Written by David Vandervort

Back in the first half of 2015, I was working on a research project to adapt Bitcoin technology for use as a community currency. Our hope was that we could design a cryptocurrency with features that would encourage people’s tendency to form group attachments. In other words, we wanted to give them incentives to work together, for the benefit of the whole group. We were not the first to come up with the idea. There’s a long history of paper-based community currencies around the world and even a few attempts to create them in the digital area (If you’re interested, my colleagues and I wrote a paper on the subject. http://suddenplasma.weebly.com/uploads/2/5/9/7/25974272/community_cryptocurrency_issues_pre-pub.pdf).

In our case, the customized currency never got off the ground, in large part because the New York State Department of Financial Services made regulations requiring anyone who programs or issues a cryptocurrency to have a special license. They made the licensing process long, legalistic and expensive (expensive for ordinary people; Dirt cheap for companies like Goldman Sachs). It didn’t seem like the kind of headache that a research project with practically no budget needed. We shelved the cryptocurrency plan and shortly thereafter the project was canceled.

New York claimed that it had to regulate Bitcoin and everything like it in order to protect people, though they never seemed very clear on what it was people were actually being protected from. Meanwhile, their vision of what the technology could be used for was limited mostly to financial instruments like money, stocks and bonds. They didn’t seem to have even heard of smart contracts, or blockchain based-asset registry or any of a hundred other ideas that are on the horizon. The blockchain is a revolutionary invention. New York decided to err on the side of caution and let the revolution take place somewhere else.

Compared to some jurisdictions, such as mainland China and Russia, New York was positively friendly. Every place seems to take a different approach. The IRS considers a cryptocoin to be property. Germany considers it a “unit of account” (aka money). London considers it an important part of the future as they set their sights on being the center of next generation fintech (good for them!). California has been on both sides of the issue, sometimes seeming friendly, then working to regulate it, then not. Given the current wildfire situation in California, maybe they have other things on their minds.

According to the International Monetary Fund (http://www.imf.org/external/pubs/ft/issues/issues30/), a significant amount of economic activity around the world takes place “off books” or, “under the table” as we say. Someone paints someone else’s garage, or fixes their car, or takes care of their dog for a few days while they are away. A small amount of cash changes hands. The cash goes into the recipient’s pocket and that’s that. The tax collector never even knows the transaction took place and never collects a dime of taxes on it. If it’s something that normally requires a license or a bunch of forms, well, those things get lost in the shuffle.

This is important: In the gray economy, it’s not the goods and services that are illegal but the act of providing them without paying the necessary taxes and fees or doing the required paperwork. People engage in this behavior when there is so much regulation, or so much corruption, that doing things the legal way seems unrealistic. They do what they feel they have to in order to make ends meet or even get a little ahead. Again according to the IMF, this sort of “gray market” activity takes place to the tune of several trillion dollars a year, worldwide.

Given that “trillions” is a LOT of money, and there are also a LOT of people involved in this economy, it seems likely that there is a place for a trustless, decentralized, at least partially anonymous digital currency or two. I believe that it is close to inevitable that cryptocurrencies will flourish in this niche if regulators (around the world now, not just in one state or country) continue to try to push them out of the visible, orderly, above-the-table world. This creates risks for the people in the gray economy but also opportunities.

Using only one currency, be it Bitcoin or Ether or any of the other currently popular ones, to do your under the table work, is especially problematic. They are well known, their blockchains and major exchanges are already (likely) heavily monitored by authorities. Suppose, though, that a small group of people decided to help each other out with household chores and the like, and designed their own coin (or smart contract — quite useful in this context) as a sort of token to show “favors” performed or owed? I fix your computer, you give me a crypto-token (instead of the more traditional six pack of beer). It is this kind of exchange that is behind many community currencies. Most regulatory agencies allow these currencies to exist, as long as they stay small and have no pretensions of competing with fiat currencies (aka regular money, like US dollars). Happily, money is fungible, meaning that if I can give some of these crypto-tokens to someone to fix my car, I don’t have to spend my paycheck on it. I can use that for other things.

To the people using them, there are significant advantages to using this type of currency. The security of the transactions protects against bad checks and false promises. The bar for accepting any cryptocurrency for payment is far lower than for credit cards, too. Importantly for the people involved, the small scale of a local, customized “digital token” may help protect from regulators, who are more inclined to go after the big fish like Bitcoin. This is especially true if there are hundreds or thousands of these little currencies in circulation.

Personally I think depending on that factor is not much different from betting your life savings on a fifty to one shot at Pimlico, but people often take big chances when trying to feed their families. In comfortable Western New York suburbia, the risks certainly seem much worse than they would to someone starving in Siberia, or anywhere else.

Anyway, the confluence of regulation, cryptocurrencies and community brings up some thoughts. To begin with, re-branding existing cryptocurrency code is not incredibly hard (Trust me, I’ve done it). In general, things that are not hard and are also profitable tend to keep happening. Adding regulations does not stop them, it just drives them underground. Stop and think about that. As New York or any other government adds to the burden of regulation on cryptocurrencies, they are not making those currencies go away, they are merely pushing them into grayer, less easily regulated areas.

This, then, is a possible future. If regulations on cryptocurrency tech escalate, I think we will see a rise in small scale, gray economy “custom” currencies, used by ordinary people just trying to get by. Different states and countries will find different ways to try to discourage the trend, and as often as not wind up unintentionally encouraging it instead. People can be very creative about finding ways around regulations they don’t believe in, especially when there’s money to be made.