[Recommend my two-volume book for more reading]:
BIT & COIN: Merging Digitality and Physicality
Introduction
This article is a critique of debt-based fiat money and the potential of tokenized credit-based community money.
The contemporary monetary system is predominantly based on debt-issued fiat currencies, a structure that has attracted significant criticism due to its moral and economic implications.
Money is fundamentally a credit instrument, a promise of the issuer to redeem it for something of value. In this sense, only providers of real goods and services have intrinsic qualifications to issue money. But the current fiat money system is essentially a usurpation of political power to control a fundamental aspect of an economic society, ultimately leading to not only economic collapse but also political tyranny.
In response to the challenges posed by fiat money, advocates of cryptocurrencies introduced the concept of “digital gold” as an alternative. Cryptocurrencies like BTC (pretending to be Bitcoin but severely deviating from the original design of Bitcoin by Satoshi Nakamoto) were designed to mimic the scarcity and stability of gold, offering a decentralized form of money outside the control of traditional financial institutions.
However, the so-called “digital gold” does not address the fundamental problems inherent in fiat money, such as the usurpation of power and the detachment from the productive realities of economies.
Instead, it represents another form of concentrated power that is even more pernicious. It is a hidden and secretive one, potentially replacing existing authorities with a small group of individuals who operate behind the scenes. On the surface, this group promotes ideals of openness and democracy, but in practice, the system is based on a form of cryptography under cover of an anarchic narrative that plays on people’s fear or resentment against existing governments. It is further coupled with speculative Ponzi-like schemes. The lack of economic productivity and utility, transparency, and accountability can lead to power being secretly concentrated on an unregulated few under a disguise of decentralization, further detaching the monetary system from actual value creation and productive economic activities.
An emerging alternative is tokenized credit-based community money, a form of currency where money is created and circulated based on mutual credit agreements among real economic participants—producers and consumers within a community. This system leverages tokenization, implemented through a universal and scalable blockchain, to represent these agreements via tokens that embody the agreed-upon value between parties.
This essay explores the fundamental differences between debt-based fiat money and tokenized credit-based community money, emphasizing the importance of economic transactions that create real value and enhance productivity. It also critiques the current central banking system and discusses the potential benefits and challenges of adopting a monetary framework rooted in mutual credit agreements and facilitated by tokenization on a scalable blockchain platform.
Debt-Based Fiat Money vs. Tokenized Credit-Based Community Money
Debt-based fiat money is created through lending processes managed by central banks and private financial institutions. Money is issued as debt that must be repaid with interest, often leading to cycles of indebtedness and a disconnection between the money supply and actual economic productivity. The creation and control of money are centralized, with value agreements imposed and enforced upon private parties.
In contrast, tokenized credit-based community money is a decentralized form of currency implemented through tokenization on a universal and scalable blockchain. Tokens represent the value of money agreed upon by the parties involved in economic transactions. These tokens may, but do not have to, be denominated in another form of money, such as fiat currency or commodity money like gold. The blockchain serves as the underlying infrastructure that enables the issuance, exchange, and administration of these tokens, ensuring transparency, security, and efficiency.
For this system to function effectively, the blockchain must be universal in nature and vastly scalable to accommodate the issuance, exchange, and administration of tokens across a broad spectrum of economic activities and participants.
The Importance of Economic Transactions and Value Creation
At the core of any robust economy lies the generation of wealth through the creation of valuable goods and services—a principle emphasized by classical economists like Adam Smith. Economic transactions that contribute to value creation and enhance productivity are essential for sustainable growth and societal well-being.
Debt-based money can undermine this relationship by allowing the creation of money without corresponding increases in value production. When money is introduced into the economy as debt, it often finances consumption or speculative activities rather than productive investments, leading to asset bubbles, inflation, and economic instability.
Tokenized credit-based community money seeks to rectify this by ensuring that currency creation and circulation are directly linked to mutual credit agreements among producers and consumers. Tokens represent actual economic value agreed upon by the parties, reinforcing the fundamental role of money as an agreement that facilitates genuine economic activity.
