Mining not minting
How decentralised money systems are actually quite exciting…
Two meetings happened yesterday which, when considered together, offer an interesting insight into the financial industry of the UK, present and future.
One of these meetings took place in the City of London where politicians, bankers, lawyers and other luminary masters of the universe gathered to hear the Managing Director of the IMF Christine Lagarde speak. Ms Lagarde has, in the past, served as a cautious voice regarding the British economy, urging that lack of government spending and failure to lend by banks threatens to choke off the recovery and harm small and medium sized business from growing and flourishing.
This meeting was held for the Inclusive Capitalism conference where Prince Charles was another of the speakers and members of the G20 gathered to discuss the progress for reform of the banking sector since the economic crash in 2008.
The mood was not of a congratulatory nature and that is probably just as well. Again, Ms Lagarde felt the need to be quite scathing in her assessment:
“Although some changes in behaviour are taking place, these are not deep or broad enough. The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.”
Few of the reforms outlined in the post-crisis analysis have been implemented at all, let alone embraced by the industry. If you want to understand how those involved view the causes of the crash and the subsequent fall out this article is excellent, especially for those of us who can never quite remember how their interest rate derivatives differ from a collateralised debt obligation.
The article highlights how vast the UK (really mainly London, sadly) financial sector has become.
It is split into three distinct areas; Canary Wharf houses the investment banks, the City is where brokers and insurers live and swanky Mayfair where is home to the hedge funds and private equity firms. And no-one really understands how it works. Not even those who work there, not really. One of the bankers interviewed for the Guardian banking special says:
“If I leave my desk and walk 10 yards, I have no idea what the people sitting there do. I’m on one floor of a huge, multi-storey building, and each floor is the size of a football pitch.”
And this is part of the problem. Many of the companies have thousands of people working under the same vast roof, in increasingly ‘silo-ised’ and specialised departments. Too big to fail has, quite literally, become a reality, with such fears of significant job losses should even a single institution go down that banks who have behaved irresponsibly and are compromised were then propped up by the taxpayer.
And it’s not just size, but the mentality which is worrying. The industry has grown separate and distant from the culture and society it is supposed to serve. A senior banker, insisting on anonymity, offers an illuminating description:
“The banks are here (in the UK), but almost everything they do is not here,” he says. “I’ve got no clients in this country. I’ve got clients in Russia, Mexico, South Africa, Australia, Switzerland. That’s very normal in the City. The City doesn’t service London and the UK; it starts off in India and goes all the way to Ireland, then up to Russia and down to Cape Town.”
So their focus is outside the UK, they operate in a closed world, where security is high to prevent outside interference, using a language that is incomprehensible to most.
The lack of transparency, of accessibility, is stark and concerning. Most notably since this has shown no signs of changing since the massive fall out of the economic crash, where malpractice was revealed to be widespread. What other industry could operate this way and get away with it?
In 2010 a group of young professionals was asked to draw up a manifesto for the banking industry, intended as a guiding vision for how they would like to see their world become, in 5-10 years – working practice for the next generation (which suggests, as many agree, that it’s too late for the current one, who refuse to change and resist reform wilfully). The group came up with this mantra, amongst their suggestions:
“A part of society, not apart from society”.
Which has a nice ring to it but also dives right to the heart of why the banks and some of the individuals within it are now feared, envied and loathed in equal measure. Ordinary members of the public do not understand the industry and are not encouraged or invited to. This sense of otherness (felt both from within and by those outside, who might seek to make sense of it) fosters mistrust and, at a time when faith and confidence is in short supply, this is all the more unhelpful.
Especially when business owners and individuals are struggling to get credit, buy a house or find a savings account with a reliably decent rate of return.
Which brings us to the other meeting that took place yesterday (Tuesday 28th May), at the Watershed , in Bristol.
This one was called: ‘Bitcoin: An introduction’ It was for new and existing members to come along and learn about this relatively new crypto currency. One reason for the recent local interest is that Bristol is about to get a Bitcoin ATM installed, at the Superfoods shop on St Stephens, street, Bristol, from next Monday (2nd June).
For those unfamiliar with the new currency there is a guide which will explain it far better than this author; what I do know, however, is that this is proving to be quite an interesting experiment by the designers and promoters of Bitcoin and it is another coup for Bristol to have such an involvement, at what are still early days.
One of three machines (known as Robocoin) to be installed by start up company SatoshiPoint (after the currency’s creator Satoshi Nakamoto) and is the only point outside London. The ATM, will allow users to buy and sell bitcoins for pounds sterling, and the company says it will charge a flat 5% fee over the online price. SatoshiPoint’s MD Jonathan James Harrison said:
“SatoshiPoint wants to take bitcoin mainstream in 2014 and believes that bitcoin ATMs are essential in making this a reality. Bitcoin ATMs provide a familiar and consistent way for normal people to get hold of bitcoin fast, or sell it quickly for real world physical cash.”
This ultra-modern, high tech currency comes to a city which has already proven its willingness to innovate where money is concerned, in the form of the Bristol Pound CIC, a local currency set up in 2012 as a not for profit partnership with Bristol Credit Union and run largely through voluntary means.
Bristol Pound already has around 680 traders who accept the money, across Bristol, in various business sectors and 1,100 active members are signed up to use the currency. Individuals can then top up their account online and via the Credit Union. Many more may be using the paper money, although this is harder to establish.
How should these breakthrough currencies be understood, in relation to one another, and how will they do, operating in the same marketplace?
Firstly, they are, by no means, naturally direct competitors; bitcoin is a primarily digital currency whose main advantage is how easily and conveniently it can be exchanged freely across the world.
