Social Currencies

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This concept covers two separate meanings: 1) as a synonym for complementary local currencies; 2) as a reputation marker


Complementary Social Currencies

Description

Marusa Vasconcelos Freire:

"Use of social currencies is not a new phenomenon (DeMeulenaere, 2000) and has been tolerated by central banks in various countries, with the argument that they promote development of local economies (Lietaer, 2001; Rösl, 2006; Schraven, 2001). Brazil too, like other countries, has had various experiences with social currencies (Melo & Magalhães, 2006; Soares, 2006; Silva, 2005).

The concept of social currencies tends to be immediately associated with currencies produced by society, in contrast to the concept of legal tender – an established national currency whose monopolized issue in Brazil (as is generally the case in most other jurisdictions) rests with the Central Bank of Brazil (art. 164 of the Federal Constitution). Hence, it is no coincidence that historically, social currencies have been at the center of a deep controversy among economists.

One extreme of economic thought regards the currency as an institutional element wholly subordinated to central controls established by monetary authorities, and that such controls must be the exclusive realm of central banks, that administer the money supply based on what is known as monetary policy (Lopes & Rosseti, 2005). On the other hand, another extreme of economic thought argues that the money supply need not be subordinated to central control, given that it is generated by the needs of the economy itself; and that, consequently, the Central Bank is incapable of controlling the money supply, which is a variable determined by society, that creates and destroys the currency, in accordance with its immediate needs and convenience (Lopes & Rosseti, 2005).

The truth of the matter is that, in all social circumstances and at any point in history, when the monetary authorities cease to issue sufficient currency to fulfill the needs of business, companies begin to issue various forms of credit securities (Lopes & Rosseti, 2005). This, in turn, results in:

(a) creation of one or of many monetary systems, in parallel to the official currency;

(b) a perception that parallel currencies are alternatives to national currencies;

(c) discussions as to the need to rethink the role of the centralized monetary system, in favor of the development of local economies (Solomon, 1996; Swann & Witt, 1995; Douthwaite, 2006)." (http://www.uea.ac.uk/env/ijccr/pdfs/IJCCRvol13(2009)pp76-94Freire.pdf)

Discussion

Refers to the context in Brazil:

"A review of the specialized literature, however, shows that social currencies are payment instruments or systems, created and administered by their users, by means of non-profit associations, on the basis of economic relations built upon cooperation and solidarity of the participants of certain communities, regardless of exercise of any form of financial intermediation activity (MTE, 2006).

From an economic standpoint, social currencies are considered a “market mechanism”, and thus, an institution of the economic order (art. 170, of the Federal Constitution) capable of fulfilling some of the functions of the social welfare system. From a social standpoint, social currencies are considered as an alternative means of promoting access to goods and services that would otherwise be inaccessible to their users, thereby constituting an institution of the social order that complements the official currency, at the basis of which lies the fruits of labor, and that aims to instill well being and social justice (art. 193, of the Federal Constitution).

From a functional standpoint, social currencies constitute a new way of promoting integration of people into the labor market (art. 203, III, of the Federal Constitution). Their use, even when stemming from public policies for combating poverty and promoting local development, is not to be confused with other programs for allocation of resources and income transfers from the richer to the poorer segments of the population (MTE, 2006), which should be perceived as a form of social welfare that should be provided by the State to those in need, regardless of whether or not they contribute toward social security (art. 203, of the Federal Constitution).

From a legal standpoint, social currencies promote access to social rights (art. 6, of the Federal Constitution) by means of a contractual agreement signed by members of a given community, grouped by regional or sectoral criteria. Social currencies are considered as personalized or customized currencies (or forms of money), in that they are legally-structured instruments or systems that advance the purposes and aims aspired to by participants of the social groups that use them (Lietaer & Hallsmith, 2006). Though they submit to the legal disciplines of Law of Contracts and Law of Obligations (one of the components of private law elements of the civil law system), social currencies have neither the status of legal tender, nor full settlement value assured by law. No one is (nor can be) obliged to accept a social currency or to participate in a social currency system. Like any other economic or social activity, social currency systems are subject to normative rules in situations foreseen in Law (art. 5 and art. 170, of the Federal Constitution).

Despite implications of higher costs and higher risks for the holders of social currencies, in relation to the official currency, the use of social currencies has multiplied as a reaction of local communities to the globalization process (Rösl, 2006). This phenomenon is associated to the fact that, when the official currency proves incapable of facilitating all potential exchanges within a local economy, a complementary currency may alleviate the problem (Schraven, 2001). Thus, even with higher transaction costs than those associated with use of the official currency, there is nonetheless an incentive for people to use social currencies in their day-to-day transactions in local economies (Schraven, 2001).

