How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity Finance

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* Working Paper 2016-1: How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity Finance? Brett Scott. UNRISD, 2016

URL = http://www.unrisd.org/brett-scott


Abstract

"The decentralized digital currency Bitcoin—and its underlying “blockchain” technology—has created much excitement in the technology community, but its potential for building truly empowering social and solidarity-based finance has yet to be tested. This paper provides a primer on the basics of Bitcoin and discusses the existent narratives about the technology’s potential to facilitate remittances, financial inclusion, cooperative structures and even micro-insurance systems. It also flags up potential points of concern and conflict; such as the tech-from-above “solutionism” and conservative libertarian political dynamics of some of the technology start-up community that surrounds Bitcoin. As a way of contrast the paper considers “blockchain 2.0” technologies with more overtly communitarian ideals and their potential for creating “cooperation at scale”. It concludes with suggestions for future research."


Excerpts

Solidarity-Based Uses of the Blockchain

Brett Scott:

"To those with a more left-wing libertarian impulse, though, cryptocurrency is interesting because it has features that potentially allow for non-hierarchal self-organization and peer-to-peer collaboration within a communitarian network structure. There are thus emergent attempts to build cryptocurrencies that can be used as a means of exchange for explicitly cooperative and collaborative enterprises that exist outside the logic of normal market processes (see De Filippi 2015).

One example of this is Faircoin, spearheaded by Fair.Coop, an initiative started by Catalan activist Enric Duran. The project is still at an early stage, but Fair.Coop is seeking to establish Faircoin as a global cryptocurrency to be used for transfers among a global cooperative network. Once established, it is believed that the global currency can also be used as the backing for more local mutual credit systems. As a hypothetical example, imagine a commune in Barcelona sending Faircoin tokens in solidarity to a farmer’s cooperative in Moldova, who in turn can use that as the basis for a more local mutual credit system to help individual farmers within the cooperative.

In seeking to utilize cryptocurrency technology outside of a capitalist model, Faircoin is explicitly aligned with principles found within left-wing anarchism and autonomism. It has a much stronger focus on collaborative solidarity and autonomist self-governance, viewing equality and redistribution as more important than rigid protection of historical property rights.

Such an approach runs contrary to many financial inclusion narratives that suggest that economic inequality is due to external factors that stymie the efficient workings of markets, thereby creating market failures. For example, market-based approaches may identify poorly defined property titles as a cause of market exclusion, and therefore of poverty. The financial inclusion practitioner operating within this framework may seek to rectify that, in order to extend market systems into areas where they do not currently operate well. The theory is that this will give individuals within that situation a better chance of competing within the normal market.

A project like Faircoin, on the other hand, starts from the assumption that, while formal market systems may be a source of economic growth and individual enhancement, they are simultaneously the source of social inequality, individual alienation and community disintegration. Thus, rather than trying to find narrow solutions to individual hardship, initiatives like Faircoin seek to create alternative economic systems that bypass normal markets, and that rewrite the deep level rules of economic engagement. In particular they place heavy emphasis on the basis of economic life being mutual cooperation and solidarity, rather than individual competition for narrow economic success.

What makes the cryptocurrency element of this interesting, is that—traditionally— autonomist communities have often retreated to small-scale localism as a means to foster close human relationships. The vision of projects like Faircoin, on the other hand, is to build large-scale networks of solidarity-based collaboration using technology. It is in potentially enabling such “collaboration at scale” that cryptocurrency technology begins to look like a force for radical economic alternatives.

Cryptocurrencies are subject to all manner of ideological battles, but one thing most interested parties agree on is that the underlying concept of a decentralized public ledger, collectively maintained by a network of participants is very important. This has led to an interest in blockchain 2.0 projects, or the use of a blockchain ledger to record things other than currency transactions (Swan 2015).

It is useful to think of a blockchain as a database that incrementally gets built up by a network of participating parties who run the same software, and that is subject to the constraints and rules set by the underlying software they run. A blockchain, as the name suggests, gets built up by blocks of data gradually being “chained” together. It could almost be imagined as a spreadsheet that is gradually built by new cells being chained on. A blockchain database continues to be built and maintained so long as the software continues to be run. Thus, unlike a centralized database held by a single entity, it continues to stay “alive” even if individual participants pull out (or go bankrupt, for example). It creates an indelible record, resistant to tampering by any individual party.

Furthermore, if you tweak the code of the underlying software being run by participants, the nature of the resultant blockchain changes, opening the possibility of creating blockchain databases storing all manner of diverse data, including, for example, property titles, contracts, shares (Lee 2015), voting decisions (Noizat 2015), or even reputation scores (Scott 2015b). Groups like Ethereum, Counterparty and Blockstream are working on building platforms to allow people or start-ups to implement blockchainbased systems. For example, Provenance is a start-up attempting to use the Ethereum system to create a highly transparent ledger of global corporate supply chain data.

At the cutting edge of the scene are experiments with smart contracts, which are small bundles of code—or scripts—that can be recorded on a blockchain, and that participants can interact with in order to undertake simple tasks (Wright and De Filippi 2015). For example, we might code a simple insurance contract (see Mainelli and Von Gunten 2014). Imagine a coded blockchain-based script that is activated when two parties send bitcoins to an escrow Bitcoin account that is controlled by the script, and which will release the bitcoins in the future to whoever wins a bet on the average level of rainfall over a certain period. This smart-contract is programmed to read data from weather agencies, and after a set amount of time releases the bitcoins from the escrow, sending it to a farmer who requires protection against low rainfall. This is a blockchain-based weather derivatives contract.

Such simple building-block contracts could be woven together to form the basis for more complex multi-stage or multi-function entities, referred to by some as decentralized autonomous organizations (DAOs) (Pangburn 2015). Such DAOs are hard to conceptualize, and seem to be in the realm of science fiction to many people, but are essentially advanced multi-stage algorithms held in play on a decentralized network of computers, rather than controlled by a single management team.

To those with more immediate pragmatic needs, blockchain systems seem most useful in recording simpler data. One element of blockchain systems that has captured the interest of those with a free-market economics orientation is the way in which they may be used to indelibly record property rights. One frequently cited use-case for this are land registries (Williams 2015). In countries with weak governance and record-keeping systems, there is a problem of double-registry of land, land title fraud or uncertain title to land, something that could potentially be tackled with a blockchain system that indelibly records land title in a definitive public manner. Indeed, in 2015 Honduras announced a deal with American company Factom to develop a blockchain-based land registry (Chavez-Dreyfus 2015).

In an (extraordinarily titled) interview in Forbes called “How Bitcoin will end world poverty” (Forbes 2015), Brian Singer suggests that such blockchain technology is the ultimate way to realize Hernando de Soto’s vision of building strong property rights in informal economies. If people are given identities and titles to property, otherwise inert capital can be activated. Property title can be used as collateral, enabling cheaper bank lending to informal entrepreneurs.

This analysis rests on the assertion that, provided that property and contract are well protected, market and capitalization processes will help lift people out of poverty, bringing forth the hidden value of informal economies. But, instead of hoping for a democratically governed state to optimize these market processes, the povertyeliminating potential of property and markets might be activated by replacing weak state institutions with technology, another form of political “escape”.

It is unclear, though, that such blockchain registries necessarily solve underlying problems. In places that experience issues like uncertain land title, there tend to be weak institutions that give rise to the uncertainty in the first place. In such a context, merely presenting a technology that can be used to record claims means little unless there are strong legal institutions that recognize the recorded blockchain claims, and strong procedures in place for who gets to makes the claims. There is a certain irony here.

Blockchain technology is potentially most useful in situations where there are weak institutions and parties who cannot easily trust each other—for example, in a setting like Afghanistan, with low state capacity and low trust amidst conflict—but such countries are also often in the weakest position to effectively implement such technology". (http://www.unrisd.org/brett-scott)


Coded Governance to escape Community ?

Brett Scott:

"These visions of “coded governance” (Wood and Buchanan 2015), blockchain law and programmed smart contracts do not sit entirely comfortably alongside the traditional legal contract profession. Contracts are representations of frequently ambiguous, unpredictable and messy relationships between imperfect humans with imperfect knowledge. Such relationships cannot easily be pre-programmed, and much of the work of lawyers involves resolving and interpreting contracts in light of changing realities. Building systems that seek to move away from such politicized negotiation can sound utopian, but might equally lead to situations of inflexible technocracy.

Furthermore, while the technological novelty of blockchain systems is authentically exciting, the darker side is that much of the more extreme rhetoric has hinged on “fixing” human imperfection, rather than accommodating it. As argued in the essay Visions of a Techno-Leviathan (Scott 2015a), the most ardent blockchain proponents often present (whether advertently or inadvertently) a dim vision of human nature, suggesting that people need to be protected from themselves by deferring responsibility to “trustless” technological platforms that will enforce contract-based relationships between atomistic individuals in an escape from community." (http://www.unrisd.org/brett-scott)


The Dream of Collaboration at Scale Through the Blockchain

Brett Scott:

"There is a nascent trend—found within groups like Swarm, Blockstream and Ethereum—to de-emphasize the focus on the trustless nature of blockchains, and instead characterize blockchain technology as trust-enabling. Blockstream, for example, claims to “transform global systems of value exchange that, by design, make it possible to trust anyone” (Blockstream 2015). The idea is that in removing the need to trust central authorities, blockchains could be platforms upon which build new forms of nonhierarchal cooperation between strangers. To understand this, though, it is necessary to briefly look more deeply into the political dynamics of, and ambiguity within, the term “trust”.

Normally, interpersonal trust is built through close personal contact, and in the absence of such a relationship, such trust may be low. If, however, the need to build close personal relationships prior to trusting someone is removed, it may be possible to extend a form of—perhaps impersonal—trust to those you do not know.

In many modern societies this already extensively occurs through the use of formal centralized authorities and formal legal contract systems that remove the need for individuals to know each other personally before engaging in relations. You may not know the shopkeeper, or the quality of his products, but you have a detached form of trust in the consumer protection laws. An institutional trust layer stands guarantor to the otherwise trustless relationship between you and the shopkeeper.

This dynamic applies also to normal monetary systems. A British £20 note is a piece of paper representing a promise to pay, but in a world without strong state institutions it is unlikely that a stranger would accept such a promissory note from another stranger in exchange for real goods and services. Nevertheless, within the context of the British state and legal system, I can hand over that paper bill to an unknown shopkeeper and get coffee in return. The power of that note has been historically constructed via a constellation of official state institutions (and non-state actors like commercial banks) that I have an abstract form of trust in, and their perceived legitimacy (or hegemony) is often so well engrained that such notes will easily circulate, especially once people becomes dependent upon them for everyday exchange.

The trust dynamics are thus multi-faceted.

1. The note works through its embedding within an institutionalized trust system.

2. But that removes the need for any two people to have interpersonal trust.

3. The two strangers may experience this as a trustless or trust-free exchange at an interpersonal level, but only because they both put trust in a higher-order third-party guarantor.

4. In removing much of the need to trust strangers in commercial exchanges, we might characterize such money as a force for atomizing and disconnecting people from each other, weakening non-state community structures.

5. On the other hand, we might say that the exchange between two strangers would not have happened if it had not been enabled by the money system.

From this framing, modern money is a trust-enabling system that gives rise to transactions that otherwise would not exist.

6. Furthermore, in removing a source of potential tension between those strangers, the money might even lay the groundwork for a pleasant, albeit shallow, relationship.


The main point, though, is that while you can choose to characterize modern money as either atomizing and alienating or as trust-enabling between two strangers, both strangers will need to trust in the state institutions. It is this latter point that blockchain proponents initially fixate upon. To frame it within the old view found in Hobbes’ Leviathan, if people defer part of their freedom to a state in order to secure themselves (and their property), they must implicitly trust that the social contract will be upheld.


For those who earnestly believe in the democratic political process, it is assumed that the modern Leviathan of the democratic state can do this while representing the interests of all."


Individualistic Right-Libertarian vs Left-Libertian Communitarian Readings of Blockchain Technology

Brett Scott:

"Conservative libertarians, however, often present the state as representing the interests of corrupt politicians, while left-leaning anarchists often present the state as representing the interests of powerful capitalists.

Thus, the original vision of libertarian blockchain evangelists was focused upon the idea that blockchain systems based on cryptography could do away with the need for trusted (or, perhaps more accurately, hegemonic) central intermediaries that would normally be required to mediate relations between strangers. Thus, “In cryptography we trust” has become a staple of Bitcoin bumper stickers and t-shirts, along with proclamations that the technology is “politics free”.

The conservative libertarian vision, however, has often gone further to imply that the reason why centralized institutional systems are flawed is because they are inevitably controlled by untrustworthy and self-interested humans (e.g. the politicians, the Federal Reserve board, the bankers). Furthermore, the reason why those humans are like that is due to “human nature”, which is self-interested. Humans thus inevitably seek to gain at the expense of others if given a chance. The implication is not just that some powerful people abuse others who are weaker, but that all people seek to abuse all other people if given a chance, a sentiment reminiscent of Hobbes’ “war of all against all”.

In this context, the cryptographic apolitical purity of a blockchain system appears not just as a way to stop abusive people who control central institutions, but as a way to once-and-for-all resolve the problem of how to establish contractual relationships between untrustworthy human beings who seek out their self-interest. This is the neoHobbesian view of a blockchain system as the ultimate and perfected arbiter between individuals who would otherwise be trying to swindle, defraud or damage each other.

This techno-leviathan subsequently lays the ground for a world where people will not need to trust either each other or central institutions as they individually pursue their self-interest.

