Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity (20 page)

Nakamoto, it seemed, had at last developed a way to distribute trust in the digital economy: create a public record of transactions and lock it down, not with bank security or virtual firewalls, but with the combined computing power of the community. Your money can’t be stolen, because there’s nowhere to break into. Everyone has a record of everything.

For almost five years, the Bitcoin network and its pool of bitcoins grew, while users exchanged bitcoins for products such as thumb drives, alpaca socks, and, yes, drugs. The fact that people transact through cryptographic keys instead of names or e-mail addresses lets them make purchases anonymously. Since there’s no credit-card statement at the end of the month listing the illicit goods and services someone may have purchased, cryptocurrency became popular on black markets and earned a reputation as money for criminals. Then in late 2013, something interesting, if all too predictable, happened. Whether in response to the high-profile bust of an illicit online bitcoin-based marketplace known as the Silk Road or to the growing participation of Chinese users, Wall Street suddenly seized on bitcoins as a new instrument for speculative investing. It became the next big thing.
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What speculators love so much about bitcoins is that only a limited number of them will be mined into circulation. The mining process will be complete within the next couple of decades, and the money supply will remain fixed after that. Moreover, if a user loses his or her private key, then that user’s bitcoins leave circulation. These two factors make the bitcoin currency highly deflationary. If they were actually to catch on, investors reasoned, those who got in early would have cornered the market on an entire currency. That’s why from 2012 to 2013, the price of a single bitcoin skyrocketed, from ten dollars in November 2012 to a thousand
dollars a year later.
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There are now bitcoin investment funds—one famously started by the Winklevoss twins, known best for hiring college student Mark Zuckerberg to build their social network platform and subsequently losing it to him.

They may be missing the nature of this opportunity as well.

Bitcoin money is only a utility—not the thing of value in itself. It’s a label. If bitcoins become too precious and scarce, there are always plenty of alternative blockchain currencies to use instead. Unlike the issuers of national fiat currencies, no one—not even the tax authority—is forcing anyone to use bitcoins. So they don’t have the same role as the sort of money that was invented for early Renaissance monarchs to shut down the peer-to-peer marketplace. Amazingly, it’s money people who have the hardest time understanding this part, which is why they are so destined to be burned on their bitcoin investments, however they play this one.

The only way to understand the real purpose and function of Bitcoin is to stop asking ourselves if it’s a good investment. Even now, many of the people reading these words are trying to figure out whether I’m saying bitcoins will or won’t be worth something: should they close the book and buy some right now, or not? If you need an answer in order to move on, then fine: Don’t invest in bitcoins. You could make money if you buy them at the right moment, but that’s not what they’re for.

Although bitcoins need enough investor interest to prove their merit and gain acceptance with transactors, too much investor interest actually limits the currency’s effectiveness. Bitcoin, as a program, is not meant to solve the problem of how people can invest money over time. It is addressing the problem of how people can transact securely without a central mediator and do so anonymously. And Bitcoin is most assuredly secure. For the record, the much-publicized bitcoin robberies and cyberattacks have been on some of the bitcoin exchanges and online wallet systems—one of them adapted from a gaming Web site that was never intended to secure banking records.
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Even so, they have nothing to do with the Bitcoin blockchain itself, which is, for all intents and purposes, impenetrable.

Bitcoin’s failure to overcome our business culture’s bias for hoarding
and scarcity may be a temporary setback, or it could prove to be a fundamental flaw in the way the system was designed. The Bitcoin blockchain generates an arbitrarily limited supply of bitcoins. It may have been meant to counteract what sometimes seems like the profligate pumping of money into the economy by central banks. But by setting a cap on how many bitcoins can ever be created, Bitcoin doesn’t transcend the scarcity bias of central currency; it exacerbates it.

The only ones who don’t think about bitcoin that way are the miners—those participants with the fastest computers—whose power to verify transactions and earn new coin puts them at the center of the economy, at least while new coin is being created. All the money originates with them, even though it leaves their hands when they spend it—with no strings or interest attached, unlike central currency. They may be a new kind of elite, but they’re an elite all the same. They are the new bankers, even if they function from the periphery, and even if they exist only in the first ten years or so of Bitcoin’s existence, until the money supply is completed.