By adopting as a reference the classification of alternative forms of wealth used in the quantitative theory of money approach developed by Milton Friedman, according to which total wealth is also comprised of human wealth, and not only of material wealth – money, variable-income securities, fixed income securities, physical goods, property and other material assets (Lopes & Rosseti, 2005) – it is possible to define social currencies as non financial wealth, related to application of human wealth in the production process and in the process of circulation and distribution of physical goods and services produced by human labor." (http://www.uea.ac.uk/env/ijccr/pdfs/IJCCRvol13(2009)pp76-94Freire.pdf)


How They Work

Marusa Vasconcelos Freire:

"By complementing lawful fiat money, the issuing of which is underwritten and monopolized by the State, and which has the status of legal tender and full settlement value assured by law (Lopes & Rosseti, 2005), and private banking money (bank deposits), created by commercial banks, which account for a major portion of the means of payment employed in accordance with the conventional concept of money used in almost all countries (Lopes & Rosseti, 2005), social currencies can present significant variability of form and of denomination, depending upon the specific purposes for which they were created.

In dealing with legal business compacted by a collective group of people, who are subject of individual rights, the three essential elements for establishment and functioning of a social currency system are: people; choices; and rules. To be valid, capable agents, a determined or determinable legitimate purpose, and a form prescribed or not forbidden by Law are required (art. 104 of Law 10.406/02).

Based upon the concept of freedom to contract and, in principle, established according to standards that govern atypical contracts (arts. 421 and others of Law 10.406/02) it is not possible to speak of one ideal model for a ground and sound functioning of social currency systems. The ideal design for a ground and sound functioning of the system depends upon a series of variable circumstances of fact and of law, conditioned by social realities of the context in which the social currency is implanted and, particularly, by the way in which the local population makes its livelihood (Lietaer, 2001; Schraven, 2001).

In practice, all models for a ground and sound functioning of social currency systems have some characteristics that are advantageous in certain situations, but that may be perceived as being not advantageous in others (Lietaer, 2001).


Nonetheless, theoretically, most models of social currency systems share certain common characteristics:

(a) They function legally in over 35 countries: social currency systems tend to be established where constitutional, legal, and regulatory standards allow space for private enterprise; or where there are gaps in financial, banking, and monetary regulation or legislation (DeMeulenaere, 2000; Lietaer, 2001; Schraven, 2001).

(b) Social currencies are issued to associate members that have accounts in the social currency system, and are known as participants.

(c) They are controlled by the participants by means of representative organizations.

(d) Social currencies circulate only in a given or limited geographic or sectoral area defined by the associates or participants of the system, and can only be used or spent and accepted within said areas.

(e) Social currencies do not fulfill all functions of the legal tender currency, but rather, only those associated with the goals of the particular system.

(f) The essential characteristic of social currencies is (or ought to be) reciprocity, whereby the costs and benefits of the system are (or ought to be) fairly distributed among the participants, coordinators, and managers of the system, in accordance with the level of participation of each, so that no one benefits (or appropriates) unforeseen advantages at the cost of the labor of others.

(g) Since they are complementary, transactions in social currency generally function (or ought to function) in a counter-cyclical manner, both in relation to monetary policy, and to employment levels in the formal economy. Thus, when the official money supply expands, transactions in social currency decline; and when the official money supply declines, transactions in social currency expand. Likewise, when the level of employment in the formal economy expands, transactions in social currency decline; and when the level of employment in the formal economy declines, transactions in social currency expand.

Aside from these common characteristics, the functioning of social currency systems depends upon logistical and operational aspects that contribute toward economic efficiency of the system (Lietaer & Hallsmith, 2006), and which are established by basic contractual clauses of the legal framework that differentiate the various social currency systems." (http://www.uea.ac.uk/env/ijccr/pdfs/IJCCRvol13(2009)pp76-94Freire.pdf)


Source

  • SOCIAL ECONOMY AND CENTRAL BANKS: LEGAL AND REGULATORY ISSUES ON SOCIAL CURRENCIES (SOCIAL MONEY) AS A PUBLIC POLICY INSTRUMENT CONSISTENT WITH MONETARY POLICY. Marusa Vasconcelos Freire. International Journal of Community Currency Research Vol 13 (2009) pp.76 - 94

URL = http://www.uea.ac.uk/env/ijccr/pdfs/IJCCRvol13(2009)pp76-94Freire.pdf


Reputation Currencies

A social currency is the reputation score an individual or entity acquires in a particular social network that credibly reflects their value in that network. (John H. Clippinger at http://onthecommons.org/node/723)

See also the related material on Reputation and Identity

Please note this link is broken and needs re-verification.


Description

John H. Clippinger at http://onthecommons.org/node/723

"A social currency is the reputation score an individual or entity acquires in a particular social network that credibly reflects their value in that network. For example, like a monetary currency, the value of a social currency may be set by the demand that an individual in a given social network can command, as in some kind of supply and demand calculation. Yet the calculation may also reflect a more subtle calculation of value based upon peer ratings of performance that cannot be captured in measures of supply and demand.

Different social networks have their own social currencies reflecting their reputation and membership rules. Highly proficient members of these networks - those who know how to truck, barter and exchange - can accumulate their own form of social capital - i.e., favors, obligations, goodwill. In many cases, they can convert one social currency into currencies in other social networks. For example, success in sports is often convertible to success in politics, business and entertainment. Likewise, social currencies accumulated in a business network are generally convertible into the currencies of social standing and political credibility. The more open and diverse a society is, the greater possibility for social mobility - something rarely possible in closed, traditional societies.