It is possible, however, to build a communitarian anarchist reading of the same technology. Social anarchist (or libertarian socialist) conceptions of the world do not position human nature as fundamentally self-interested, but rather assert that people get alienated and corrupted within the bureaucratic hierarchies and power dynamics of large-scale capitalist system institutions. Anarchist traditions have thus often advocated the need to develop smaller-scale non-hierarchical and solidarity-based systems where people can experience their social and interdependent nature, and thereby achieve emancipation.

The tantalizing open question for those inspired by this tradition is whether blockchain systems can be a basis upon which people can easily interact with distant strangers for collaboration at scale. Blockchain systems—at least superficially—offer a vision of large-scale egalitarian self-organization far beyond the scale of ordinary anarchist attempts at building cooperative communes. In this vision, the objective is to replace hierarchal centralized institutions with decentralized ones, but the point of doing this is not to once-and-for-all perfect a means for naturally self-interested individual humans to contract with each other. Rather it is to allow naturally social beings to flourish and collaborate with each other in a spirit of cooperation, not individualistic competition.

An interesting exploration of this is the Coin Center paper on Distributed Collaborative Organizations, which describes explicitly collaborative entities that issue blockchain-based shares—or crypto-equity tokens—that give the holders ownership or membership rights in a type of decentralized cooperative (Bollier et al. 2015). How such organizations might end up looking in the real world remains to be seen, but they may be an interesting new form to explore in the quest to build social and solidarity-based finance. Can a city network of informal street vendors run a collective mutual insurance pool between themselves using only their smartphones to interact with a distributed ledger system, with no central financial institution involved? Can a regional mutual credit system—effectively a ledger of credits and debits—be implemented in a decentralized blockchain form?

The individualistic and communitarian poles presented here are, in reality, often blurred. For both, though, the deep question is how to get people who may be used to existing systems of institutionalized trust to start using another one. How does a blockchain system gain legitimacy and stability, such that users will adopt it and grow to trust the safety of their position within it?

State systems are not immune from instability, but for many they provide the only formal and relatively predictable everyday protections. The small business owners in South Africa might not like the tax authorities and regulators, but they know their basic rights, protections and responsibilities—and the flexibilities of those—and can engage in commerce on reasonably solid ground. Blockchain systems, on the other hand, do not as of yet offer such protection. It is telling that Ethereum deliberately and publically crossed out the word “safe” in its 2015 frontier release of its decentralized blockchain software platform. For the everyday pragmatic practitioner then, the impulse is to implement blockchain systems very firmly within the existing institutional context of modern nation states and the formal global economy, rather than outside of such systems.

A second question, for the communitarian conception in particular, is how you scale cooperation up without lapsing back into a bureaucratic, alienating and unaccountable system. Thus, the question is how to build decentralized governance systems that give people true voice in the decentralized technology systems.

Within much original Bitcoin culture, the governance system was said to be based on open source principles: in this conception, a project is open for anyone to get involved, and if they do not like the direction they can fork the code to create something else. The primary political action then is exit, but there is a chance for voice if you can influence other developers on the forums and at the conferences. The power dynamics of this process is often glossed over, but it is important to explicitly interrogate it. In much open source software philosophy, it is often uncritically assumed that everyone has equal power, despite the fact that certain individuals—often those with technical skills or capital—dominate apparently open projects." (http://www.unrisd.org/brett-scott)

More Information

  • Bollier, D., P. de Filippi, J. Dietz, H. Shadab, P. Van Valkenberg and G. Xethalis. 2015.

Distibuted Collaborative Organisations: Distributed Networks & Regulatory Frameworks. Coin Center Working Paper. Accessed 17 August 2015. [1].

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Moneylab Reader: An Intervention in Digital Economy, edited by G. Lovink, N. Tkacz and P. de Vries. Amsterdam: Institute of Network Cultures.

  • Miscione, G. and D. Kavanagh. 2015. “Bitcoin and the Blockchain: A Coup D'État

through Digital Heterotopia?” Humanistic Management Network, Research Paper Series No. 23/15.

  • Scott, B. 2015a. “RLS - Visions of a Techno-Leviathan: The Politics of the Bitcoin

Blockchain.” Rosa Luxembourg Stiftung Policy Paper 02/2015. Accessed 13 August 2015. http://www.rosalux.de/publication/41131/visions-of-a-technoleviathan.html.

  • Wood, G., Buchanan, A. 2015. “Advancing Egalitarianism.” In Handbook of Digital

Currency, edited by David Lee Kuo Chuen, 385-402. San Diego, CA: Academic Press.

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of Lex Cryptographia. Accessed 23 September 2015. [2]