Below is my discussion paper for the Research Conference on Money Design in Global Perspective, held as part of the Institute of Global Law & Policy Conference at Harvard Law School in June 2015. (This response paper is not footnoted, but I am happy to provide sources for anyone interested.)
- How do you define “money,” and how does that definition inform your work?
My definition of money is still evolving, much as money itself seems to always be evolving.
I define money as a common representation of value, as well as the practice that allows us to recognize and use that common marker of value. Money also holds value, enabling us to conserve resources for the future, knowing that we can obtain desired goods or services with the money later.
I am currently looking at virtual currencies, such as Bitcoin, as potential new manifestations of money.
Features of money that I find interesting and that inform my work include:
- its status as a human construct that is created and maintained;
- its dependence on faith to function;
- its dynamic nature;
- its fragility;
- its systemic structure; and
- the role it plays as public infrastructure.
Below is a brief description of each of these features and what I find particularly intriguing about it. Although some of these features overlap, there are distinctions among them that are worth noting.
- Money is a Human Construct – Created and Maintained
I see money as a social practice or institution. It is not organic – i.e., gold is not inherently money until people make it so through manipulation and belief.
If money is a social practice, then there are always people involved in the making of money. People who create the money, and people who do things to maintain the money so that it continues to function – people who are inherently flawed, who make mistakes, and who are subject to corruption.
In the past, the making and maintaining of money has involved tasks like minting and reminting coins, or adjusting the money supply, but with the advent of virtual currencies, it now involves writing and revising software code and coordinating a team of software developers.
Although in our recent past, the government (or its delegate) has traditionally been the party that has created and maintained money, there is an active debate and struggle now over who should create and maintain money. This is most clearly manifested in the proliferation of both centralized and decentralized non-governmental virtual currencies since 2009, although it has also been seen through the growth of community currencies, attempts at private mints, and initiatives in state legislatures to adopt alternative currencies to the U.S. dollar.
Given my understanding of money as a people project, my examination of virtual currencies has focused on the people involved in creating and maintaining them. For virtual currencies, these people are software developers.
- Money is Dependent on Faith
Money’s value, and therefore its basic functioning, is based on faith. Faith that the money will be worth a particular amount tomorrow or further into the future, and faith that the money will be accepted in exchange for goods that one wants to acquire.
Money’s faith component is tied closely to its status as a human construct, produced and maintained by someone. So, one’s faith in the ongoing successful performance of money is tied to one’s faith in those who create and/or maintain that money. In part, this is a faith that the issuer will continue to exist and thrive, and will make good decisions about maintaining the money (i.e., that the issuer won’t take actions that devalue the currency).
My view of faith’s role in the ongoing functioning of money means that I am interested in what creators and maintainers of money do to justify and uphold this faith, and what (if any) duties these people have to the users to the currency to maintain this faith.
- Money is Dynamic
Like all social practices, money is dynamic and ever evolving. Money has taken many different forms over time, from gold coins, to massive stones, to pieces of paper, and now potentially simply a list maintained by a decentralized computer network. There have also been countless failures of moneys over time, some gradual and some sudden through hyperinflation.
To me, this means we don’t have it all figured out yet.
Thus, everything we do with money is to some extent an experiment, and we should not be overly confident in any particular strategy that we have it all right.
Interestingly, the shifting nature of money is not readily transparent to the general public, who take it for granted that the money just works…until it doesn’t. It seems that major changes in what money is (its form, features, source, and management) often are introduced in times of crisis and then linger on after the crisis passes. At least in the U.S., crisis management rather than long-term planning has driven major events such as the introduction of paper currency, the severing of the link between gold and the U.S. dollar, and massive amounts of “quantitative easing.” One wonders if these shifts in money would have happened through deliberative planning.
This point of view informs my work in that I am skeptical of claims that any particular form of money, whether fiat, commodity, or virtual, is ideal or invulnerable. I am therefore approaching virtual currencies with a critical eye in examining their status as money.
- Money is Fragile
Money is breakable.
Money can break slowly, with gradual inflation and a resulting decrease in the money’s value, or quickly, with a simultaneous rush to exit the currency.
Even more worrisome, the consequences of money breaking are catastrophic, as we have seen with prior currency collapses such as those in the Weimar Republic and Zimbabwe. A currency collapse results in a massive loss of wealth for its holders, and has historically given rise to devastative consequences such as increased crime, food insecurity, social unrest, and even collapse of a society. Scholars have argued that the Weimar Republic hyperinflation was related to Adolph Hitler’s rise to power.
Given money’s fragile nature, I am interested in what makes it so fragile, how to make it less so, and in minimizing the possible harms that a given money’s failure could cause. My view of money as fragile also causes me to question the adequacy of the standard economic definition of money (something that serves as a store of value, unit of account, and medium of exchange), as it is possible that something could perform those functions yet be so fragile that it is nonetheless undesirable as money. Just because something is widely used does not mean it should be celebrated (think cigarettes and credit default swaps).
My look at virtual currencies seeks to understand their vulnerabilities – what could cause them to “break,” and does that make them more or less fragile than more traditional forms of money?
