Open Source Finance Hacking

Article: Open source finance hacking: The potentials and problems. Brett Scott. Spanda Journal,

URL = http://www.spanda.org/publications.html pdf

• Special Issue: Spanda Journal special issue on "Systemic Change", VI, 1, June 2015. Edited by Helene Finidori.

Contextual Citations

1.

“The hacker drive for de-alienated self-empowerment throws up tricky issues. As people with a hacker impulse gain confidence, they can become increasingly intolerant towards conventions, but also towards institutions like large welfare systems, which are viewed as being alienating in their own way. When combined with the individualistic streak, this can make for a libertarian political impulse. At its best, that can be a left-leaning libertarianism concerned with how to empower the underdog from the bottom up, showing solidarity with those in less empowered positions, similar to anarchist mutual aid. In its negative incarnation, though, hacker culture can fetishise personal liberty, a conservative ‘don’t tell me what to do’ libertarianism associated with people who already have power and who do not particularly go out of their way to help spread it. We see this in the likes of libertarian activist Adam Kokesh, who says ‘fuck you’ to authorities, but without really offering much empathy to those who are not empowered, skilled, or connected enough to be as bold as he.”

2.

“A final word on hacking. The open source hacker ethic is powerful, but it needs to be extended and augmented. It is still too tied up in the ‘revenge of the nerds’ politics of the male geek, and relies too much on those who already have the resources to act as heroic Robin Hood figures. Rather than sticking with the stereotype of the outsider rogue male, hacker culture needs to be balanced (or perhaps queered) by a more warm and feminine spirit, and also needs much more focus on social and ecological processes, rather than just technical disruption. Building a holistic financial hacker culture is an exciting prospect going forward.”

Excerpts

Introduction

Brett Scott:

“The global financial system is a notoriously opaque and alienating complex. The system is implicated in social injustice and ecological destruction around the world, and the key financial institutions, such as banks and funds, wield unhealthy levels of political power. The financial sector – that cluster of institutions that sit in the centre of the financial system – have at least five problematic dimensions.

Firstly, the financial sector routinely steers money into projects that are hardwired to breach planetary ecological boundaries. It is thus premised on ecological unsustainability. Secondly, it is an active agent of inequality. Not only do financial professionals reap outlandishly large salaries, but financial instruments like shares and bonds are conduits for powerful cartels of investors to direct money into the powerful corporate sector, often in ways that do not benefit ordinary people.

Thirdly, even if you do not believe that the sector creates inequality, it exhibits high levels of complexity and opacity, which, when combined with the fact that the system is highly interconnected, translates into high levels of systemic risk, the ability for financial crashes in one country to shake the entire global economy.

Fourthly, the sector hosts a particular culture of finance. This tends to be portrayed in the press by pictures of obnoxious traders swilling champagne, but the much deeper issue is the pervasive denial of agency and responsibility found in the sector: Financial institutions like to portray their profession as an apolitical agent of economic efficiency, rather than accepting the highly political nature of allocating credit and facilitating investment processes around the world.

Fifthly, there is the process called financialisation. In basic terms it is the creeping sense that the culture and drives of the financial sector are taking over many aspects of life previously untouched by it, turning everything into investable and tradable commodities. Thus, land and atmospheric pollution rights become parcelled into land investment funds and commodity investment baskets, while people’s life insurance policies get parcelled into structured investment products for hedge funds to speculate on.

These trends, when taken together, have a way of creating ever more alienating and obscure financial phenomena, which appear incomprehensible and uncontrollable to the average citizen. Take, for example, high-frequency algorithmic trading, portrayed by those involved as a force for rational efficiency, but creating hitherto unknown levels of systemic risk.”

Characteristics

The Five Pillars of Open Source Finance

Brett Scott:

You can thus take on five conceptually separate, but mutualistic roles: Producer, consumer, validator, community member, or (competitive or complementary) breakaway. These same five elements can be the pillars underpinning a future system of Open Source Finance. So let us look briefly at each pillar in turn, along with examples of the types of initiatives that exemplify them.

Pillar 1: Access to the means of financial production

Right now, production of financial services is limited to a closed, elite group of professionals - bankers, fund managers, traders, and so on - who reap very large rewards. They might possess talent, but they are also known to not always act in the public interest, and to occasionally cause giant economic crashes. The goal of encouraging wider participation in financial production would be to bring more diversity into the system whilst empowering people.

