of the future gets so sophisticated that it has a super-human conscience “hard-wired” in. And what if we reach that point, where “good” money is more ethically sensitive than its owner? Then, one day, we might end up having to ask our money’s permission to spend it.