Symbolic Exchange: How alternative currencies help change the world for the better

2013.10.02

Photo credit: Associated Press

Photo credit: Associated Press

Money can’t buy you happiness, but it certainly can help achieve it, especially if you can create your own money. The past few years have seen an incredible growth in alternative currencies around the world, which are not controlled by any financial institution or government. Bitcoins, Shaimuratiks, Starbucks “stars” and other riches – “Theory and Practice” looks at new symbolic tokens of exchange and figures out how they work to make the world better.

Money, bonus points, coupons — it is impossible to imagine the modern world without them. But what is money? We accept it as a given, the so-called “money in being,” we imagine money as shiny piles of gold coins, rustling banknotes, or platinum credit cards. However, things are much simpler and much less glamorous. From the moment money was created – which, in fact, was a very ingenious invention – it has merely been a means of measurement, a means of exchange and a means of saving.  The most important part of the value of money – whether it’s gold, platinum, paper or electronic – is consumers’ trust. Only then will money have sufficient liquidity – an ability to be converted into various benefits at no extra cost.  Financial regulators: central banks and national governments ensure this ability to some extent.  So we have legal tenders: official currencies acknowledged and regulated by national and global monetary institutions.  And we take their word for it.

However, there is much more to money around the world than official currencies; there are many other ways to buy, exchange or save benefits: miles, bonus points, coupons – all of these are, in fact, alternative currencies. Just like conventional legal tenders – paper banknotes and cupronickel or cuprozinc-alloy coins in your wallet, they are mere symbolic tokens, which, nevertheless, have the magical property of being the means of exchange. Yet, there is one important difference: alternative currencies are not regulated by conventional institutions. Their function depends entirely on their users’ trust, and effectively there is no guarantee. The entire diverse global range of all modern alternative currencies can be roughly divided into three types.

Encrypted currency

The first type is decentralized global currencies. Wei Dai, a cypherpunk and cryptoanarchist, was the first to describe the possibility of creating and circulating a “free” virtual currency in 1998. His article on “b-money” for a mailing list of like-minded individuals describes in fair detail various transactions involving anonymous users without resorting to the conventional banking system. Another forward-thinking ideologist of an alternative monetary revolution, Nick Szabo dreamed of digital currency Bit Gold and its opportunities. Right now, decentralized global currencies include the widespread Bitcoin crypto-currency, somewhat less popular Litecoin, PPCoin, Namecoin, and many others.

Not much is known about the creators of Bitcoin, which is already a very indicative feature of this brainchild of a man or a developer team using the alias Satoshi Nakamoto. The first description of the Bitcoin network appeared at the height of the credit crunch in 2008. The network was launched a year later, attracting more and more users by its accessibility, ideas of independence and its DIY spirit. The Bitcoin network can be used to make practically instant money transfers, pay for purchases around the world, and even convert it into other currencies or make donations — all of this without a mandatory transaction fee. The Bitcoin system is not controlled by any governments or financial regulators; nobody can block your account and cancel a transaction. And yet, absolutely all transaction data is freely accessible: any user can track out of which wallet the bit coins were transferred. As of 15 September 2013, the value of one BTC exceeded USD 135 and reached EUR 100, according to Mt.Gox, where Bitcoins are traded.

The key difference of Bitcoin from other currencies is that it does not have a centralized issuing authority (the “money-printing press”). Bitcoins have no royal profiles or words written by their creators. Crypto-currency units, which are essentially electronic records, are generated by Bitcoin network nodes using complex mathematical algorithms. The bitcoin production process is called “mining,” which requires special software. Curiously, Bitcoin creators limited the total size of the system by a deflationary model: new bitcoin mining will cease as soon as the total number reaches 21 million. Right now, more than 11.5 million bitcoins are in circulation.

Local currencies

Alongside official national currencies, local currencies are becoming increasingly popular. These currencies are accepted only in a certain clearly restricted area. The best examples include the Toronto dollar, the Brixton pound in London, the “napo” of Naples, popularly called “an honest coin for honest people.” They can be used to pay for purchases at retail stores, bars and beauty parlours, which may offer discounts for payments in local currencies. The 2008-2009 financial crisis caused an all-out boom in “small money.” The expectation was that they would become a safety cushion for municipal economies in the case of a global official currency meltdown.

A local currency has been used alongside the Russian Ruble in the Russian village of Shaimuratovo for several years with great success. The local coupons are called “Shaimuratiks” and have helped prevent a collapse of local production and economy in the Bashkirian village during and right after the recent financial crisis. Shaimuratiks were designed to make saving them unattractive: they lose about 2% of their value every month. However, they are a convenient way to pay for groceries at a local store, and even local cab drivers have started accepting the local currency. The alternative currency was introduced by local farmer Artur Nurgaliev when his farm fell on hard times, and a severe cash flow deficit made it impossible for him to pay his hired employees, residents of Shaimuratovo. One of the farmer’s friends, Rustam Davletbaev, the founder of the Qiwi chain, came up with the idea for an anti-crisis currency. After introduction of Shaimuratics, goods turnover in the village has increased more than 10-fold, in stark contrast from the dire social and economic crisis in “company town” Pikalevo, where the local economy collapsed after the main employer stopped paying wages. Curiously, the regional prosecutor’s office in Bashkiria took a dim view of an alternative currency being used in Russia alongside the Russian Ruble, and attempted to ban “Shaimuratiks.” However, the Bashkirian Supreme Court reinstated the local currency, which has gained a legendary status.

Brand “currencies”

In addition to official, virtual and local currencies, there are also branded currencies. They include various coupons, mobile bonus points, gift cards and other marketing “inventions.” Branded currencies are used within specific retail chains. Starbucks stars, Nike rewards, Malina cards, and others, serve the single complex goal of becoming the means of exchange and saving inside a retail chain, which is expected to ensure additional purchasing power and increased loyalty of chain customers. The combined purchasing power of all coupons, miles, and bonus points is estimated at $165 billion USD. Furthermore, corporations do not stop at simple promotions of the “collect 10 labels, get a prize” kind, and adapt with the times. The famous Starbucks stars are accumulated for every purchase of food, beverage or other merchandise, enticing customers with a range of different rewards, not just the traditional free coffee. Starbucks launched iPhone and Android apps to make it easier for customers to use their Starbucks “savings.” More than 7 million people currently use these apps to pay for 4.5 million transactions a week. Virtual wallets linked to gift cards have already been created for the branded currency.

Alternative currencies, their great variety notwithstanding, are still a new model of free economics. Unofficial means of exchange are the result primarily of technology development and the post-crisis monetary policy. However, efforts are being made at this early stage to bring them in line. This might be simply a growing pain – the fear of something new. The prospect of proliferation of alternative currencies may scare monetary authorities, who are under a lot of stress as it is: the U.S. Federal Reserve and the world’s central banks have to make assumptions about the inevitable consequences of printing money. And now they’re feeling the ground give way under their feet from a totally unexpected direction, as new self-regulating institutions are emerging, which pay absolutely no attention to anyone’s decisions. Thus, the U.S. Fed, the IRS, and the U.S. Treasury are all closely monitoring the growing popularity of bitcoins. The U.S. Office of the Comptroller of the currency, the Federal Deposit Insurance Corporation, and the FBI are all trying to establish control over the Bitcoin network. The incumbent system is resisting change as best it can. Leading mainstream economists have expressed concern about the development of decentralized currencies, calling them “antisocial.” However, the alternative that is based on trust and supported by trust alone has achieved commercial success and recognition. And it is not going to be easy to tame this new power.

Source: theoryandpractice.ru

Translated from Russian. Original article was published on September 29, 2013 on http://worldcrisis.ru/crisis/1222982

Article prepared by Leon Dubois

About Leon Dubois

French, currently working in Hong-Kong in the beauty sphere, trying himself in social blogging and ready to share with us the last news about HK life.

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