Divergent Views on Monetary Systems
Debates about monetary systems often stem from differing foundational definitions and perspectives on the nature of money and its role in the economy. A critical distinction exists between money creation through centralized, debt-based mechanisms and the concept of money as a decentralized agreement among economic participants, facilitated by tokenization on a blockchain.
Proponents of debt-based systems argue that centralized control provides the necessary tools to manage economic cycles through monetary policy interventions. However, critics contend that this system inherently leads to unsustainable debt levels, economic distortions, and concentrates power in the hands of a few.
Advocates of tokenized credit-based community money argue that aligning currency creation with mutual agreements of value promotes economic stability and fairness. By using tokens on a scalable blockchain to represent these agreements, the money supply naturally adjusts to the level of productive activity, reducing the need for artificial interventions and mitigating the risks associated with debt accumulation.
The Role of Central Banks and Money Expansion
Central banks play a pivotal role in debt-based monetary systems by controlling the money supply and implementing monetary policies aimed at managing inflation and promoting economic growth. While these powers are intended to stabilize the economy, they can also lead to unintended consequences, such as encouraging excessive borrowing and contributing to financial crises.
In a tokenized credit-based community money system, the expansion of the money supply is intrinsically linked to mutual agreements and actual economic activities of community members, rather than centralized policy decisions. Tokens are issued and circulated based on the value agreed upon by parties in economic transactions, facilitated by a universal and scalable blockchain. This decentralized approach reduces reliance on central banks, aligns monetary growth with economic productivity, and enhances the resilience of the economy by grounding it in real economic relationships.
The Potential of Tokenized Credit-Based Community Money
Tokenization on a scalable blockchain provides a robust platform for implementing credit-based community money by offering:
- Decentralization: Eliminates the need for central authorities, allowing participants to directly engage in issuing and exchanging tokens based on mutual agreements.
- Transparency and Security: The blockchain’s immutable ledger records all transactions, enhancing trust among participants and reducing the risk of fraud.
- Scalability and Universality: A universally accessible and scalable blockchain can accommodate a vast number of transactions and participants, making it suitable for widespread economic activities.
- Flexibility in Denomination: Tokens can represent value in various forms, whether denominated in fiat currency, commodities like gold, or entirely new units agreed upon by the community.
- Alignment with Value Creation: By basing token issuance on actual economic agreements, the system ensures that the money supply corresponds to real productive activity.
Addressing the Limitations of Debt-Based Systems
Debt-based monetary systems have inherent limitations that hinder economic efficiency and stability:
- Unsustainable Debt Levels: Overreliance on debt can lead to economic crises.
- Economic Inequalities: Centralized control often exacerbates wealth disparities.
- Inflationary Pressures: Excessive money creation through debt can devalue currency.
Tokenized credit-based community money addresses these limitations by:
- Reducing Debt Dependency: Money is created through mutual agreements rather than debt, minimizing the risks associated with borrowing.
- Enhancing Fairness: Decentralization empowers individuals and reduces wealth concentration.
- Stabilizing the Economy: Aligning the money supply with actual value creation mitigates inflation and promotes sustainable growth.
The Fundamental Importance of Mutual Agreements via Tokenization
Money is fundamentally an agreement of value. In a tokenized system, tokens embody this agreement, representing the value of goods and services as determined by the parties involved. The use of a universal and scalable blockchain ensures that these tokens can be securely issued, exchanged, and recorded, preserving the integrity of transactions and making the monetary system responsive to the real economy.
By utilizing tokenization on a scalable blockchain, participants can:
- Securely Record Agreements: Each token transaction is recorded on the blockchain, providing an immutable record of value exchange.
- Facilitate Trustless Transactions: Smart contracts can automate agreements, reducing the need for intermediaries and enhancing efficiency.