Very few of us perceive ourselves as offering financial services when we deposit our money in banks. Mostly we perceive ourselves as passive recipients of services. Put another way, we frequently do not imagine we have the capability to produce financial services, even though the entire financial system is foundationally constructed from the actions of small-scale players depositing money into banks and funds, buying the products of companies that receive loans, and culturally validating the money system that the banks uphold.

Interestingly, one of the original movements to bring wider participation in financial life was the rise of day-trading by stay-at-home semi-professional traders using discount brokerages to play the stock and currency markets. Despite being portrayed by the industry as a movement for empowerment, it is entirely based on the same toxic mentality of short-term speculation encouraged by financial elites. Furthermore, the industry is run by brokers who reap far larger rewards from the system than the actual participants. Lastly, the participants do not offer any real services to society, other than the banal claim made by all speculators that they help to ‘increase liquidity’ in markets.

A much more meaningful movement is the peer-to-peer (P2P) finance movement. We all intuitively understand what P2P finance is: If you decide to lend money to your friend, it is a direct P2P action, and you directly perceive yourself as offering them a service. P2P finance platforms, such as Zopa, extend that concept beyond your circle of close contacts, so that you can directly offer a financial service to more distant people who request those services. In so doing, such platforms offer you access to an active, direct role in producing financial services, rather than an indirect, passive one.

There are also many interesting examples of actual open source financial software aimed at helping to fulfil the overall mission of an open financial system. Examples include Mifos, Cyclos, and Community Forge’s Hamlets, all of which are designed to help people set up their own financial institutions or currency systems.

Certainly, currency is one active area of experimentation. The concept of ‘producing’ a currency is probably strange to most people, given that many people are inaccurately taught that currency just emerges magically from the government. Designing alternative currencies, though, brings a much more acute awareness of how currency, and confidence in currency, has to be constructed. Bitcoin is fascinating to the public partly because of the incredulity at the idea that people can produce the currency themselves. In using such a currency I feel aware of my role in upholding – or producing – the system. The scope to construct currency goes far beyond crypto-currencies though: local currencies, time-banks, and mutual credit systems are emerging all over.

One final area to consider is the drive to add third party customisation on top of existing financial services. The Open Bank Project, for example, is trying to open up banks to third party apps that would allow a depositor to have much greater customisability of their bank account. It is not aimed at bypassing banks in the way that P2P is, but it is seeking to create an environment where an ecosystem of alternative systems can plug into the underlying infrastructure provided by banks.

Pillar 2: Widespread distribution

Financial intermediaries like banks and funds serve as powerful gatekeepers to access to financing. To some extent this is a valid role - much like a publisher or music label will attempt to only publish books or music that they believe are high quality enough - but on the other hand, this leads to excessive power vested in the intermediaries, and systematic bias in what gets to survive. When combined with a lack of democratic accountability on the part of the intermediaries, you can have whole societies held hostage to the (arbitrary) whims, prejudices and interests of such intermediaries.

One such prejudice built into the current financial system is the way it tends to steer money to those who already have it. For example, huge amounts of money get lent to hedge funds, while entrepreneurs with small businesses that are useful to society, but that are not sexy like Facebook, get ignored by big investors and banks. Expanding access to financial services is thus a big front in the battle for economic democratisation.

Financial inclusion is a whole field in its own right, with a significant history of innovation, mistakes and political wrangling. This includes the credit union movement trying to extend finance into poorer communities that get overlooked by large banks. It also includes microfinance, and international development finance that offers concessionary loans or grants to poorer countries.

Financial inclusion also overlaps with the realm of ICT4D – information and communication technologies for development. One big area of right now, for example, is mobile banking and payment systems, which has important implications for international development. Well known innovations include M-Pesa in Kenya, a technology to use mobile phones as proto-bank accounts. These technologies do not necessarily guarantee inclusion, but they do have potential to expand access to lower cost financial services to people that most banks ignore.

On the cutting edge right now, though, is the rise of crowdfunding. In the dominant financial system, you have to don a suit and suck up to the small set of gatekeepers, hoping they will not exclude you. Crowdfunding though, has expanded access to receiving financial services to a whole host of people who previously would not have access, such as artists, small-scale filmmakers, activists, and entrepreneurs with little track record. It is no secret that crowdfunding can be most effectively used by those with existing social networks, but it has a lot of potential to serve as a micro redistribution system in society, offering people a direct way to transfer wealth to areas that traditional welfare systems might neglect.

Pillar 3: The ability to monitor

When we deposit money into large commercial banks, we are helping to provide them with a reserve buffer against which they extend new credit in the form of loans. Do you know where they lend to though? Chances are that you do not, because most banks will reveal their lending activity, under the guise of commercial secrecy and confidentiality. It is like they want to have their cake and eat it, claiming to be acting as intermediaries on your behalf, but without offering any accountability. And what about the money in your pension fund? Also very little accountability.