Not that mining bitcoins is cheap. In addition to the hardware, miners must invest in a tremendous amount of computer processing and electricity consumption. In 2013, miners expended some 1,000 megawatt-hours per day verifying transactions and mining new bitcoins.
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,
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As Bloomberg writer Mark Gimein noted, that’s half the power needed to run the Large Hadron Collider. Less than one year later, PandoDaily placed the network’s energy usage at 131,019.91 megawatt-hours per day, an increase of over 1,000 percent.
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While specialized computers called “mining rigs” are improving the energy efficiency of bitcoin mining, the shrinking number of unmined bitcoins and increasing length of the blockchain are raising the level of computing power required to perform Bitcoin’s proof-of-work problems.
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So even if Bitcoin did turn out to be economically feasible, it is unlikely to prove environmentally sustainable.

Those with digital literacy, processing power, and the fewest qualms about wasting electricity have the advantage. Meanwhile, those who already have lots of money can simply rent bitcoin-processing computers
from companies with names like LeaseRig to do mining on their behalf. Money still buys a seat at the table.

So Bitcoin takes capital creation away from bankers but gives it to programmers or those who pay them. It does fix some of currency’s problem, in that it’s no longer sourced for interest and no longer requires growth. But it’s still scarce and hoarded and never stops taking from the physical environment. If anything, it’s more like the original gold coin that proved too scarce to be practical than it is like the abundant and circulating market money that spawned the peer-to-peer economy of the bazaar. There’s no central bank earning interest on the currency, but its value is still a product of its relative scarcity—the way cigarettes serve as cash in a POW camp. Money for prisoners. This creates a zero-sum mentality in its users and discourages circulation. There’s only so much to go around, so it’s better to hoard it than spend it.

Still, while bitcoins may ultimately prove to have limited value as a currency, the Bitcoin network represents a potentially epochal shift in how we organize finance, computing, corporations, and even our society. On even the most superficial level, thanks to the Bitcoin network, bitcoins are more verifiable than central currency and more collectively negotiated. The amount in circulation is entirely removed from the control of a Fed or a central bank, as well as from the politics and agendas that might inform their decisions. But on a more essential level, the Bitcoin protocol represents a profound leap in how we understand trust and security—two of the original functions of money.

Verification is no longer something we need from an outside authority. There is no official person or entity that can offer (or deny) a stamp of approval. Trust, safety, and ownership are guaranteed not by central command but by the network of participants. In this system, the power of a currency derives not from the enforcement capabilities of the central government but from the grassroots connectivity of the people in the marketplace. Money is not protected with bank vaults, real or virtual, but with the widest possible public oversight.

Wall Street speculators don’t realize that (or perhaps don’t want to
realize it), because this change promises a radical shift away from the system by which they extract wealth through finance. Yet their willingness to bet on bitcoins, even in the wrong ways and for the wrong reasons, shows that the market does recognize there’s a shift under way. They just don’t know how to participate in it yet.

Bitcoin is actually bigger than money. The blockchain may not engender unilateral trust, but it compensates for our distrust of one another in a new way. Instead of an authority bearing witness to an agreement, we all do. There is no single “watcher” with a key to the ledger or a hand on the till, so the question of who is watching the watchers becomes moot. There is no authority—absolute or otherwise—to corrupt. Authority is distributed. If we look past all the cryptography, the algorithms, and the buying and selling, the blockchain is simply an open ledger—a collectively produced, publicly accessible record of agreements made between individuals. Additionally, it is verified by an anonymous peer group, then encrypted so that only those involved in the specific transaction know who participated. This has applications well beyond bitcoins.
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The blockchain can “notarize” and record anything we choose, not just the cash transactions between Bitcoin users. Entire companies can be organized on blockchains, which can authenticate everything from contracts to compensation. Decentralized autonomous corporations, or DACs, for example, are a fast-growing category of businesses that depend on a collectively computed blockchain to determine how shares are distributed. To count as a true DAC, a company must be an open-source endeavor whose operation occurs without the supervision of a single guiding body, such as a board or a CEO.
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Instead, a project’s governing rules and mission must emerge from consensus. Project workers are compensated for their labor or capital investment with shares in the blockchain, which increase in number as the project develops.
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We can think of DACs as
companies whose stock is issued little by little as the company grows from a mere business plan into a sustainable enterprise. Only individuals who create value for the company are awarded new stock proportionate to their contributions.
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Fittingly, the majority of DACs currently sell blockchain-related services themselves. By committing to the blockchain for their own governance and share distribution, DACs lend credibility to the technologies they are selling. They stand in stark contrast to the bitcoin ETFs being peddled by the Winklevoss twins and others, in which profit is extracted through traditional Wall Street markups and expense ratios, and transactions remain opaque. By using the blockchain, DACs subject themselves to total transparency. Everyone can see everything.

