The End of Money

by David Wolman

  Private currencies are legal too, and, once you start looking for them, quite common. Up until the Great Depression, local currencies could be found throughout the country as people realized that there was an inadequate supply of money to facilitate exchange. Before that, during the Free Banking Era of the nineteenth century, private banks issued notes backed (or supposedly backed) by real coins or bars of metal inside their safe rooms. Once the Federal Reserve and the dollar came to reign, however, most local currencies died or were snuffed out by the Feds.

  Now they’re bounding back. Referred to as alternative or community currencies, a few of the better-known examples are the Ithaca HOUR, issued in Ithaca, New York; the BerkShare in western Massachusetts; and the Brixton Pound, which circulates in a district of London. (The award for best local currency name goes to one in Japan called fureai kippu, which loosely translates to “caring relationship tickets.”) The philosophy behind alternative currencies is the financial equivalent of eating locally. By focusing consumption on food grown or raised nearby, you reduce, or at least get to say you reduce, bad things like factory farming and greenhouse gas emissions, while also eating fresher food and supporting local businesses.

  The locavore approach to money is supposed to have similar benefits for your neighborhood economy. Instead of taking your hard-earned salary and using it to purchase a table made in India, brought to you by way of a credit-card payment on CrateandBarrel.com, why not use your community currency to buy a table from the furniture-maker on Main Street? He in turn uses his BerkShares to buy bread from the baker next door, and not from Walmart or Costco, which would send a portion of that payment into corporate coffers located far, far away. Some of these local currencies use paper bills, while others have an open central database recording transactions so that users can track what they have or owe, and which area businesses accept the currency.

  Most alternative currencies are, at the end of the day, souped-up barter exchanges, whereby person A exchanges services with person B for x amount of tokens, which are then used to buy something from person C. To most of us that sounds a lot like regular old money, and in terms of function it is. But it’s distinctly not the same as sovereign currency because the country’s central bank doesn’t control the supply of it and you can’t pay your taxes with it, although the IRS says you do have to treat earnings in alternative currencies as taxable income. Most alternative currencies have an exchange rate with dollars or other national currencies, which is how taxes are calculated, at least in the United States.

  The alternative currency idea branches in a number of directions and, not surprisingly, most are blossoming online. These virtual currencies are used primarily to buy virtual goods in online games, be it property, weapons, farm equipment, or special powers. In 2011, Facebook rolled out something called Facebook Credits. Like other virtual currencies, these credits have a dollar value and are used to buy and sell things in games and other applications. You buy them with good ol’ U.S. government money, usually online, but Facebook has also made them available in the form of gift cards. It’s not unlike buying tokens at Chuck E. Cheese, using them to play skee-ball, winning tickets, and then using the tickets to buy toys. Except that Chuck E. Cheese doesn’t have 800 million customers like Facebook does. If the marketplace of goods available for purchase through Facebook expands, as it’s forecasted to, it’s hard to imagine what you won’t be able to buy with your Facebook Credits.

  Like any electronic payment service, most virtual currencies provide a way to transact that doesn’t involve government-issued tokens representative of an amount of money. It’s not national currency, but it has an exchange rate with currency of the realm that makes them close cousins.

  Yet these currencies also have the potential to steal revenue from governments. A few years ago in China, a virtual currency called the QQ coin was taking off. Sold by an Internet company at the price of 1 QQ for 1 Chinese yuan, the coins were being used by tens of millions of gamers to buy virtual goods to meet their online needs, as well as real-world merchandise.3 The business was booming, and government silence on the matter was interpreted as tacit consent. But then QQ crossed some unspecified line, perhaps one as simple as the number of users or transactions, or maybe someone finally estimated government revenue lost due to transactions in this non-yuan currency. Whatever the trigger, in 2009 the Chinese government banned the use of virtual currency for transactions involving real goods.4

  The allure of virtual currencies can extend beyond commercial necessity and convenience. A few summers ago, a computer scientist from the University of California at Irvine named Yang Wang spent some time in China and Japan, looking at peoples’ relationships to digital money. While in Beijing, he met a man who, like so many millions of people, had become addicted to the online videogame World of Warcraft. In the game, you buy stuff with accumulated gold coins—weapons, magic powers, armor, and so on. But earning gold often requires patience with in-game tasks that some people consider tedious or boring, compared with other in-game exploits that require more gold. So why not just pay someone else to do the menial work?