Bristol Pound’s whole raison d’etre is to be a local form of money, which stays in the community and works harder for the people and businesses of that area.
Bitcoin is in the vanguard of a range of digital currencies which may yet go on to reshape the way we look at, and use, money altogether. It offers a method and rate of exchange that is global, transparent (anyone with the mathematical formula, or a template, can interrogate every transaction ever made) and – this is the crucial, exciting part – it is decentralised.
That’s right – no single institution controls the bitcoin network. Individuals create the money digitally, by ‘mining’, using computer power in a distributed network. Therefore it is not anchored to any tangible value, for example in the way the £ and $ used to be based on gold.
This principle has been used by bitcoin’s detractors (including banks and governments – including our coalition government and the central bank) to criticise the currency, although clearly questions around their vested interests in maintaining the status quo have a bearing here.
But that same ‘institutional freedom’ is also seen as a huge potential advantage by many.
Bitcoin operates, then, on the principle of subjective theory of value, which means it really is free from the meddling hands of central bankers who have political pressures to complicate their involvement and ‘greedy’ bankers, who always have a vested interest in controlling the money’s supply and demand.
But that bitcoin has arrived at about the same time as the Bristol pound is not by accident; it seems that they are, certainly in part, both responses to some of the problems faced by the huge, often faceless, financial institutions operating in the City – they just differ in how they address the issue.
The Bristol Pound places a strong emphasis on community, bitcoin’s market is global.
Yet they have the shared goal of seeking to share the benefits of financial exchange and helping it to work better for people and business, not just the huge banks.
Martin Wolf, in his FT article setting out his thoughts on the way the financial sector needed to reform, said:
“The transition to a system in which money creation is separated from financial intermediation would be feasible, albeit complex. But it would bring huge advantages. It would be possible to increase the money supply without encouraging people to borrow to the hilt. It would end “too big to fail” in banking. It would also transfer seignorage – the benefits from creating money – to the public.”
These financial outliers won’t, of course, replace the City and it’s institutions. But, in different ways, it seems they do have a part to play in our increasingly complex global financial system. They actually make it simpler. Because what they do very well is give the people who are responsible for them, and the people who use the money, a stake in the currencies’ respective success.
One of the repeated complaints voiced in the Guardian article about the City is how it has evolved, was that as the institutions grew in size they stopped putting their own money on the line. Since the infamous ‘Big Bang’ in the ’80s, when the Thatcher government set about deregulating the industry, layers of bureaucracy were stripped away; this was good in the way it reduced nepotism and collusion but it had an undesirable side-effect, which is directly responsible for accelerating the 2008 crash in the UK, and probably beyond.
The City went from a group of relatively small, manageable banks and institutions which were primarily family run and controlled to these enormous, ruthless, shareholder-led behemoths, which are no longer even risking their own money.
When viewed that way a lot makes sense; if it isn’t your money on the line you’ll always play a riskier hand; like playing poker for matchsticks, the game is incomparable to when playing for live stakes. The same principle applies in global finance – but here the consequences are catastrophic.
Even the Coop bank has recently been in the news, with an apparent 150 million black hole in its balance sheet. Which is bad, no doubt, but it simply should not be the only example we look to for ethical, local banking. Where are the mainstream alternatives?
The nature of small, local banking and money exchange systems is clearly becoming more popular as a result.
More people than ever are turning to Credit Unions, including cabinet ministers, well one at least! Work and Pensions Secretary Iain Duncan Smith has urged people to consider them:
“Credit unions can offer some of the best rates on the market for loans and dividends for your savings. But saving with a credit union can provide more than a financial return, as you will be investing in your local community.”
One reason is that the bond of trust has been broken with traditional banks; they see the names on the high street as ticking time bombs and, evidence suggests they’re at least partly right to do so.
Germany (as ever, we can learn from the ‘powerhouse’ of the European economy) has a strong network of local banks which has provided a valuable source of credit to individuals and small businesses since the crash in 2008.
Historically Britain’s high street banks were just that, there to service the needs of customers at a local level, without the dangerous co-habitation with the ‘casino’ structures making high risk, extraordinarily complicated transactions at lightening speed in the modern global financial markets, operating out of the City and across the world and co-opting the public’s financial rectitude along with them.
It is not a matter of closing down the City. We couldn’t if we wanted to; it reportedly brings in 12% of GDP to the UK (depending on where you look and who you ask). But it must surely be time to seriously explore alternatives and start to offer customers and smaller business, in desperate need of support and access to a viable, safer finance.
Bristol Pound and bitcoin are two examples of inventive, elegant solutions to a problem which shows no signs of being addressed from the top, by those in power (politicians and the banking industry have too much interest in keeping things as they are); and it seems there are classic bottom-up solutions.
Local currency is already being tried elsewhere with some interesting results. That we are still at an experimental stage should be all the more encouraging – there are people out there with good ideas to put to the market.
Some will do better than others but the fact that many people, who believe that small is beautiful (as E.F Schumacher would say), and want to experiment with a new form of financial transaction, one which doesn’t come with the technocratic, bureaucratic baggage and puts some control back in the individual’s hands is very welcome.
Alexis de Tocqueville wrote, in mid- 1800s:
“Decentralization has, not only an administrative value, but also a civic dimension, since it increases the opportunities for citizens to take interest in public affairs; it makes them get accustomed to using freedom. And from the accumulation of these local, active, persnickety freedoms, is born the most efficient counterweight against the claims of the central government, even if it were supported by an impersonal, collective will.”
I bet you a fiver it catches on?