- Money as a System
Money operates in systems comprised of all of the users and holders of the particular form of money. This systemic nature makes money’s fragility even more significant, because a failure of a particular form of currency means that every single user operating within the system is simultaneously affected. The hyperinflations in the Weimar Republic and Zimbabwe demonstrate this clearly.
In a given money system, it’s as if all users of a currency sit in a single room with one light bulb – when the money they use works, the light bulb shines brightly, but when the money fails, all are plunged simultaneously into darkness. Moreover, this darkness is one that may be inescapable, at least for people whose wealth is stored primarily or exclusively in that particular money, as they may be unable to exchange their failed money for other currencies or resources.
Thus, even if a currency is only used amongst a relatively small group of people (as with Bitcoin or other virtual currencies today), for the people who use the failed money (i.e., those within the system), the effects are disastrous. Of course, the larger the system of a given money becomes, the more people who are subject to its risk of failure. Indeed, it is this systemic nature of money that we see the Eurozone countries wrestling with, as all of their fortunes are tied to the currency system they have chosen to enter together.
Systemic risk is obviously a huge buzzword since the financial crisis, and is generally used in relation to the financial system. I see it as relevant to monetary systems as well, and my work considers money as a system, and the risks that could cause system failure. Currently, this focuses on the possibility of system failures in virtual currencies (particularly Bitcoin), but I am also interested in the systemic risks posed by more traditional forms of currency, such as the U.S. dollar, so widely held and distributed due to its reserve currency status.
- Money as Infrastructure
Money in many ways functions as infrastructure. It is used by the public, and is available to be obtained by anyone, unlike securities, whose ownership is restricted depending on a number of factors. There are no restrictions on people’s ability to own money, and it is widely used and relied upon in facilitating commerce and storing wealth, making it very much a public good.
Moreover, similar to other public goods, money’s ongoing functionality is simply assumed and relied upon by its users – i.e., the public. Much like a bridge, people expect money to just work. When they hand it over to a cashier in exchange for their groceries, they expect it to be accepted and to receive their desired goods in exchange. While they may understand that there may sometimes be glitches in the functionality of credit cards, people count on cash working no matter what.
My view of money as infrastructure, or a system that is both essential and relied-upon by the public, shapes my opinions on the responsibilities of those who create or maintain money. If these people are creating and maintaining basic infrastructure, then they owe certain duties to the public (fiduciary, perhaps?) to produce money that works and may be relied upon in both the short- and long-term. Thus, in my examination of virtual currencies, I focus on the role of the software developers (the creators and maintainers) of virtual currencies, and how they perform their role as creators/maintainers of public infrastructure.
2. Does your definition lead you to prioritize certain institutions as objects of study? Why? How does your institutional focus relate the conceptualization of money and its practices? What do you hope to accomplish by your institutional focus?
I am interested in institutions/people who create and maintain money. I am interested in those parties who decide what money will look like (what features it has, how much of it there is, etc.), what their qualifications are to perform this task, and how they relate to the users of the money they create.
This focus on the creators/maintainers of money directly relates to my views on money and its attributes. If money is a breakable public infrastructure, whose failure is catastrophic for its users, then those who create it and keep it running are performing an extremely important role.
This perspective would generally lead me to look at governments and central banks, but my current research focus on virtual currencies means that I am looking at the software developers who create and run these new forms of money.
I believe that it is worth examining virtual currencies as a potential new form of money because of their continued growth (both in the absolute number of them (in the hundreds if not thousands) and in the value that they represent), the massive ecosystems that are being built around them (with hundreds of millions of dollars in investments from venture capitalists and others), and the high number of prominent, influential people (such as Marc Andreessen and Arthur Levitt) who are publicly supporting them. Indeed, the prominence of these virtual currencies is prompting governments to consider issuing their own forms of digital currency, and it is possible that virtual currencies could become mainstream.
Decentralized virtual currencies are especially interesting, therefore, because they purport to eliminate the issuer – i.e, they pretend that humans are not involved in the creation or maintenance of the currency. Indeed, the most prominent of the decentralized virtual currencies, Bitcoin, comes from an anonymous creator, and is mythologized to the public as having its rules set in stone, with a fixed upper limit on the number of units of the currency that may ever exist. Yet the original Bitcoin software has been largely rewritten, with many modifications to the currency’s original features (though its defining features have been maintained). The Bitcoin software is on version 10 at the moment, highlighting the dynamic nature of this new form of money.
Manifesting my view of money as a people project, Bitcoin is operated by a team of people – a group of software developers tied together through the standard practices of open-source software development. There are leaders of the software developers (known as the “core developers”) who hold the keys to the code, and thus have elevated decision-making power over the features of the software that implements and comprises the currency. The core developers are therefore analogous to the “central bank” of Bitcoin, in their role as maintainers of the currency.
Yet, this group of coders resists categorization under our standard legal structures, which have undergirded money creation in recent history. This group is amorphous, neither sovereign nor business entity, which complicates the analysis of what obligations they may owe to the users of the currency.
