Thinking Money

What’s wrong with money?

Just because something is working it doesn’t mean you can’t fix it.
The following is a record of my current thoughts on what money might look like in the 21st century if we leverage the profound evolutionary change money experienced in 2009.

I believe existing digital currencies are just the first step in the evolution of digital currencies that could follow many functional branches, a ‘Cambrian explosion’ of new forms and uses. Once the paradigm shift has been made from ‘money as a database entry’ to money as a piece of software, money can become an active agent in transactions. That paradigm shift occurred in 2009 with release of Bitcoin’s Genesis block, we are just playing conceptual catch up.

Bitcoin was the first successful evolutionary change to money as a digitised currency. There have been many earlier attempts- see the notes at the end of this article, but Bitcoin, supported by the blockchain, has had an enduring impact.

As the market for digital currency has moved from the specialist to more mainstream use more innovative uses of digital currency are emerging. Ripple, is a recent example operating on completely different principles to Bitcoin. All of these new forms of money are embodiments of a fundamental change in money.

Perhaps the most promising development for a new form of money is the smart contract concept built within the Ethereum network. Ethereum is interesting for recognising the potential for contracts that contain code that turn contracts from a static statement of commitments to an active agent policing transactions, exactly what we need for an active autonomous form of money. Smart contracts are prime candidates for the architecture behind the development of new forms of money.

Money as Code.

Although digital currency has provided a powerful conceptual reset for money, the full potential of money as code has yet to be thoroughly explored.

Money as code can offer greatly increased functionality :

Identity – money is currently anonymous by design, identity offers greater potential for control and tracking.
Programmability – as software rather than a passive record, money can be given programable functions.
Intelligence – a limited form of autonomy can be given to money, allowing the digital currency to accept or decline a transfer based on its status and the conditions it ’sees’

And under the Programmability heading money can aquire the following features.

Class – money can belong to unique classes differentiating functionality,
Attributes – currently limited to a value, additional attributes can be built into money.
Functions– money can be given specific functions and have its functionality changed to meet specific conditions.
Methods – money can be given methods of operation, controlled means of accessing money’s abilities
Location – the database a unit of currently resides in, the map of its transactional paths, its transaction dates and times

The question I want to try to answer is, given that money can and therefore inevitably will become an active agent, what do we want money to do?

Money Problems

Contemporary money is no longer connected to real wealth creation in any meaningful way. Money is a tool employed in a speculative ecology. Just one example is sufficient to make the case. The average daily trade on the FOREX market is 6.59TN However the Global GDP is circa 142TN per annum which equates to 0.382TN per day. In this one example we see the speculative market is, at minimum, 17X the size of the real economy. I have chosen the FOREX market because it is purely speculative. In 1975 80% of FOREX transactions were for trade and services, 20% in speculative trades. By 2011 only 0.6% of FOREX activity could be traced to trade and services.

There are many more speculative financial markets in operation daily. Some markets claim to have links to the real economy, e.g. the various Stock Markets. Although it is true the trade is in the stock of real companies, it is difficult to reconcile the valuations traded with the day to day activity of the companies involved.

If stock market valuations were genuinely linked to company performance, then the stock markets progress would more or less map global GDP’s growth and would not be prone to bubbles and crashes.

This is not a naive speculation. Predatory investment uses money as a weapon to create more money. Private equity firms borrow money in order to buy companies to sweat the company for value by inflating stock prices artificially before selling them on. Such companies have no interest in real wealth creation, they are entirely focussed on increasing money, imaginary wealth.

Executives in large companies borrow money to pursue stock buybacks that again artificially inflate the stock price of the company, granting the executives fortunes in ‘performance bonuses’ before abandoning the companies for new targets.

It is obvious that if this speculative money was to be invested in real wealth creation, which I call Civilisational Wealth, we would live in a transformed world.

Thinking Money needs to direct investment away from speculation towards real wealth generation.

The following sections outline how this might be achieved

Digital Cheques

One form of money that contains part of the solution is that of the old fashioned paper cheque. Unlike cash, a cheque is not an anonymised form of money, it is highly targeted, and its use cannot be subverted.

A cheque contains the following key attributes.

A qualified Issuer with suitable Issuer verifiable ID elements embedded in the cheque

The ID of the Payer

The ID of the Receiver

The specific amount to be transferred.

To the rest of the world this is dead money, just a piece of paper. To the payer and receiver, it could be worth millions. Traditionally a cheque has needed the mediation of an authority, a bank, but as we will see in the next section an independent authority is not essential to the transfer process.

Democratic Money

Banks have evolved over time as the accepted contemporary source of money creation but many other methods have been used. For more information on some of the many varied forms of currency creation the following list will provide a useful starting point.

Community currency https://en.wikipedia.org/wiki/Community_currency

Mutual Credit https://en.wikipedia.org/wiki/Mutual_credit

Local Currency https://en.wikipedia.org/wiki/Chiemgauer

The Wolg Experiment https://en.wikipedia.org/wiki/W%C3%B6rgl#The_W.C3.B6rgl_Experiment

Bristol Pound https://en.wikipedia.org/wiki/Bristol_Pound

Brixton Pound https://brixtonpound.org/

In the complex history of alternative money and money creation all alternatives have had to compete with the banks perceived authority and the legal constraints on money creation. However, it is clear that, were the banks ever to fail, communities would rapidly replace them with local alternatives.

This was field tested in 1970 when the banks in the Republic of Ireland went on strike for six months. The wonderfully Irish solutions was to use the pub as an alternative to the bank. The pub was chosen because the landlord knew his clientele well, knew who was trustworthy and who was not. Pub customers began to deposit IOU’s with their local and the publican kept them safe. Although the conventional money supply contracted sharply, the economy continued to function satisfactorily supported by this ad-hoc alternative money supply.

With a digital currency new community-based credit issuers are credible alternatives to banks. A peer to peer payment system backed by a distributed money creation system is entirely feasible today. Money is no longer the property of a nation state, it can be created and distributed by any community with a sufficiently robust trust structure.

Ironically, the Irish experiment demonstrated trust structures are far more robust if they are local. `Although local and mutual credit currencies work, we need to be able to extend the scope of money creation and distribution beyond local systems.

This is where digital systems play a fundamental role. The blockchain is the first market proven means of providing security for a distributed money creation system but it will not be the last.

Classy Money

So far, we have not strayed too far from conventional money paradigms, but we need to do so to direct money flow away from speculation towards real wealth creation. We we can further control the use of money by introducing classes of money with different attributes.

Class A – Absolute money is used in the real economy.

This is money used by citizens in their daily lives and business in their normal functions. Class A money can never be converted to any other class of money although it can be destroyed. This would happen if Class A money was hoarded or put into a ‘holding pattern’ constantly circulating between a limited number of locations by opportunists.

To ensure circulation Class A money has a velocity threshold, and if it falls below this threshold its value vanishes.

Limits can be set to allow reasonable degrees of stasis under pre-set conditions if this is discovered to be necessary, but if Class A money is abused, it disappears from the market. More on this latter.

Class I- Investment class money is for wealth creation.

This money is not expected to experience as high a velocity as Class A money as it may take time to complete a large project.

Class I money can, via spending into the real economy, convert to Class A money.

However, Class I money does have an additional attribute. Each issue of Class I money will have a specific half-life and rate. The value of Class-I money reduces by a specific amount over a set timeframe. This is to prevent Class I money from being sequestered. The half-life timeframe and trigger date will be set by the specifics for each project.

This drives the focus of users of Class I money to complete their project on a timely basis and, additionally, to convert Class I money to Class A by spending on real resources and activity as soon as possible.

There are opportunities for fraud here but Class I money, like Class A money, can use the features of targeted money – e.g. Payer and Receiver ID’s, to enable authorities to track any abuse easily.

There is no real need for any other form of money, but such is the size of the speculative financial market, and such is the degree of intelligence applied to creating and exploiting such markets, that we will create a currency just for them.

Class- S, Speculative money is for those that insist on running a casino.

Class-S money is convertible to Class I or Class A by an exchange rate that reflects the ratio between Global GDP (real wealth) and the speculative markets ‘valuation’. So, Class S money can be spent, but if the speculative market overheats and forms a bubble its exchange value drops pro-rata, protecting the purchasing power of Class I and Class A money.
Class S money exchange value is also calculated with regard to the inflation rate experienced by the real economy in a similar fashion. We don’t want speculators driving inflation into the real economy.
If Class S money enters a holding pattern e.g. is stored offshore, as with Class A and Class I money we can record its location and ID via authorised transfers, it triggers its half-life which is more aggressive than the half-life rate in Class-I money.
If any attempt is made to transfer Class S money out of its field of use by unauthorised methods, its value is zeroed.

If this classification of money into classes seems artificial I note that that similar classifications already exist, Cash, Bonds, Guilts, Stocks, are all differentiated classes of money with specific functionality.

It is arguable that no authority will ever condone such a classification of money, however, as we have seen from the previous section, permission for issuing Class A money is not required. It can be achieved by any sufficiently large group of people with the means to issue a private digital currency. As Bitcoin has proved, this is possible now on a global scale and, more importantly, is essentially ex-judicial.

History has shown us many times, by the debasing of coins, financial crashes, and the need for debt jubilees, that people mediated currencies and markets cannot defeat irrational and criminal practice. So, we need a currency that can police itself.

This sounds like a bizarre concept at first, but all that is happening is that we are embedding in the unit of currency all the factors that govern the issue of a unit of currency by a bank today. Is the ID of the payer and receiver valid and legal? Does the use to which the money is being put meet banking criteria? Are the locations of transmission and reception recognised and legal? Most of these evaluations are already automated by banks today, all that is being proposed is that the software moves from a bank server to become agent based.

That sounds complex but software agents are ubiquitous and range from sophisticated web interface apps through to tiny machine code level equipment control agents. A currency agent will be closer to the latter than the former as its functions are in reality quite simple and the design of the agent can be close to a finite state machine than anything more sophisticated.

Today digital currencies rely on server-based computation. The blockchain, transaction verification etc are all server-based activity with the result being the output of the computation. A Bitcoin, or a Ripple/ XRP, or Libra coin etc, are strings of data, not code. A more flexible and secure model for the unit of currency is to take the next step and make the unit of currency autonomous.

The currency itself evaluates its status ( location, issuer ID, Receiver ID, Class, time in market, transaction history), its environment ( to be expanded on, but in brief its local v global market conditions) and decides its actions- e.g. to accept or reject a transfer, reclassification of its Class, adjustment to its transfer value, and potentially, its deletion from the marketplace where illegal transactions are attempted.

These currency functions can be implemented as agent-based software that can run on a wide variety of hardware including smartphones and other forms of distributed computers ensuring a widely distributed computational network free of supervision and ownership.

Architectures

I don’t propose to say too much on this issue as the options are enormous and can encompass the entire field of cryptocurrency design a vast field. However, implicit in the use of active agents is a structural change to security that is important to note.

Currently data security is a task applied to the server. Data resides within a database(s) protected by layers of security and encryption. Perversely this is a liability because, once the security layer has been breached, all the data in the database is vulnerable. With an agent based system, each agent, that is each currency unit, is protected by its own security layer which makes large scale data breaches highly resource intensive.

How do we make currency agents robust? There is the Blockchain model which has proven its security albeit with one or two bumps in the road. The Blockchain was further extended with Ethereum 2’s innovations which have extended the security model and increased computational efficiency to speed transactions. In addition to these methods there are a host of additional security models that we can rely on. I will mention some options I like which have the potential to provide small and computationally efficient agents with sufficient inherent security to meet the required confidence level.

One promising architecture for an autonomous currency is a finite state machine(s) embedded within a security/encryption shell.

There are alternatives that can supply the security we need with efficiency. One alternative that I like is the Diffie-Hellman cryptographic key method used to encrypt any transfer in a one-time pad like manner.

There are many ways to build code and a computer doesn’t care how the code is written providing it can be complied to machine code. Esoteric coding styles are something of an art form which this presentation by Dylan Beattie will confirm. One way to increase the security of our code is to mix the code into the data in pseudorandom form. This makes the code highly difficult for any hacker to read assuming they are able to penetrate the Diffie-Hellman types of encryption but providing the code can compile, the computer using the code is not affected by the complexity or esoteric nature of the code. We can therefore give a fractal like structure to the finite state machine(s) code where the functional code is fragmented within the total codebase of the agent.

As an additional layer of security the specific details of the fragmentation can use the biological model of polymorphism ( rather than the polymorphism design used in computer code) so that the code will be unique to each unit of currency, the specific pseudorandom structure of code and data established at the time of ‘minting’ adding a further layer of complexity.

There are many more techniques that can be adapted from computer virus technology, a highly sophisticated field rich in efficient effective agents. I don’t intend to go into any further details, but I am sure you can envisage many alternative models and no doubt some better ones than the two I have suggested.

I do not want to be glib about security, there will be huge efforts made to break into a currency agent with the intention of diverting its destination, value or class, and not only by criminals and opportunists, but state sponsored actors as well. So, the new currency has to be robust. Secure encryption and verification will be major challenges, but we have already established the most important security feature. Unlike passive money, any attempt to hack into a currency agent will trip its ‘suicide switch’ reducing its value to zero, and or, deleting its identity.

Pulling it together

We can tentatively summarise the key features of Thinking Money as :-

Money with identity and functionality.

Targeted money- like a digital cheque, it can only be used to pay the intended receiver.

Created by citizens for citizens, who subscribe to a community owned trust based ‘mint’.

Classified in terms of its functionality and use to separate wealth generating money from speculative money.

And entirely autonomous, with all the necessary permissions criteria defined in real wealth terms and with the unit of currency able to control all transactions.

Autonomous currency removes the ability of any organisation or individual to subvert the use of money from real wealth creation and the activities of the real economy by placing the permissions authority with the currency agent code. As an individual or organisation, you either accept the conditions money sets, which are of course designed by the originators of the currency, or you don’t use it.

Pushback, what pushback?

Bitcoin has proven that a digital currency, outside of the control of any national or regional authority, can be introduced successfully to the market and become widely accepted. Bitcoin is impossible to shut down due to its highly distributed nature and the anonymity of its creators. The Federal Reserve spent considerable time and resources looking into how Bitcoin might be shut down and it has failed to find any. Contrast this robustness with Facebook’s Libra project which was scaled back severely due to the degree of pushback it received from regulators worldwide.

To succeed,Thinking Money needs to adopt an anonymous, ground up insurgent model like Bitcoin. The anonymity is an important feature as is a global distribution of Thinking Money mints and exchanges, essentially cloning the successful introduction of Bitcoin.

This might seem to conflict with the community credit principle, but this is to confuse identity with architecture. Whatever Thinking Money is called, or which community it is associated with, the public identity is separate from the currency architecture and associated functionality. This means that the currency can be introduced in many localities as a community currency or mutual credit scrip but, as the architecture is identical, these scrips or community currencies have complete compatibility and can be extended, once they are established, well beyond their localities, ultimately becoming as globally useful as Bitcoin is today.

It can be anticipated that authorities will try to emulate the features of Thinking Money with their own digital currency in an attempt to displace the citizen-based currency. However, as Thinking Money should be a globally distributed currency, this will be difficult for localised and regional authorities to achieve. To be accepted by and become successful in the market, authority-based money would have to be as functional and attractive as Thinking Money, and if it achieves this, Thinking Money will have completed its strategic objective to replace a passive anonymous money which allows speculation and sequestration with a real wealth generating autonomous currency.

Notes and further links

Historic digital currency experiments

DigiCash (1989): by David Chaum was a form of centralized “electronic money” that deployed the same kinds of cryptographic protocols — public key cryptography — that support the untraceable (but verifiable) nature of bitcoin transactions. It is often called “Chaumian eCash.”
Hashcash (1997): by Adam Back was initially conceived as a mechanism to limit email spam by forcing email senders to solve computational puzzles, it never saw widespread use as either a spam protection mechanism and despite the name hashcash, was never a financial instrument. Bitcoin re-purposed these proof-of-work (PoW) puzzles to become the basis of bitcoin mining.
B-money proposal (1998): by Wei Dai explored how to create anonymous, distributed systems in which money was created by the Hashcash PoW algorithm.
The Bit Gold proposal (1998): by Nick Szabo outlined an algorithmic approach for posting transactions containing PoW to servers which must agree to these transaction. This same ‘consensus model’ is now built into the Bitcoin blockchain.
Re-usable Proofs of Work (RPOW) (2004): by Hal Finney was an attempt to make Proofs of Work into exchangeable tokens. Hal Finney later became the first person to receive a Bitcoin transaction from the creator Satoshi Nakamoto.

https://scholar.princeton.edu/sites/default/files/markus/files/02c_digitalmoney.pdf

https://www.accenture.com/gb-en/insight-blockchain-evolution-money

https://www.accenture.com/us-en/insights/blockchain/evolution-money

https://www.imf.org/external/pubs/ft/fandd/2018/06/what-are-cryptocurrencies-like-bitcoin/basics.htm