- Enable Flexibility: Tokens can be tailored to the specific needs of the community, including various denominations and units of value.
Critique of the Debt-Based Monetary System
The debt-based monetary system is criticized for creating systemic risks and perpetuating economic inequalities. Centralized control over money creation often benefits a select few, while the majority bear the burden of debt and economic instability.
By imposing value agreements through centralized institutions, the system disconnects money from the actual economic activities and needs of individuals. This can lead to disengagement, lack of accountability, and a misalignment between the money supply and value creation.
The Illusion of Money Scarcity
Perceived money scarcity often arises from unequal distribution and inefficient allocation rather than an actual shortage. In a debt-based system, money can become concentrated among certain groups, limiting access for others.
Tokenized credit-based community money can alleviate these issues by:
- Promoting Equitable Distribution: Decentralized issuance ensures that money circulates based on mutual agreements and actual economic participation.
- Enhancing the Velocity of Money: Efficient and secure transactions increase the movement of money through the economy, supporting ongoing value creation.
- Reducing Perception of Scarcity: As participants can directly create and exchange tokens based on agreed value, the notion of scarcity diminishes.
The Reality of the Current System
Transitioning from a debt-based system to a tokenized credit-based community money system presents challenges:
- Technological Barriers: Requires widespread access to technology and digital literacy.
- Regulatory Hurdles: Existing legal frameworks may not accommodate decentralized currencies.
- Cultural Shift: Changing long-standing beliefs about money and authority necessitates significant education and adaptation.
Despite these obstacles, the potential benefits for economic stability, fairness, and efficiency make exploration of tokenized credit-based community money a worthwhile endeavor.
Reflections on Monetary Theory and Tokenized Credit-Based Community Money
Historically, various forms of community currencies and mutual credit systems have existed, often in response to limitations of dominant monetary systems. Tokenization, implemented through a universal and scalable blockchain, revitalizes these concepts by providing a secure and efficient platform for implementation.
Equity-Based Money as an Example
Equity-based money can be implemented through tokens representing ownership stakes in productive assets. Participants can issue tokens based on their equity, which others accept due to the underlying value and trust established within the blockchain network. The tokens represent mutual credit agreements and facilitate transactions based on the agreed value of the equity.
Technological Implementation
- Universal and Scalable Blockchain: Essential for handling a vast number of transactions and ensuring accessibility across different communities and economies.
- Smart Contracts: Automate agreements and facilitate complex transactions without intermediaries, enhancing trust and efficiency.
- Interoperability: Allows tokens to interact with other systems, including fiat currencies and commodities, providing flexibility and broader acceptance.
Conclusion
The critique of debt-based fiat money and the exploration of tokenized credit-based community money reflect fundamental concerns about value creation, productivity, and the integrity of monetary systems. By leveraging tokenization on a universal and scalable blockchain, it’s possible to create a decentralized, transparent, and fair monetary system that aligns the money supply with real economic activity.
Transitioning to such a system requires addressing technological, regulatory, and cultural challenges. However, the potential benefits for economic stability, fairness, and societal well-being make it a pursuit worthy of serious consideration.
Embracing a monetary system that values and reflects mutual agreements among real economic participants can lead to a more equitable and sustainable economic future. Tokenized credit-based community money offers a viable technical implementation, providing the tools necessary to realize this vision.
By focusing on mutual agreements, secured and facilitated through advanced tokenization technology on a scalable blockchain, we can work towards an economy that not only advances efficiency and productivity but also upholds moral principles and strengthens social cohesion. The journey towards such a system is complex, but the potential rewards for collective prosperity and resilience make it an important endeavor for the future of global economics.
Appendix:
The real difference between debt-based money and credit-based money
From a purely accounting point of view, credit and debt are just two sides of the same coin. Credit is one’s capacity to borrow, while debt is the actual amount one has borrowed. As a result, terms like “debt-based money” and “credit-based money” can be used to describe the same or similar things. For example, in a broad sense, Fiat money can be either debt-based or credit-based, depending on the perspective.
