The wheels of monetary freedom are turning

March 21, 2013 § 8 Comments

Photo by Flickr user Images_of_Money
Photo by Flickr user Images_of_Money

Monetary transactions truly permeate modern human society. For this reason, some recent events on the payments scene are noteworthy.

Event 1: Some (crazy?) Canadian has offered to sell his house for bitcoins. Bitcoin (BTC) is a decentralized digital currency, meaning there is no central bank issuing or controlling it. For a central government, it’s like a new kind of digital cash that they have no control over. A nightmare — how could you track and collect taxes on transactions that are anonymous (mostly) and don’t pass through regulated banks? It seems BTC haven’t been used for much else than gambling and illegal goods until recently, but things seem to be changing. The odd risk-taker is one thing, WordPress accepting bitcoins as payment quite another.

Event 2: I would argue that this is the more interesting event. Once upon a time, there was an idea called Ripple, promising a smart way of creating and handling community credit. Years passed but the system was never quite developed. At some point, a small group of people took over the name and started developing and implementing the ideas. In February or March 2013, a beta version was launched, and if I were less careful I might have gone so far as to call this revolutionary.

I’ll explain briefly, but here’s an excellent article explaining Ripple and the historical system Bills of Exchange in more detail. In short, Ripple is (or will be when it’s out of Beta) a decentralized payment system that enables anybody to issue currency (already existing or new), a form of IOUs. If I issue some USD in Ripple, they represent a promise to redeem them when the holder so wishes. I would only be able to send my home-issued USD to someone who trusts me for at least the value I want to send. In practice, people will mostly trade with currency issued by so-called gateways, which act like banks. Like banks, they accept deposits and then something representing the money you deposited shows up in your account. You can then trade with anybody who trusts the bank that issued the currency on your account, or anybody that is indirectly connected to the currency issuer via the trust of others. This way there’s no need to extend trust to people that you don’t know and wouldn’t trust in real life.

Ripple has some qualities in common with Bitcoin but goes further than just acting as a currency. Any currency can be handled and issued. The usefulness of Ripple will depend on widespread adoption, which in turn will depend on serious gateways/banks starting to work with it, and that requires compliance with local and international regulations. There are already gateways, but only two. Where will this lead — is the future of banking decentralized?


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§ 8 Responses to The wheels of monetary freedom are turning

  • Uncommonly interesting, 5th. But it reminds me of listening to descriptions of emailing before I ever tried it — both obvious and impossible to imagine. I won’t have anything useful to say until then, and even experiments won’t mean much until there are lots of other experimenters.

  • 5th says:

    Thanks, p-G! I agree that these projects/ideas/movements are radical, but it seems that Ripple might just be a more flexible version of a system that has existed during a few periods in the past: free banking. Some history of this can be seen under “History” here:

    It does depend on there being lots of people (or at least a bunch of friends) using the system before being truly useful, but the somewhat insidious design of the system gives the organization behind it an incentive to get many people to start using it while also providing the means to get people to register. There is a native currency in Ripple that is used to pay for transactions and to open accounts (and to avoid “transaction spam”). Some representatives have stated that they will try to give out this currency as fairly as possible to people in order to promote adoption of the system. (However, they have also stated that they will keep a large part of the currency to themselves and hope that it appreciates so they can make some profit from it all, which many have objected to as unfair and immoral.)

  • Reminds me of this, 5th: ‘Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system.’

    I will certainly investigate Ripple, .. though I shouldn’t do that over the next two weeks, when there is too much else that needs attention.

    Was just as keen on Flattr, but there weren’t enough others willing to play. Another good fit for Metcalfe’s Law.

  • 5th says:

    Yes, and I guess the gist of that relation would hold for Ripple too, though I suspect it’s not that hard to lure people into using something if they expect some economic gain. In particular, merchants should be quite happy to stop paying fees on every payment processed by Visa and MasterCard. There may be legal issus to clear up first, though.

    It would probably be sensible to let Ripple stand the test of time and come back in a year or so and see if anything’s happening. A year isn’t much, but considering what looks like a fairly ambitious plan there should be at least some news by that time.

    I was hoping Flattr would be a hit too, but I think a major change in economic behaviour is needed before microdonations and similar forms of support become popular. Most people probably still need to realise that microdonations is just another way to encourage people to do things you like in the world.

    • ===== Most people probably still need to realise that microdonations is just another way to encourage people to do things you like in the world. ===

      Yes, and with contributions from any one person so tiny that they wouldn’t need five seconds’ thought — except to deal with the elaborate security precautions the micropayment sites are forced to have. … It’s like struggling to understand someone who can’t stand the taste of chocolate, except that the micropayment-resistors aren’t an unfortunate minority but apparently, nearly everyone, … so far.

      … What if the promoters were to tailor a system for contributing to projects involving sports heroes rather than musicians and artists, I wonder. Would that bring liftoff sooner?

      About Metcalfe’s Law. I clipped the first sentence of the Wiki definition in a hurry, for your visitors who haven’t heard of it. But I was actually thinking not of such a narrowly mathematical concept … was amused to see, further down in the Wiki entry, that the experts have been fighting about the precise definition and the maths, especially.

      • 5th says:

        (Edited your comment, fixing my quoted typo)

        I doubt people would be more inclined to donate to sports heroes. Most of them (except perhaps the unsung ones …) earn a lot more than regular people and don’t really need any incentive to keep doing what they’re doing. Perhaps people more interested in (watching) sports than I am would feel differently.

        Actually, I didn’t know about Metcalfe’s law, at least not by name, until you posted it. As you say, it’s a very narrow mathematical concept, and it’s quite silly that it’s called a ‘law’, considering that it purportedly shows an exact relation between subjective value and the number of nodes in a network. It does indicate something about the essence of networks though.

        Back to the topic of supporting creators — I just stumbled on an interesting text about how creators can be supported in a world without copyright. It’s not only about ways in which creators can make a living, but it’s not terribly long and it’s a well-written and well-argued piece.
        Jason Rohrer: Free Distribution

      • Yes, 5th, the famous ones certainly don’t need the money. That’s why I said, ‘involving’ sports heroes. Am only thinking of some means of getting a large enough number involved to help micropayments take off. … Eg., arguably, Amazon was launched to sell print books online but, through perfecting the system for doing this, got us all shopping on the net — from other sellers, too, and inspired the launch of new e-businesses. (And is now being accused of killing print publishing … ha!) … Back to sports: you could start micropayment/donation drives to send children from impoverished neighbourhoods to football games — to watch their favourite sports heroes…. Just having some aspect of sports at the core of a scheme should guarantee a much larger number of participants.

        Thanks for the Rohrer link. I haven’t read the piece yet but have been looking for a good debate on the subject for some time. Meant to reply to your copyright post in a p-G entry, and will — but probably not for a week or two. Too busy on too many fronts.

        On Metcalfe’s ‘Law’ — yes, the essence is all that matters … Was a play on Moore’s Law, hence an insiders’ Silicon Valley entertainment, I suspect.

      • 5th says:

        Oh, then it’s quite different from what I imagined, and sounds like it might be helpful. Broader promotion of the system is needed.

        Looking forward to reading your copyright reply!

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