It is no understatement that currently our global financial system is structurally unsound and unsustainable. This is primarily the result of how we approach money and banking: The highly centralized bank-debt structure of money, the way money is inevitably issued and distributed and the astonishing gap between financial and ecological flows raise significant questions about the status quo. Yet, what tangible alternatives are there to reinvent this system?
Over a decade on from its inception, cryptocurrency is still the most promising tool available to reboot the financial system. Bitcoin and the wider cryptocurrency space has revitalized political economics, spurred us to rethink the organization of people, institutions and the social contracts that enable markets to exist.
This post is part of CoinDesk’s 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. Ethan Buchman is CEO of Informal Systems and co-founder of Cosmos.
Cryptocurrency is still very much an experiment – a global community asking how we reinvent governance, finance and economics – but one tending towards a more sustainable society. This capacity for experimentation is important. But how do we move from socio-economic tinkering to a responsible, load-bearing infrastructure across the globe?
Although 2020 was a flagship year for the blockchain industry, it is still very much in an early adopters phase. To move forward, distributed ledger technologies (DLT) need to be integrated into local communities where they offer tangible benefits to citizens. We need to look beyond the casino like experiments of decentralized finance (DeFi) that currently only offer speculation and “get rich quick” schemes. The industry needs to engage with existing social and political institutions rather than playing lip service to bag-holders.
A greater focus on how DLT can benefit citizens at a local level will be key to the success of a healthy and revamped financial system in the long term. Soundness and sustainability are strongly associated with localism, with greater self-sufficiency in communities, shorter supply chains and more democratic decision making and ownership.
There have always been alternative localist financial services: mutual credit systems and credit unions, complementary currencies, time banks, lending circles and mutual aid. But historically they’ve struggled to scale. Scaling a financial system is a matter of scaling trust across communities. Blockchains and cryptocurrencies provide the most credible foundation yet for attacking this problem of formulating and scaling new money systems.
The industry needs to engage with existing social and political institutions rather than playing lip service to bag-holders.
Vast swathes of the existing financial system are currently being rebuilt on more transparent and accessible infrastructure. Access to financial opportunities like derivatives or contracts are now available to groups beyond Wall Street insiders. Now, anyone can write and access such opportunities on the Ethereum blockchain. However, in doing so we need to make sure that we do not repeat the failings of our existing financial infrastructure.
One of the central problems of our economy over the last few decades, was that it became hyper financialized. That meant value creation was completely abstracted from real world wealth and sustainability, while traders made money from crazy financial products without generating any real value for society. And as finance ate the world, value became synonymous with U.S. dollars.
This needs to change at a fundamental level. We need to build technology that allows structures to demonstrate real economic well-being, and improve quality of life by promoting innovative solutions that challenge mainstream thinking on economic, environmental and social issues.
As for blockchains, money is the killer app. Our goal with this technological revolution must be to evolve a more sound and sustainable international financial regime that bridges the gap from local to global money and back. We are in the very early days of this transformation.
We’re working our way from simple, global cryptocurrencies to more application specific and local ones. Already the underpinnings of this system are coming together: Bitcoin is the definitive store of value of the 21st century. Ethereum is a materially transformative technology that has unleashed invaluable experimentation in political economics. Cosmos makes Ethereum’s transformative tech more accessible through interoperable sovereignty, providing the philosophy and tools for building, operating and interoperating more local financial infrastructure.
Money is the killer app
Localism is necessary for both technical and social scalability. There will be many, many blockchains and cryptocurrencies. Together they will form an “internet of blockchains” with a dynamic topology. Chains and currencies will be created and destroyed, grown and shrunk, split and merged. Each chain or cryptocurrency represents a different community and set of values. They provide a mechanism for stakeholders to coordinate via an explicit state machine to scale trust across their communities, and compete with incumbent, centralized powers.
Global stablecoins and CBDCs are an important step in the right direction, but also a distraction. More important will be municipal and neighbourhood currencies tied directly to local sustenance and generated by local mutual credit reflecting real trade. Projects like Grassroots Economics are most inspiring in that regard, but others like Circles and Union Protocol also seem to be on the right track.
As we witness the latest exciting proliferation of new blockchain platforms, applications and bullish sentiment, we must not lose sight of the end goal and keep on track to building a fair and sustainable financial system for citizens across the globe.