However, we emphasize producers and the community when it comes to producers’ credit-based community money.
Besides, we are not talking about accounting here. In economics, especially the part that relates to financial systems and monetary policies, credit-based community money is fundamentally different from debt-based fiat money.
The former is based on the credit of a producer (either product or service). The creditor gives credit to a producer due to his belief that the producer can produce a product or service, which the creditor views as a direct ability to reciprocate the value of the credit extended. Because a community may develop a common credit system, and members of the community are all economic participants, the credit tends to reflect a mutual acceptance of the products and services provided by members as a common good to the community.
In contrast, debt is based on the lender’s perceived ability of the borrower to pay back the debt plus interest. One might argue that the ability of a producer to produce is equivalent to a borrower’s ability to pay back, but in economic reality, they have vastly different economic drivers, psychological motivators, and social interactions, leading to different financial systems and economic realities.
Perhaps the most obvious example is found in the debt-based money generated by the government’s ability to borrow. There are multiple levels of corruption here.
At the first level, the government borrows from the public by issuing bonds. Why is the public willing to buy the government bonds? Initially, the public might have done it because they recognized that the government could produce a service that is valuable to society. That is a fairly healthy start. But things start to go astray from that point. Today’s reality is that bond purchasers buy government bonds because they trust the government’s ability to pay the debt with interest. Even this in itself is not that bad.
But how do they get that confidence?
It may be because of the economic strength and stability of the government itself, but more and more, it is built on a self-promoting system, specifically the central bank’s ability to create money and the government’s addiction to free money. This is fundamentally different from the natural trust that economic participants give to other participants who are producers of a good or service. At this point, the whole thing has completely deviated from the original concept of “credit” in the context of a productive economy.
This has become a harmful self-reinforcing psychological loop, which lacks the self-healing power of a healthy economy but always goes deeper with a vicious cycle beyond the normal fix and always requires some kind of bust or even total collapse.
If one goes beyond the central bank problem and looks to the next level, which is the commercial and retail banking system, you will still find a similar problem. Although from a pure accounting sense, it starts from something quite reasonable, as banks only loan money to someone who has the ability to pay back with interest. However, because bank loans are not based on producers’ credibility of production but on borrowers’ ability to pay back through financing or refinancing, they always produce a skewed effect: assess prices go up while the protective economy suffers. This is because under this model, the banks’ interest is inherently contradictory to the interest of the real productive economy, and the adversary effect is further magnified by the banking financial system’s ability to reach beyond the present time and harm future generations. This has created an immoral generational crisis in modern societies.
Banks are necessary for a modern economy. However, the problem is that modern banking is built upon a central bank-controlled debt-based fiat money system, which detaches from the natural productive economic reality. As a result, modern banks are no longer true economic participants but are increasingly becoming parasitic middle agents.
This is not an easy concept to explain and grasp. Economists fail to understand it. It is not a matter of intelligence but more deeply rooted in people’s rightful sense of values. Put another way, it is more of a moral problem than an academic one. Unfortunately, we live in a society that quickly becomes one where smart people compete for career positions in order to support a corrupt system. Their job is to lubricate a pilfering machine by cleverly rationalizing schemes of stealing. Not only politicians. Economists, financiers, analysts, and investors too.
Producers’ credit-based community money (PCC) is a cure, perhaps the only cure.
PCC is not my invention. Pioneers like Thomas Greco have devoted their entire career to this matter. But few pay attention to it. I advocate PCC in the context of decentralized human capitalism (DHC). DHC can fix many of the current economic and political problems in the world, but people need to wake up to this reality and also understand why PCC is a necessary element of DHC and, further, why tokenized PCC is the right way to implement PCC.
But few do or care. In a world that thinks the “number go up” gambling schemes like BTC are better than the original Bitcoin (BSV) designed by Satoshi as a productive economic system, it is hardly surprising.
[Recommend my two-volume book for more reading]: