For most of us, the world of cryptocurrencies is still a long way off from meaningful integration into real life. I say “world” because the various altcoins we hold still seem to exist within their own reality – hit me up when we can buy tampons with “Putin Classic”. Although institutional investment is on the rise, the industry still lacks liquidity, sufficient on-ramps and off-ramps, or use cases that enhance our daily lives.
There is no shortage of people looking to reinvent money. It was only recently, however, through my work in Kenya with Grassroots Economics, that I realized designing monetary systems for the 21st century goes far beyond questions of technological innovation or governance. The real challenge is creating socio-economic value systems that are rooted in vibrant, cohesive and resilient communities.
We have the ability to create money out of thin air. But do we know how to create value?
Rethinking the origins of money
The collapse of the US housing bubble in 2008 was a punch in the belly, ushering in the widespread realization that much of the global financial system is pretty messed up. It’s what happens when money creation is based on interest-backed loans, and the people issuing those loans are neither concerned with how the loans are spent nor whether they are equitably accessed. Our economy relies on the “debt-growth imperative”. You see, no one really creates money – rather, it more or less happens as a byproduct of the activities of commercial banks. “New money” only enters the economy when banks issue loans and people use those loans to buy goods and services. Conversely, when people repay these loans, that money is effectively removed from circulation. However, repayments are usually delayed for a few months, years or decades. This time lag between the creation and destruction of money, at a macro scale, creates a vast pool of excess money floating around in the economy.
And what do we do when we have a little more cash in our pockets? We spend! We become ravenous consumers to a stupefying degree. We buy $200 T-shirts that have holes in them. We buy foldable smartphones and smartphones with three cameras instead of two. Our increased demand pushes up prices and creates a bubble of inflation. Prices go up not because goods and services are worth more, but because money is worth less. There is too much money in circulation; it’s just artificially scarce in certain areas because it is shockingly unequally distributed.
This is the flawed financial system that the likes of Satoshi Nakamoto sought to correct. We live in a world where exorbitant debt creates value. The global economy encourages high risk and is characterized by inevitable periodic crises. Unfortunately, the people who bear the brunt of financial crises are always the world’s poor.
Enter community currencies
A community currency is a complementary medium of exchange to a national currency. It typically exists as a voucher or digital token that may be exchanged for goods and services within a defined network. Here in Kenya, Grassroots Economics has piloted eleven community currency programs over the last ten years.
In places like Kibera, Africa’s largest slum, the supply of income is erratic and so money circulation is in a constant state of low liquidity. Small businesses are challenged by the conundrum that demand is high (everyone needs to eat or wants to get their hair done), yet is never met because few can afford what’s on offer. The money that enters the community is usually from remittances or sporadic employment, but because income is unevenly distributed over time, the local economy has stagnated.
Small businesses can’t manage their stock flow, entrepreneurs can’t access finance, and there is an ever-increasing pool of wasted labour and underutilized resources. Add to the mix the effect of national currency volatility (Venezuela and Zimbabwe are extreme worst cases) and all these factors create a reinforcing feedback loop that stifles socio-economic mobility for those who need it most.
Community currencies attempt to fix this. What if we gave everyone a small amount of a new form of money, and ensured that they could only spend it amongst themselves? Would they be more likely to buy from local businesses? How would this affect their access to credit? What would they do with the national currency they save by spending the community currency instead?
Together with Bancor, Grassroots Economics launched a blockchain-based currency system called Sarafu. Liquidity gets artificially injected into a community when members are given 400 Sarafu upon registration – the equivalent to about 4 US dollars. Multiply this airdrop by a couple of thousand people, and you’ve just introduced a decentralized pool of zero-interest credit to businesses and households.
But surely, you can’t just give away free money? Is it even “real” money? If you’re sceptical, you’re not alone. In the early days, a number of people flat out refused to join the Sarafu network because they believed any form of free money must be linked to the Illuminati.
It turns out that you don’t have to be a soul-trafficking secret society to create money. Banks do it all the time. Thousands of people have done it with cryptocurrencies. The difference between the mainstream economy and the Sarafu network is how that money creation gets transformed into real value.
A new form of value
Value is a measure of the benefit provided by a good or service. You’ll find competing theories of value in mainstream economics, but however you choose to define it, value in the global economy has largely been abstracted beyond meaning. (If you’re into some more technical reading, here’s a great article that explains the role of complex financial instruments leading up to the 2008 financial crisis). When you’re working in a 2.5 square kilometre slum in which most adults are self-employed traders living on less than $1 a day, there are only so many ways that value can and should be defined.
Here in Kenya, when people choose to spend their community currency locally, their trade activity pushes the pool of communal credit from their digital wallets into local businesses, schools, clinics and community-based organizations. The more people trade with each other as opposed to outside of the community, the more money gets re-invested back into co-operative assets that benefit everyone.
I spoke to a number of female business owners who form part of the Sarafu network in Nairobi. It became clear that using the community currency has increased their customer flow and helped them save money.
Before, a hair salon owner had to turn clients away who couldn’t pay her in full. Now, she encourages them to pay partly in Kenyan shillings and partly in Sarafu. She knows she can use the Sarafu to buy groceries and save the shillings, or spend them where Sarafu is not yet accepted. Is she not concerned that she’s earning less in Kenyan shillings? No. She says the fact that she is now able to meet demand means that her increase in clients cancels out any loss in shillings from each individual. Since joining the network and using Sarafu for daily expenses, she has been able to save more per month than ever before. Not only has her business grown, but she’s created direct employment opportunities for people in her community.
For a local school that receives no government support, teachers are receiving their monthly salaries in full for the first time – partly in Sarafu, partly in Kenyan shillings. Instead of sending away pupils whose fees are outstanding, the school now accepts school fees in Sarafu and uses this to supplement staff salaries.
Schools, clinics, traders, and micro-savings groups all benefit from being part of the community currency network because the more they use it, the more it grows. Their social capital is what drives liquidity and creates a more resilient local economy.
Chapatis on the blockchain
Working with the operations team running the Sarafu network has been an incredibly eye-opening experience for me. It’s also been ironic; I’ve worked with crypto projects that sit with million-dollar budgets and create communities out of thin air on Telegram channels. Here, communities precede the innovation. Digitization only serves to enhance the social capital that already exists between people.
More than anything, working on a project that forms part of the livelihood of its users has also taught me that far too often, our conversations around reinventing money lack substantial rooting in the realities of the people who use it. Whether you’re looking at a slum in Nairobi, a group of high-frequency traders, or a community of artists trying to commodify their work online, what ultimately matters is value creation.
Most cryptocurrencies suffer from a severe lack of real value. Price does not constitute value. In fact, the relationship should ideally be the other way round. Sometimes, I wonder whether the women trading chapatis on the blockchain know more about the value of money than all the HODLers out there.
As a society, our relationship with money has always been characterized by fear, greed, and short-sightedness. Yet gradually, all over the world, people are beginning to question whether it’s possible to redefine value as the things we really care about – growth, wellbeing, meaningful productivity, security. I don’t think Satoshi ever intended bitcoin to be the next fixation of hedge funds and institutions.
Community currencies teach us that the peer-to-peer economy first and foremost relies on peers. If these villages and slums have been able to redefine money in a way practically unheard of within most cryptocurrency networks, then there is hope. It’s not that we’re doing anything wrong – we’re just not looking closely enough at the people who are doing it right. My observation is that it is the very poor – the hawkers, the hustlers, and the have-nots – who are really dragging cryptocurrencies into the “real world”.