These features of Bitcoin give rise to many questions for me. Some that I am currently considering include:
- Must there be an identifiable issuer for money? Does that issuer owe anything to the users of the currency or the public at large? e., are the people who create and maintain virtual currencies serving as fiduciaries in relation to the currency’s users? If so, do we care who they are? What their expertise is? Who is paying them to perform these money management tasks, and whether this raises conflicts of interest in a very public project?
- Fleshing out the expertise question a bit more, who has the expertise to issue and maintain virtual currency, anyway? Must they be experts in economics, history, political science, law, psychology, finance, and business, in addition to masters of computer science, coding, cryptography, software development, cybersecurity and networks? Do such people exist, or have we created something too complex to adequately understand and manage? (The complex securitization chains and derivative structures of the financial crisis come to mind again.)
- What impact does this reshaping of the creator/issuer have on the usefulness of money? Does it affect the money’s exchangeability? Its stability? Its ongoing functioning?
- Does money whose successful exchange depends on the operation of software pose new risks for that money? Given software’s inherent vulnerability to bugs and attacks, is it wise to rely on it for something that we expect to be operational at all times? Does this add a new form of fragility to money as infrastructure or system, in its reliance on software and computer networks merely to operate? Are widely-used virtual currencies the ultimate desirable target for terrorists or state-sponsored hackers?
- What does Bitcoin’s structure as a public list of transactions mean for what money is? Is money just a communication device used to keep track of who has what? Does this form of money make it more or less stable than other forms of money?
Ultimately, I am concerned with how resilient this form of money is, given my view of money as a fragile type of infrastructure. And, I want to be sure that we do not lose sight of the human component of this digital money, given my view that money is a people project that we really don’t have figured out yet.
And what do I hope to accomplish by examining these questions?
Financial and money crises are extremely destructive to societies, opening the door to great suffering, social unrest, and sometimes even war. They take us backwards as a civilization because we have to rebuild resources that we once had. A better understanding of how money works, and how we can design it to be more stable, can hopefully help us to avoid money crises like currency collapses.
Given the rapid proliferation of virtual currencies (and indeed the move to digitize and decentralize pretty much everything), it is imperative to consider their desirability as money now, rather than letting a potentially unstable system grow to mammoth proportions. (Something we seem to have a problem with in the financial system.) If we can figure out ways to keep money more functional, we can minimize the devastation seen when money goes bad.
As infrastructure, the continued existence and relatively stable value of money should be something that people can count on, much as they count on bridges, highways, running water, electricity, and other basic community systems. This enables people to worry about other things, ideally leading to a more productive, peaceful society.
The current palpable anxiety around money is part of what has given rise to these virtual currencies, with people questioning whether they can “do” money as well or better than the government has. This feels like a moment in which our basic ideas and practices about money could shift dramatically, and I am hopeful that any such changes will be made in a considered rather than a revolutionary way.
If virtual currencies do indeed represent an advancement in the stability of money (and if not, if they become widely used anyway), how can we ensure that their stability is supported? What elements or design or oversight could be useful, if any? Over the course of our human experience with money, have we learned anything about money design that could prove useful to virtual currencies, or did the mysterious anonymous creator of Bitcoin outsmart all of humankind and invent the perfect form of money?
I am anxious to try to figure it out.
3.How does your approach to money and its institutions illuminate the travel of value across borders? How do you conceptualize the international (or now global) dimensions of the monetary system given the domestic character of many of its elements?
My focus on virtual currencies draws attention to the travel of value across borders, as virtual currencies, like the Internet itself, traverse borders seamlessly. Proponents of virtual currencies celebrate the fact that they allow value to be transmitted directly between people on opposite sides of the globe, without involving any intermediaries or having to convert one currency into another. They argue that virtual currencies will revolutionize international remittances, saving those who send money across borders to their families significant amounts of fees. A great deal of regulatory and media attention has also focused on how virtual currencies facilitate cross-border crime, such as money laundering or the sale of illegal goods and services.
In addition to the movement of virtual money across borders, virtual currencies also bring forth the creation of money across borders. The computers that run the Bitcoin software and that verify changes to the ledger that comprises it operate in a network that spans the globe. Likewise, the software developers who care for and shape the code live all over the world – with some of the core developers living in the U.S., and others in places like the Netherlands. This system of money creation upends the standard model of a sovereign creating currency to operate within its domain (or even the shared currency model of the Euro, which is still a bounded currency created within its established borders). It co-opts the peer-to-peer creation model used familiarly in places like Wikipedia and applies it to money itself.
I view this as the digital revolution coming to money itself. Countless industries have been disrupted by the global network of the Internet, and in some instances, international borders remained relevant, and in others they became irrelevant. This new form of money raises questions about whether borders should continue to be relevant to money, which relates to the question of whether money can/should come from sources other than sovereigns. We must ask, therefore, whether borders are relevant to money for reasons other than technological limitations (i.e., could we have made borders less relevant to money, but policy reasons caused us not to).
I look forward to considering these and other questions with the group at IGLP.
Angela Walch 