Social currencies can play an important role in the ability of a society to navigate between chaos and order, and between innovation and stagnation. One of the enduring insights from evolutionary biology is that the more innovative and adaptive self-organizing networks are, the more able they are to straddle the poles of excessive order and excessive disorder. They can stay in this "sweet spot," and be are maximally responsive to the novelty of their environment." (http://onthecommons.org/node/723)


Discussion

What social currencies measure

"The first major difference between social currencies, online or offline, and money as a unit of account is what is being measured. Money measures the value of goods and services which are inherently scarce and can be exchanged. One legitimate criticism of the monetary system is that it is blind to other types of value, which have equal significance in the way economies function.

Social value, or “social capital,” is the value created and sustained through our relations in social networks. While it’s tautological that the rich have lots of money compared to everyone else, it’s less recognised that they are also usually socially wealthy as well. They enjoy connections to other rich and powerful people, which help them get into private schools, high paying jobs and access to other social and economic opportunities.

Money as it is defined today encourages us to see the world in financial terms, and to ignore the myriad other forms of wealth which contribute to wellbeing. One of the functions of social currencies, which makes them compelling to anyone interested in transcending the limitations of an economy viewed solely through money, is that they make visible otherwise intangible forms of social capital, like trust and reputation, for the world to see. This brings us to the second feature of social currencies."


Recording trust:

"While social capital is a very useful type of asset, it has some limitations which don’t tend to affect the type of value measured by money. One of these is that, historically, social capital has mainly existed in people’s minds, rather than on paper.

In medieval times, the majority of economic life took place in the context of social networks of trusted participants. There was an honour code, for example, in the medieval Islamic merchant trade networks.


According to David Graeber, transactions in goods and services between merchants were secured “with a handshake and a glance at heaven”:

- If there were problems, they were referred to sharia courts with no power to have miscreants arrested or imprisoned, but with the power to destroy a merchant’s reputation, and therefore, credit-worthiness, if he were to refuse to abide by their rulings. (David Graeber, How Debt Has Defined Human History)

In other words, deals were highly dependent on trust. Honour therefore had a very tangible economic importance: without it, a person couldn’t secure access to credit, and would find themselves excluded from vital trade networks.

Social networks record trust of their participants an informal, implicit ways which don’t scale easily. What’s more, when someone behaves in the wrong way, the information doesn’t spread so quickly through word of mouth. Trust-worthy people who are not known to people they wish to deal with, or who do not have trusted friends to vouch for them, will find it hard to secure trust.

The first social currencies as units of account were attempts to solve this problem, by creating a symbolic representation of trust, or social capital generally, which others could rely upon in deciding whether to trust the bearer. This happened long before the internet: it’s important to realise that social currencies online are just an extension and refinement of an age-old idea. In their older forms, there are all sorts of symbols which stand in for trust, attempting to solve the scaling problems associated with social assets. The commercial trade example is just one of many: medical degrees, Nobel Prizes, club memberships, gold stars in classrooms, getting “made” in the Mafia are all forms of social currency. They record social capital in a way which is commonly accepted within a network, and so encode trust and make it visible for others to see.

It is this function of “making visible” social capital which sets social currencies apart from money. While money measures value, it isn’t primarily used in order to display wealth to others. People do show off wealth to each other, but primarily through things which they own and flout (so called “Veblen goods.”) Social currencies, on the other hand, exist not just to measure social wealth, but also to display it to others. That’s the point: by making recorded trust visible, they enable new trust-based interactions with other people outside of their networks. They enable social capital to scale." (http://www.webisteme.com/blog/?p=564)


Towards Digitally-enabled Quantitative Social Currencies

"Money measures scarce value in a quantitative manner. Social currencies don’t always. As I’ve mentioned before, many types of symbols operate as social currency without being the kinds of things which count anything: Nobel Prizes, for instance, or a review of a hotel. These types of symbols are more qualitative: they represent something without trying to quantity it too precisely. Perhaps this is because such forms of value can’t be too easily quantified: they try to record intangible types of value, which can’t be bought, sold, or measured in any straightforward way.

Perhaps one of the major opportunities the internet brings is the ability to create quantitative social currencies. eBay reputation points are an excellent example: each successful transaction on eBay increases your reputation score by a point, and conversely. By measuring qualitative judgments about individual interactions, eBay is able to summarise a person’s degree of trustworthiness in their community with a number. The proliferation of platforms for collaborative consumption is making quantitative social currencies ever more common. Wherever trust is required to enter into transactions, these symbols help to bridge the gap.

At the basis of a quantitative social currency is the ability to measure gestures, directly or indirectly, from participants, which can be taken as indicators of trust. The ability to aggregate numbers of gestures into an overall metric creates an abstract measure of social value within a network. Sometimes, the recorded gesture is an explicit vote of confidence, in the case of eBay transactions. Other times, the gesture is a byproduct of another, related action, such as following someone on Twitter. In some cases, the record of trust is quite abstract: consider the cumulative consequences of linking to a web site, and the effect on its position in search results." (http://www.webisteme.com/blog/?p=564)


More Information

See the related material on Reputation and Identity