We have nascent examples of banks that buck the trend and that explicitly open themselves up to scrutiny. For example, small UK banks like Triodos Bank and Charity Bank publish exactly what projects they lend to. This gives you the ability to hold them to account in a way that no other bank will allow.

Trying to bring more general transparency to the system of financial intermediaries is very difficult, but different interest groups are pushing for it. Governments value transparency because it allows them to monitor taxation and facilitate regulation, especially in an era where huge numbers of hidden inter-bank derivative relationships can form intense webs of systemic risk. Activists want transparency so that they can be more effective watchdogs. Free-market crusaders value transparency in theory, seeing as though markets are supposed to only work when there is perfect information.

The transparency agenda goes beyond financial companies. Corporations in general are vehicles for extracting value out of assets and then distributing that value via financial instruments to shareholders and creditors. Corporate structures though, have reached a level of complexity approaching pure obfuscation. There can be no democratic accountability when you cannot see who owns what, and how the money flows. The corporate open data movement, exemplified by groups like OpenCorporates and OpenOil though, are offering new tools to shine a light on the shadowy world of tax havens, ownership structures and contracts.

There is something about the sheer scale of corporate-level finance that brings a culture of low accountability on the part of both large lenders and large borrowers. It is interesting to contrast this with peer-to-peer models: When people are treated as mere account numbers with credit scores by banks, the people in turn feel little accountability towards the banks. On the other hand, if an individual has directly placed trust in me, I feel much more compelled to respect that.

Pillar 4: An ethos of non-prescriptive collaboration

The prevailing culture of finance is split into two toxic camps. On the one hand there are passive retail investors who put money into banks and pension funds but who do not expect much in the way of accountability. On the other hand, there is the high-flying world of glory-boy traders and corporate financiers who care little about financial inclusion.

People do not always want to have to take full responsibility for their financial life, but it would be great to encourage opportunities for more collaborative, creative participation. At the heart of open source movements is a deep DIY ethos. This is in part about the sheer creative joy of producing things, but it is also about asserting individual power over institutionalised arrangements and pre-established officialdom. It carries, as discussed earlier, the search to remove individual alienation: You are not a cog in a wheel, producing stuff you do not have a stake in, in order to consume stuff that you do not know the origins of.

This ethos of individual responsibility and creativity stands in contrast to the traditional passive frame of finance that is frequently found on both the Right and Left of the political spectrum. Indeed, the debates around 'socially useful finance' are seldom about reducing people’s alienation from their financial lives. They are mostly about turning the existing financial sector into a slightly more benign dictatorship. The essence of open source though, is to band together, not via the enforced hierarchy of the corporation or bureaucracy, but as part of a likeminded community of individuals creatively offering services to each other.

It is very easy to romanticise that notion, but examples of this ethos are becoming more common. For example, the indie beer company BrewDog raised money through its 'Equity for Punks' share offering. Such an offering is probably only going to attract beer-lovers, but that is the point: you get together as a group with mutual appreciation for a project, and you finance it, and then when you are drinking the beer you will know you helped make it happen in a small way. Similarly, community shares offer local groups the ability to connect to, and finance projects that are meaningful to them in a local area, whether it be a solar co-operative, a pub, or a ferry boat service.

This underlying ethos is also found in crowdfunding platforms. They offer would-be crowdfunders the chance to connect personally to projects that excite them. That does not guarantee that such people offer equal levels of financing to all types of projects, but it does mean that they feel more connected to those things they do finance.

Pillar 5: The right to fork

No financial system is ever going to be perfect, and any particular model inevitably comes with tradeoffs. For example, deposit insurance was initially put in place to protect small-scale depositors, but it has subsequently contributed to people's complacency towards banks. Our goal should not be to try design a stable utopia, but to build institutions that preserve peoples' ability to challenge whatever dominant system is in place at any one time.

The right to dissent is a crucial component of a democratic society. In the open source movement, this right to dissent is referred to as the ‘Right to Fork’, the ability to take pre-existing code, and to modify it or use it as the basis for your own. The right to fork is supposed to be both a check on power, but also a force for diversity and creativity.

In the mainstream financial system, there are extensive blocks on any such right, many of them actively enforced by financial regulators. They make it hard for new banks to start, and apply inappropriate regulation to small, new financial technologies. The battle for the right to fork therefore, is one that has to also be fought at the regulatory level.

