Most analysts acknowledge something is wrong with our financial system— it’s just a question of when it catches up with us

Yesterday I attended a conference at which the keynote speech was given by a senior economist at a global financial institution (because he spoke in a personal capacity, I won’t say who, or which institution here). He sketched some of the issues facing the global economy, including the significant — though not insoluble — systemic risk currently posed by Deutsche Bank, and the radical monetary policy options that are being explored by central banks. In the UK, QE may become a permanent fixture; monetary financing of debt is openly being talked about in various countries; central banks are buying up ever-greater proportions of government debt. Japan’s central bank owns around half of all government debt, meaning there is limited road left for them at the current pace.

His diagnosis of the ultimate problem was intergenerational inequality, evidenced in yesterday’s headline that the wealth of those in their early thirties has halved compared with those even a decade older. Pension liabilities are enormous, but don’t appear in most government accounts — largely because they are so unpalatable. Productivity growth, so high 20 or 30 years ago, is nearing zero. Property prices are exorbitantly high and young people are unable to buy. The response to the last crisis has paved the way for a new set of problems.

Centralised vs decentralised responses

To date the policy response to the issues we face has been strong, but limited. The financial crisis of 2007–09 was contained to the degree it was due to the co-ordinated and emphatic response of central banks; other issues like the ageing population and care gap are medium-term problems and fall outside of the immediate remit of governments preoccupied with dealing with day-to-day crises and the desire to stay in power beyond the end of the parliament.

And so perhaps it is not surprising that responses are arising from the ground up. Some of the big technological advances of recent years have not led to large productivity gains, as those of previous decades have. The sharing economy — Uber, Airbnb and other such platforms — tend to reallocate wealth rather than create it. They represent a shift of power; whilst it’s never possible to remove all of the gatekeepers, there are fewer of them and they are less powerful.

Blockchain technology falls into this category. There’s no doubt it will play a role in the ground-up responses to dissatisfaction with an economy that is either not working well for so many of us, or is simply broken. I’ve been active in the crypto world for almost three years now — not long in absolute terms, but long enough in such a fast-moving world. My involvement with Waves over the last few months has offered some new insights via the range of partnerships and collaborations that are building behind the scenes. And I think it’s fair to say the dialogue has been changing.

From quantitative to qualitative

Three years ago, the conversation was all about efficiency. Bitcoin, and blockchain more generally, would become a popular way of moving money around thanks to the low-cost, fast and borderless nature of distributed ledgers. Around the same time, a related conversation was developing. It wouldn’t just be money. With the development of 2.0 platforms, which at the time most prominently included Nxt and Counterparty, it would be possible to apply these efficiencies to all kinds of asset classes. Stocks and bonds, vault gold and other physical assets like property, even commodities like oil and wheat. Retail investors typically don’t have access to these, since they are prohibitively expensive to purchase in small amounts.

Clearly there is still room for these to be developed. DigixDAO has pioneered gold on the blockchain, and I expect several applications along these lines to be the first that will be hosted on the Waves platform. Among the first are likely to be commodities like precious metals, since these don’t have the same KYC requirements as stocks. But these are really only evolutions of the idea of fiat on the blockchain that central and commercial banks are exploring. They offer efficiencies, but not something qualitatively different.

New forms of asset and currencies

Open blockchain platforms offer the chance to do things completely differently — or, perhaps more accurately, to do things as we used to do them. Aside from commodity/representative money, which may or may not make a return in blockchain-enabled form, two exciting developments I’m seeing on the near horizon are private money and time credits.

Private money shifts the money supply away from the state and central banks and into the hands of businesses. In the past, businesses have commonly offered their own forms of money — indeed, until relatively recently, cheques could be used in this way, as a kind of IOU from businesses. In some countries, they still are. In America in the mid-1800s, around 8,000 different companies, states, stores, even churches and individuals issued their own private currencies. Naturally the reliability and solvency of the organisation in question was critical for confidence in the money supply.

Today, this type of private currency is more likely to take the form of blockchain-enabled loyalty tokens of one form or another. Freely transferrable and tradeable, these would have real value, and hence would function as real money. It’s inevitable that tokens from the largest and most reliable businesses (Apple? Starbucks? Microsoft?) would start to be used more widely. These currencies would function outside of the state’s remit and would be unimpeded by central or commercial banks. Anyone could use them. Rather than being backed by a lender of last resort, they would be backed by the issuing business, or businesses. I’ve been working on the Incent concept with BitScan for two years now, and this is precisely what the Incent token is: a kind of private money, backed by a broad network of businesses that will use it to reward customers with real value. Although these businesses will accept it for payment, it is not a traditional loyalty point but a form of parallel money. Thus anyone with a smartphone can use it. It seems highly likely that many such schemes will arise, pioneered by companies large and small. They will exist outside the current banking sector — thereby providing a source of alternative banking facilities. Naturally, the market will test which currencies are most effective, and we can expect regulators to step in if things get out of hand. Credits from large corporations or backed by broad networks will be viewed more favourably than smaller schemes.

Timebanking is another type of parallel money we are likely to see arise outside of the traditional state-backed monetary system. The best-known form presently in use are Ithaca Hours, a local currency used in Ithaca, New York but implemented elsewhere in various forms. One Ithaca Hour is nominally worth $10 and can be redeemed for an hour of work (negotiable, for obvious reasons).

Such a development on the blockchain offers huge advantages. Time-based currencies like Ithaca Hours are currently limited to local economies; the idea is that businesses that accept these notes will spend them with neighbouring stores and tradespeople. A blockchain-based version of the idea opens time currencies to greater versatility (more professions, not just those commonly used in one geographical area); greater utility (tokens can be used in more places around the country and the world); and tradeability, against each other and against fiat currencies, to name a few. A software engineer in one country can trade an hour of labour for an hour of plumbing work by a professional in his local area — or cash out to the national currency at market rates.

The gradual shift

Any movement towards non-state-backed currencies is likely to be incremental and gradual. Currencies need to offer something qualitatively, even radically different to appeal to people, since changing the monetary system is not something undertaken lightly. But as things stand, there are problems with our economy. They may or may not be surmountable and the journey to out the other side may well be painful.

The most creative and effective responses to these crises or euphemistically-termed ‘headwinds’ will not come from policy-makers: they will come from the bottom up. And that makes these exciting as well as challenging times.