  The industry is known as gold farming. Teens and twenty-somethings, usually in Asia, sit at computer terminals for hours, earning virtual gold for clients who might live 40 or 4,000 miles away. They settle up with an online payment, of course, denominated in some sovereign currency and often paid for with a credit card or via PayPal.

  The economics were interesting to Wang the computer scientist, but even more so were the details of some of the transactions. The middle-aged man from Beijing, for instance, had once arranged to purchase some in-game gold from someone he met online. Unbeknownst to the buyer, the seller was a twelve-year-old boy in central China. The seller said he couldn’t accept payment by mail, probably because his parents might get suspicious. For the man in Beijing, then, the question arose: how to pay for his World of Warcraft gold?

  On New Year’s Eve a few years ago, the Beijing man got in his car and drove hundreds of miles for a rendezvous at an Internet café. He met the kid, and they sat down at neighboring computers to log into the game. He got his gold, and he paid the kid with cash, yuan worth about $150. Then the man got back in his car to begin the drive back to Beijing. A costly, borderline farcical rigmarole, right? But the guy from Beijing conveyed to Wang that the whole thing was like an adventure. “It was just the opposite of the inconvenience you would expect to hear about,” Wang later told me. “Virtual currency isn’t just about accounting and denomination. It’s extending the game experience into real life, mixing together these elements of personal entertainment and empowerment.”

  Currencies connected to social networking take this idea of redefining transactions to a new level. Projects like Hub Culture, Bitcoin, and Superfluid are trying to blend the interconnectivity of social networks with alternative currency models (although who knows if they’ll still be around by the time you read this). At Superfluid, users trade in Quids, which, as the website explains, are not dollars. “They’re placeholders for favors.” Hub Culture’s currency, Ven, is an attempt to bridge the divide between virtual currencies and real-world goods and services. People in the network transact in the “local” currency, which is priced from a basket of major sovereign currencies, commodities, and carbon futures. Your Ven can be exchanged for one of the major national currencies based on the same floating exchange rates that govern the value of world currencies against one another. Bitcoin has captured peoples’ imaginations because the money supply is determined by an algorithm, not bureaucrats or economists, and there is a cap to the number of Bitcoins that can be created: 21 million.

  Two related experiments are the Wuffie Bank and Serios. Wuffie has tried to set up a currency based on reputation, as determined by an algorithm that measures the influence we have on others via our social networks. Serios is a currency of attention, based on the idea that in the age of information overload, an incoming e-mail loaded with 100 Serios is of more value than one l
oaded with just five Serios. Or think about the “Like” button on Facebook: when someone clicks this button on an article, product, or online video, she is assigning a tiny additional value that wasn’t there before.5 In the summer of 2011, the publishers of Longshot magazine decided that instead of making readers use a conventional paywall, they would ask for payment in U.S. dollars or by sharing the site with others via social media. After all, both have value. Could these kinds of reputation, attention, or networking values ever be convertible—used in a way resembling currency in the dollars sense of it? Sounds a little vague, I know. Then again, so does “In God We Trust.”l

  A broad goal shared by these initiatives is peer-to-peer transactions. Keep the government out of it, as if we are neighbors swapping a rake for a batch of homemade brownies, but by way of some medium of exchange that ensures this is not just barter but commerce conducted with a fungible currency. As author Douglas Rushkoff put it in a Wall Street Journal interview, centralized currencies were developed and perfected by monarchs centuries ago to prevent peer-to-peer transactions. By issuing currency, the government provides the people with a convenient medium for conducting exchanges. But when using government money, there’s also a built-in transaction between the individual and the central authority. The money people want for purposes of transacting, says Rushkoff, is “also being used by speculators to extract value from communities.” Fiat currency just isn’t good at both reinforcing the economic power of the government and promoting transactions between individuals.