It also needs to be instilled as a principle into the design of any alternatives to mainstream finance. I do not want to replace a world where I am forced to use national fiat currencies with one in which I am forced to use Bitcoin. The point is to create meaningful options for people.

Discussion

Building positive freedom into open source

Perhaps the biggest weakness of open source approaches though, is this assumption that this right to fork alone is enough to ensure that dissent is built into the system. To use the language of political philosophy, we might say the concept is based on negative liberty, the situation where nobody is directly blocking your freedom. It is exemplified by the phrase ‘nobody is stopping you’.

Merely saying one has the right to dissent, but without providing people with the tools to act on their theoretical freedom, can have conservative overtones. For dissent to be effective, it has to be actionable. Indeed, the mainstream financial sector can probably claim that the right to fork already exists. People are indeed free to voice their displeasure, even if they find it very difficult to actually act on their displeasure. The banks can say, sure, you’re welcome to leave. Nobody is stopping you. Good luck out there. It can have the feel of conservative free market ideology: Nobody is forcing you to take this underpaid job. It’s your own choice. Get another job if you don’t like it.

More recently, we have seen the politics of negative liberty played out on multiple levels in the Bitcoin community. The source code might be open, but there are few support structures for how to meaningfully deploy that into creating alternatives, and the existing Bitcoin community can be very unsupportive of attempts to create alternative crypto-currencies. Furthermore, there is increasingly a dog-eat-dog disregard for solidarity in the system, with triumphalist Bitcoin millionaires patting themselves on the back for being early adopters that outcompeted the slow, dim-witted individuals who were too ‘risk-averse’ to get involved early. And, much like the mainstream financial sector, the new Bitcoin elite is cloaking themselves in a layer of techy jargon that serves to preserve their power.

For dissent to be an actionable, empowering force, it has to be informed, constructive and effective, rather than reactive, regressive and theoretical. Building the basis for that involves many different elements, but there is not scope in this essay to do them justice, other than to say one crucial element is meaningful education. It is very hard to articulate ideas about what's wrong with a system when one cannot articulate how the current system operates. The ability to conceptualise alternatives relies on breaking down the wall of jargon that the financial sector cloaks itself in. It has to involve opening intellectual access to the deepest layers of financial code, from the cultural and political underpinnings of money itself, to the institutions, instruments and networks that move it around. Quite how we achieve that remains a work in progress.”

Applying the concept of open source to finance

Brett Scott:

Open source culture thus might be a useful way of framing the initial broad changes we might want to see in the financial system. After all, we are stuck within a massively powerful incumbent system, and need to find ways to build anew from that starting point.

Software code is used to build rule systems that steer energy into activating hardware towards particular ends. So, extending this as an analogy, what might financial 'code' look like? A financial system, in a basic sense, is supposed to distribute claims on human energy and resources (‘money’), via financial instruments (often created by financial intermediaries like banks), into new economic production activities ('investments'), in exchange for a return over time.

Here, for example, is a rough financial circuit: A person manages to earn a surplus of money, which they deposit into a pension fund, which in turns invests in shares and bonds (which are conduits to the real world assets of a corporation), which in turn return dividends and interest over time back to the pension fund, and finally back to the person.

Shares and bonds are extractive financial conduits that plug into a corporate structure, but if you look for how they are coded, you'd discover they are built from legal documents that are informed by regulations, acts of parliament, and social norms. They are supported by IT systems, payments systems and auxiliary services.

But it takes more than clearly-worded documentation to be able to create financial instruments. The core means of financial production, by which we mean the things that allow people to produce financial services (or build financial instruments), includes having access to networks of investors and companies, having access to specialist knowledge of financial techniques, and having access to information. It is these elements that banks and other financial intermediaries really compete over: They battle to monopolise relationships, monopolise information, and to monopolise specialist knowledge of financial techniques.

And indeed, that is why production of financial services mostly occurs within the towering concrete skycrapers of the 'financial sector', spinners of webs of financial code that is mostly unknown to most people. We have very little direct access to the means of financial production ourselves, very little say in how financial institutions choose to direct money in society, and very little ability to monitor them. We have, in essence, an intense concentration of power in financial intermediaries, who in turn reinforce and seek to preserve that power. And while I may be happy to accept a concentration of power in small specialist industries like Swiss watchmaking, a concentration of power in the system responsible for distributing claims on human society's collective resources is not a good thing. It is systematically breaking our planetary hardware, whilst helping to fuel a culture of bland individualistic materialism in increasingly atomised communities.”