Even with all their advantages, there is a certain brittleness to most of these blockchain projects. Those who get in early tend to earn the most of whatever coin is being distributed. Moreover, the rules that get into a system in the beginning become pretty intractable. Unforeseen changes to the particular sector in which the blockchain is operating, or even to the whole world, are hard to account for on the fly. Finally, if everyone is supposed to keep a copy of the public ledger, that in itself can get pretty unwieldy once enough transactions have occurred; the Bitcoin blockchain alone is bigger than many people’s hard drives. In short, as these real-time economy projects scale, their legacies become liabilities.

After all, no matter how promising the blockchain’s applications may be, decentralized technologies don’t guarantee equitable distribution; they merely allow for value to be exchanged and verified in ways that our current extractive, centralized systems do not. As we’ve seen, the Bitcoin project was intended only to address the issue of providing security through a decentralized ledger. It was solving for peer-to-peer verification with anonymity—not economic justice or even the healthier circulation of currency.
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Bitcoin does prove that there are distributed solutions to problems formerly considered the exclusive province of central authorities. We can do this ourselves. But its inherent anonymity does nothing to restore the human relationships decimated by corporate activity, and its functionality
irrespective of distance does nothing to reassert the local realities in which human beings actually live.

To do that, we may have to turn not to a collectively negotiated digital file but to one another.

As creatures of a digital age, our first impulse is often to apply some algorithm, computer program, or other technological solution to a problem. Bitcoin is just such an approach, turning the massive processing power of distributed personal computers to verifying the exchange of value. In using such a technology, we learn to trust the cryptocurrency’s open-source algorithms over the bankers and authorities who may have abused that privilege in the past. In blockchain we trust.

Of course, the underlying assumption is that people can’t trust one another enough to transact directly without the constant threat of double-dealing, fraud, or nondelivery of services. By implementing a money system that encourages us to put our faith in technology, we again usurp whatever social bonds our marketplaces may afford us. We tend toward an economic culture driven more by disconnection and brinksmanship than by bonding and mutual benefit. That’s because we are influenced by the tools we use.

Behavioral economists know this all too well. Interestingly, as we saw earlier, it was only when debt-based currency’s limits began to surface in the twentieth century that those legions of psychologists were hired by banks and credit companies to come up with ways to get people to borrow more money, and at higher interest rates. The psychologists learned how to exploit people’s misconceptions about how money worked and gave names to each of our vulnerabilities, such as “irrationality bias,” “money illusion bias,” “loss aversion theory,” and “time discounting.”
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Then, they
created products and wrote advertising that took advantage of these failings in order to get people to act against their own best interests. In other words, if the money stops fulfilling the needs of human beings, you change human beings to fit the needs of the money.

It’s yet another example of the industrial-age ethos that places human needs and values below those of the greater machines and systems in which we live. By contrast, the digital media environment invites us to look at the systems we use as changeable programs, and people as the end users for whom those systems are built. Computer programs like Bitcoin may be the most explicitly digital expression of this drive to hack economics as if it were an operating system. But the Bitcoin protocols are still more concerned with replicating the functions of money than they are with serving the needs of humans. Indeed, the most far-reaching modifications of our debt and currency systems may turn out to be a lot less technological in their expression and more focused on the specific human problems they are attempting to address. They are not solving for money but solving for people.

For instance, one of the main issues that emerged in the wake of the Occupy Wall Street movement was the problem of debt. Student debt is estimated at about $1.2 trillion as of this writing, while medical debt currently burdens over fifty million adults in the United States
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and is the nation’s largest single cause of personal bankruptcy.
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All these troubled debtors pose a problem for the debt industry as well: people in age groups that used to be counted on for buying first homes and taking out mortgages are still too busy paying back student loans to consider purchasing real estate, while homeowners facing medical debt are the leading cause of foreclosure and credit nonpayment.
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Most banks and credit-card companies simply package and sell the bad debt to loan collectors and other bottom-feeders at pennies on the dollar, just to get it off their books. The debtors still owe the full amounts on their loans, but the new creditors
know they will collect on only a portion of it, if any, before the debtors go bankrupt or run away. Everyone ends up worse off.