  So what, then? Replace the dollar? Not necessarily. The democratization of currency that we’re witnessing is about innovating monetary systems that are more efficient and valuable for use at times when government currency is suboptimal. Encouraging or using alternative currencies doesn’t have to be some kind of wholesale revolt against government-issued money, which has—let’s not kid ourselves—helped catalyze an astonishing rise in prosperity over the past century.6

  On the surface, this potential phantasmagoria of new currencies—Facebook Credits, Brixton Pounds, World of Warcraft gold, Ithaca HOURs, Bitcoin, Ven, Apple Seeds (I just made that one up)—may appear like an inefficiency disaster in the making that could never possibly compete with the omnipresent and omni-accepted power of the almighty dollar. Less convenient systems are the last thing people want, or will accept. But there is a relatively easy answer to this critique: digital technology. Software could calculate currency conversions on the fly, so that transactions would be as easy and as fast as today’s payments. Faster, even.

  One of the most provocative currency ideas I’ve seen is one based on something that has, and always will have, real and unchanging value: energy. More specifically, kilowatt-hours. These are the units in which your power company calculates your bill: 100 kWh is how much energy you need—exactly—to keep a 100-watt light bulb illuminated for 100 hours. Gold may be history’s most famous currency, but at the end of the day its value is still only built on our faith in it, and that value isn’t constant because we, the fickle creatures that drive markets, are not constant.

  A kilowatt-hour, however, is constant in the physicist’s sense of the word. To those who worry about what holds value, and about the long-term fate of national currencies, the idea of energy as currency is enticing. We can’t know what our dollars or euros will be able to buy in twenty-five years, but we know we’ll need to heat our houses and power our electric cars, and that the amount of kilowatt-hours to do so on some future date equals the amount it takes to do so now.

  But energy units are anything but fungible. How could you ever use them as a medium of exchange when their only two states of being are consumed or lost?

  A couple of months ago, I received a few dollars off my electricity bill. It was a gift of sorts, for the purpose of a demonstration. A PhD chemist, pilot, patent attorney, and inventor from Virginia named Robert Hahl had made it happen. “In 2006 and 2007, I got interested in how the economy and the financial system works,” Hahl told me. But whereas this baseline curiosity would compel most people to read a book or three, Hahl decided to see if he could upgrade the whole thing.

  He started something called Kilowatt Cards, a prototype system for turning kilowatt-hours into a currency by way of paper representing an amount of electricity. The cards are just like gift cards, which can be used to pay for ten kilowatt-hours of electricity consumption. The difference between these cards and, say, gift cards for Best Buy, is that these cards are for something everyone needs, which means they could easily be traded and, at least in theory, circulate as a type of currency.

  Hahl sent me a few Kilowatt Cards—he’s giving them away free for the time being, to help spread the word. They’re simple white slips of paper the size of a business card, with a red logo and an authentication code. Entering that code into a website will void the value on the card so that it can’t be used more than once, although in the future distributing and trading these credits, as well as authenticating them, could just as easily take place digitally.

  Here’s how it works. You can’t send the cards to your local utility to offset your bill. Instead, you redeem them by sending them to Kilowatt Cards headquarters, which is to say Hahl’s home in Virginia. Think of it like redeeming your gold from the goldsmith’s shop with a paper receipt, except that instead of gold coins, you get lighting or heat. Hahl makes the arrangements to pay 10 kWh worth of your electricity bill, in U.S. dollars. If you don’t want to redeem the power just yet, you can pass the Kilowatt Cards to someone else in exchange for goods and services.

  Because the currency is units of energy, holding them doesn’t risk a loss of value from inflation. I’m breezing through a lot of the details of Hahl’s vision, but this is the gist. And there are, as you may have surmised, major hurdles to ever making this kind of system viable. One is the variable cost, denominated in whatever currency, of delivering electricity to homes and businesses in different locations. Another challenge is limiting the issuance. Hahl says this is easy enough: he only issues as many electricity coupons as he can pay for from the sale of commodities “that represent real labor and energy,” such as grain and firewood. That sounds fine, if not a little rustic, but what if a future overseer of this currency is less ethical, or just a regular old banker who falls victim to the temptations of over issuance?

  Still, Hahl’s model is compelling for at least attempting to address the puzzle of value by way of a currency that is useful and stable, something few other currencies could ever claim. “Government currency, company stocks—they’re all just electrons,” says Hahl. “I’m not especially bitter—but it is crap. The train of thought for me was: what could make it real?” It may sound quixotic, but the scientist in Hahl sees real-world proxies indicating that his scheme may not be as out-there as critics presume. “Now that people are sending cellphone minutes to one another as payment, that shows that you can pay for things with useful things. The Kilowatt Card could be a universal unit of value or a currency.” The key, of course, is getting people to trust it, and use it not merely as a one-time thought experiment but as an everyday way to trade.

  If something like Kilowatt Cards or Ven were to ever take off, they wouldn’t, or shouldn’t, be a problem for the Feds. Alternative currencies remain on the safe side of the law by following some basic rules. They don’t look anything like government-issued paper, and they aren’t called dollars. They also use exchangeability to gain traction. Two Ithaca HOURs, for example, will cost you $20. Put another way, Ithaca HOURs are coupons that have a $US value.

  Disney Dollars may sound childish, but they too constitute an alternative currency. They only work locally or within a specified community, and they exist to promote spending; holding onto them won’t do you much good after you’ve returned from your Orlando vacation. On the other hand, you may have incentive not to convert your Ithaca HOURs into something else, because of a built-in discount that some alternative currency designers employ to encourage use. The local bike shop or c
omputer guy may offer 10 percent off to customers paying in the local currency of choice.

  It may be tempting to belittle alternative currencies as limited, unrealistic, or maybe a little hippie-ish, but they do work, so long as they don’t run into a counterfeiting problem, and so long as the supply of this money is intelligently controlled so as to avoid inflation (or worse). That’s why Bitcoin’s algorithmic approach to steering the money supply is captivating, although wild fluctuations in its value in the summer of 2011 suggest to some that The Economist is correct: “Bitcoin is technically sophisticated. As a monetary system, it looks primitive.”7

  Alternative currencies are at a disadvantage due to their limited connection to the banking system. Credit is money too, after all, but there aren’t really loans out there denominated in Ven or Bitcoin, let alone Kilowatt Cards. Nevertheless, nothing but perception makes the issuing authority of the U.S. government more legitimate than the Ithaca HOURs Circulation Committee. Both supply users with real money, and both do their best to wisely steer monetary policy in a way that, they hope, promotes growth and avoids inflation.

  Looking at the Kilowatt Cards, Liberty Dollars, Ven, and Facebook Credits all sitting on my desk and desktop makes me think back to something digital money swami Dave Birch told me in London. Alternative currencies aren’t coming from people espousing a single political, economic, or even religious philosophy. New ideas about money are uniting people on the right, who are worried about deficit spending and a heavy government hand; libertarians like von NotHaus, who more forcefully oppose sovereign currencies; and über-progressives seeking a monetary system that relies less on frenzied speculation and plundering natural resources than today’s consume-to-the-gills market capitalism. Each of these innovating groups and subgroups is nibbling around the edges of government’s monopoly on currency issuance. A rainbow of new value possibilities awaits.