All Posts Tagged “regulation”

The return of monetary politics

In March, the UK government formally announced plans to welcome and regulate digital currency activity in the UK. The promise of research funding, police training, and pragmatic regulation are welcome first steps, but to what end? The focus in this area tends to fall on questions of innovation, competition, crime, and jobs, but there may be something much broader at stake, namely the question of deciding what the money of tomorrow will look like.

Money at its core is a claim on resources, though we rarely see it in those terms. A pound coin or a twenty-pound note comes infused with notions of power, tradition, identity, and stability, and in the process its core function gets buried. Credit cards and bank accounts go some distance in stripping money back down to its bare functionality, but in a manner that complements rather than replaces existing ideas around money.

Community-issued digital currencies such as bitcoin are less accommodating, not least by their being ‘not backed by anything’. Each bitcoin is a numerical balance in a public ledger and nothing more: no gold reserve, no government pledge, no material referent of any kind, money flattened into a database.

The 2009 launch of bitcoin — an anonymous act of guerilla semiosis from one of the Internet’s darker corners — resulted in two interesting and opposing challenges to the imagination within its community of users. The first was that bitcoin itself was mystified, its digital tokens elevated with metaphors of gold, coinage, and mining, a public ledger praised as the biggest networking innovation since the Internet, and a compelling origin story with an enigmatic lead character. But in the process, for a substantial community of geeks and enthusiasts, ‘money’ more generally was de-mystified. The premise is simple: if money is just a database designed to manage claims on resources, surely there must be a smarter way to run that database? Suddenly every parameter is adjustable. That was not the case with precious metal or paper, the physicality of those forms of money making it easier to leave them unquestioned — this purple piece of paper is worth £20 the same way this pint of milk is worth 50p, nothing about either of these things prompts us to question the nature of value or ownership, it feels natural for something physical.

“…if money is just a database designed to manage claims on resources, surely there must be a smarter way to run that database?”

Once we are talking about tokens in a database the game changes entirely, because everything can be questioned. Consider the political tug-of-war that is the carbon credit system: How many carbon credits should we create? Who should get newly created credits? Should we let them expire? Or accumulate interest? Or maybe erode over time instead? Can a thing own a carbon credit? Once we make something materially fluid it becomes politically fluid as well.

Since Bretton Woods we have had a relatively rigid monetary order built on the US dollar as a global reserve currency, initially backed by gold, and later backed by little more than inertia. Over the last few decades the monetary space has largely been depoliticised — central banks have become largely autonomous, and governments have been stripped of their rights to influence money issuance or interest rates. Most of these changes were welcome, monetary policy remains arbitrary but at least decision making passed from election-focused politicians to a cadre of reassuringly boring technocrats.

The financial crisis prised the clamshell of monetary politics back open. There are two ways to increase the money supply: get banks to lend more (thus creating debt-based money) or issue new monetary tokens (aka ‘printing money’). As interest rates hit zero and post-crisis economies yearned for monetary stimulus, central banks found themselves contorting to do what was always presumed to be illegal — arbitrarily printing more money.

While the revival of central bank activism addresses the panicked and practical question — how can we stimulate the economy right now — the digital currency space has been gestating in the background, a political meditation on more fundamental questions around money, albeit now framed as a grand database that records our collective claims on resources.

When creating a claim on resources, who should initially get that claim? The monetarist consensus dictated that nobody had an unearned right to claim resources, and money created via the lending process should be sufficient. While largely successful, this also led to the systemically unstable link between money supply and debt levels. That bedrock of debt was a key ingredient in the financial crisis, and the quantitative easing which followed has left monetary consensus in tatters.

As a result, more heterodox solutions are rising to prominence. Neo-metallists (gold bugs) take the atavistic view that value is still something we dig out of the ground, while neo-chartalists (such as Positive Money) argue that money should be issued directly by an arm of the state. Both have seen a post-crisis resurgence. Meanwhile the bitcoin protocol awards newly created units of money to those who support its payment infrastructure, while other digital currencies have experimented with awarding newly created units to community members, a sponsoring organisation, renewable energy producers, or even forestry projects.

Token allocation is not the only big question posed by virtual currency schemes: should a new money system be managed by a central authority or a dispersed community? The former promises efficiency, the latter resilience and transparency. Is money a public good, infrastructure, or a competitive service? Should transactions be free? Or reversible? And what kinds of messages or programmatic functions should we allow people to latch on to their money?

But the greatest debate around digital money hinges on its relationship to identity and access, how do we find the balance between transparency and privacy? We can imagine two extremes — a perfectly anonymous digital cash system (still a largely theoretical proposition) — or a hyper-transparent social currency where all transactions, participants, and infrastructure are in the public domain. The challenge, as with all the other big questions, is finding where in the spectrum in between we want to land.

This article was originally posted on on 25 March 2015.

Our UK submission to the HM Treasury

On 3 December, we made a submission in response to the UK government’s economic and finance ministry’s call for information on digital currencies.

In an effort to make Britain the global centre of financial innovation, the HM Treasury’s consultation focussed the function of digital currencies as a payment method, rather than as a speculative investment. As published on their website, the call for information is lead by their desire to promote innovation and competition in the banking sector, learn more about digital currencies and hear the public’s views on regulation.

As suggested, our submission responded to the 13 questions posed by the HM Treasury around benefits, risks and regulation of digital currencies. Here are some excerpts:

  • Some of the benefits of digital currencies are felt at a functional, use-case level: the speed, efficiency, and flexibility of transactions. These are dependent on efficient gateways, reasonable tax treatment, and market depth. Some benefits are felt at a more systemic level, the resilience and transparency of a public secured ledger, and these are only meaningful if the currency is being used.
  • Bitcoin poses a huge challenge to international financial products which have remained stubbornly uncompetitive, most notably remittances, as well as basic banking for underbanked populations in both developing and developed economies.

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  • The biggest boon policymakers could give to the industry would be to find a way to give the industry access to banking services. The largest barrier to business in the UK is the blanket refusal of British banks to provide banking services to companies like ours.
  • Most user risks of digital currencies are comparable to the risks inherent in storing national currencies in an online bank account. Digital currencies do not offer an effective channel for money laundering or terrorist financing, given the permanent digital trail transactions leave in the public ledger.

“In communities such as Bitcoin these risks are actively tackled by researchers, developers, bounty hunters and ‘white hat’ hackers who endeavour to educate users, fix code vulnerabilities and document incidents of fraud and theft. In this sense the community, like any open source community, is already self-policing.”

  • For most digital currencies, it is effectively impossible to regulate the protocol that underlies the technology, The possible unintended consequence of this is that it could saddle early-stage technology companies with legal and regulatory costs that render them uncompetitive. Regulators should instead work with community players to ensure that the currency’s infrastructure is being responsibly managed and used.

If you have a moment, read the submission in full here. In November, we also made a submission to the Australian Senate, which can be found here.

Thank you for your support as we expand internationally to offer you a better global service.

Our Australian Senate Inquiry submission

On 28 November, we made a submission to the Australian Senate Economics References Committee for the Inquiry into an appropriate framework for digital currencies.

In our submission, we asked the Senate to endeavour to consider the following points in drawing up legislation and recommendations:

  • the unique advantages of digital currencies
  • being competitive and pragmatic in regulatory expectations
  • focusing on the players, not the protocol
  • being unambiguous and committed.

“For many of the big regulatory questions around digital currencies, the easiest way to provide clarity may be to treat them in the same manner as foreign currencies…This would offer the quickest route to extending robust protection to consumers and merchants currently using digital currencies.”

We presented expected industry impact to the payments, retail and banking industry, including:

  • competitive pressure
  • changing consumer expectations
  • an increasingly global market
  • improved financial inclusion
  • market diversification.

“A properly nurtured ecosystem of digital currency companies could create a range of credible small-to-medium financial providers, making the sector (banking) overall more competitive and resilient.”

In our concluding paragraphs, we ask the Australian government to support and defend the technology and finance sectors with integration with the global economy, fulfilling Australia’s potential as a financial technology leader.

“The Australian market on its own is simply too small to support local champions with no international presence, such players will always be vulnerable to competition from players in much larger Asian markets.”

“So while right now we may struggle to imagine why people would want to make everyday payments to people on the other side of the planet, things will look very different once such a facility is actually available.”

If you have a moment, read the submission in full here.

Thank you for your support as we expand internationally to offer you a better global service.