During the Occupy Wall Street gatherings, activists considered the conundrum from every traditional approach. They looked at promoting resistance through collective debt refusal, forcing creditors to show the full chain of custody of loans on which they were trying to collect, or forming a PAC and lobbying Congress on banking and credit reform. But taking a cue instead from the hands-on, do-it-yourself bias of the digital age, the activists came up with a much simpler solution: buy the debt. They launched a project called the Rolling Jubilee,
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raising money from donors to buy back and then dissolve debt. With just $700,000 of initial donations, they have managed to dissolve over $17 million of student debt and $15 million of medical debt and are now targeting payday loans and private probation debts.
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And the more people they get out of debt, the more new donors they create.

Such solutions may not be highly technological, but they are digital in spirit, especially in the way they retrieve the peer-to-peer mechanisms of mutual aid and distribute personal risk and liability throughout a network. Finally, the solution itself is a hack of the existing, highly exploitative system; pennies-on-the-dollar leverage afforded to credit packagers is used instead to relieve debts twenty-five times greater than the donated amount. In the best cases, the benefactors can in turn donate that small amount required to bail them out, and the debt jubilee can keep rolling to absolve more debtors.

The remaking of the money system and its many debt-based tentacles can certainly make use of the net, social media, and blockchains. We have in consumer technology all the security and administrative capabilities that used to be the exclusive province of banks and major corporations. But the reprogramming of money requires less digital technology than digital thinking and purpose. As we put our fingers—our digits—to the purpose of a better money system, we must focus less on what we can accomplish with a particular set of technologies than what we
want
to accomplish with them. With those goals clear in our minds, we can evaluate the solutions on offer or develop new ones of our own.

So instead of asking how we can manipulate human financial behavior to serve existing forms of money, we ask: What sorts of money will encourage the human behaviors we admire and long to practice? What sorts of money systems will encourage trust, reenergize local commerce, favor peer-to-peer value exchange, and transcend the growth requirement? In short, how can money be less an extractor of value and more a utility for its exchange? Less prone to getting stuck in capital, and more likely to remain dynamic and flowing?

1. Local Currency

The simplest approach to limiting the delocalizing, extractive power of central currency is for communities to adopt their own local moneys, pegged or tied in some way to central currency. One of the first and most successful contemporary efforts is the Massachusetts BerkShare, which was developed to help keep money from flowing out of the Berkshire region.

One hundred BerkShares cost ninety-five dollars and are available at local banks throughout the region. Participating local merchants then accept them as if they were dollars—offering their customers what amounts to a 5 percent discount for using the local money.
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Although it amounts to selling goods at a perpetual discount, merchants can in turn spend their local currency at other local businesses and receive the same discounted rate. Nonlocals and tourists purchase goods with dollars at full price, and those who bother to purchase items with BerkShares presumably leave town with a bit of unspent local money in their pockets.

The 5 percent local discount may seem like a huge disadvantage to take on—but only if businesses think of themselves as competing individuals. In the long term, the discount is more than compensated for by the fact that BerkShares can circulate only locally. They remain in the region and come back to the same stores again and again. Even if nonlocal stores, such as Walmart, agree to accept the local currency, they can’t deliver it up to their shareholders or trap it in static savings. The best Walmart can do is use it to pay their local workers or purchase supplies
and services from local merchants—again, supporting the local economy instead of absorbing those externalities.

Simple, dollar-pegged local currencies like BerkShares are depending on what is known as the local multiplier effect.
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Money of any kind, even regular old dollars, spent at local businesses tends to stay within the local economy. That’s because local, independent businesses tend to source their materials and services from nearby instead of from some distant corporate headquarters. According to a broad study conducted by the American Booksellers Association, 48 percent of each dollar spent at locally owned retailers recirculates through the community, compared with 14 percent at chain stores.
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With geographically limited local currencies, that number stays close to 100 percent, until they are exchanged back into dollars. Such currencies are biased against extraction and toward velocity.

BerkShares can purchase all the quaint New England commodities one would expect: local produce, a cup of fair trade coffee, a stay at the bed and breakfast. But they are also exchangeable for more utilitarian goods and services: construction contracting, Web design, even a trip to the undertaker.
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That’s where it gets tricky. Local currencies work best for locally generated goods and services, or when a commodity’s markup is derived from a locally added value, such as atmosphere or labor. They don’t work as well for selling goods that are at the end of long supply chains or depend on commodities sourced from far away. A contractor can use BerkShares to buy locally produced shutters, but he can’t buy his tools or nails with them. A bookshop owner can offer her customers an effective 5 percent discount on their purchases, but she’s still paying full price for her inventory. It’s just not in a local business’s short-term interests to accept local currencies. And the multiplier effect really works only if there are a whole lot of businesses willing to play along.

Local-currency advocates acknowledge this shortcoming but believe it is mitigated by a currency’s visibility. With geographically based currencies, the thinking goes, the “buy local” ethos becomes visible—still voluntary but validated by merchants and political leaders. Unless you’re
spending BerkShares, how can you make it clear to merchants that you are thoughtfully supporting local business? Local currencies are their own best publicity, rendering “buy local” visible and thereby fostering the community spirit and soft peer pressure that lead to widespread buy-in and network effect. Then again, some customers might demonstrate their loyalty to local merchants by forgoing the local currency discount altogether and spending “real” money without the discount.

Many other communities are experimenting with variations on the BerkShare model. Proponents claim that by being removed from the greater economy, these currencies work against the scarcity bias of central currency and are more resistant to boom, bust, and bubble cycles.
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Detroit Dollars, Santa Barbara Missions, and, in the UK, the Bristol, Brixton, and Cumbrian Pounds each offer their particular variations. Detroit Dollars offer much the same arrangement as BerkShares, only at a 10 percent discounted exchange rate.
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The UK’s Bristol Pound is backed by a credit union, has a digital debit payment system, and can be used by businesses to pay certain taxes. A pilot program in Nantes, France, promises to allow citizens to pay municipal fees in local currency.
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Most of these local currencies are still more fad than utility. In some cases, it’s because only economically conscious progressives are willing to employ them, and then only for goods and services that can’t command clear value on the regular open market, such as spiritual healing or career counseling. In others, it’s because the central monetary system is still strong enough to serve a majority of people—or dominant enough to minimize the apparent viability of alternatives. Moreover, by pegging themselves to central currency, these local discount currencies can isolate themselves only so much from the chronic monetary problems of inflation, deflation, bubbles, and debt.

2. Free Money: Cash as Utility

For a local currency to distinguish itself as more than fashion, it must be utterly independent of existing money systems—that is, pegged to nothing but itself. Maybe it’s only when an economy gets truly bad and money
is nowhere to be found that more bootstrapped applications of alternative currency tend to surface.

For example, after Germany’s defeat in World War I, much of the German-speaking world was in economic shambles. In the Austrian city of Wörgl, over 30 percent of workers were unemployed and a significant portion of the population was destitute.
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There was not enough currency—Austrian schillings—to go around, not with Austria paying off its war debt to the banks.

Inspired by the “free money” theory of German economist Silvio Gesell, the mayor of Wörgl decided to create a local currency programmed to solve this particular crisis. According to Gesell, the core qualities of a money system—its biases, the way it extracts value or discourages circulation—are unknown to the people using it until they are shown an alternative. Gesell was no Marxist; he was a free-market advocate but particularly antipathetic toward charging interest for money, which he believed was the way that moneyed classes prevented others from participating fully in the economy.

The town had plenty of workers and plenty of resources, plenty of needs and plenty of providers; it just didn’t have a means for all those people and businesses to exchange goods and services. Whatever money they were capable of generating went back to servicing debt. So the mayor took the town’s entire treasury of 40,000 Austrian schillings and put it in the local savings bank as a partial reserve against a new kind of currency: labor certificates that came to be known as Wörgl.
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He got the town working again by paying people in Wörgl to attend to public works projects, such as roads and schools. Because he had read Gesell, he made sure to tilt the currency toward local prosperity. By design, the labor certificates functioned as “circulation only” currency. Citizens could use them for goods and services and even to pay their local taxes. But Wörgls were terrible for saving: the certificates lost value, “demurring” at a rate of 1 percent per month, much like a grain-based currency of the late Middle Ages. As an unexpected consequence, this demurrage incentivized citizens to pay their taxes early, which in turn
gave local government the liquid assets it needed to manage infrastructure and create still more employment projects. Like the Rolling Jubilee, the new currency initiated a virtuous cycle. In the midst of global depression, the village built bridges, homes, a reservoir, even a ski jump.
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