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Article The changing value of money

Can advances in tech and alternative finance democratise wealth?

New and emergent forms of finance such as peer to peer lending, crowdfunding and innovative technology based crypto-currencies are erupting across the alternative finance scene, challenging the way we think about money, and threatening the big banks monopoly position as unrivalled ‘masters of the universe.’

Alternative finance has commonly been framed as a way of ‘democratising wealth.’ Tackling inequality by dis-intermediating the rent-seeking financial sector, and removing the middle-man between the buyer and seller, reducing transaction costs, and leaving more money in citizens back pockets.

In theory such assessment stacks up, however a closer look at the alternative finance sector and the technological and political structures enabling it reveals many of the same power dynamics we commonly find within mainstream finance.

As the ‘too big to fail’ banks grew in size, exploiting their monopoly positions in technology and mathematics, they lost sight of their traditional high street lending origins. Banks began to ‘game’ their own customers, as the gulf between those with and without complex financial knowledge grew ever wider.

The rise of alternative finance and P2P crypto-currencies such as Bitcoin threatens to disrupt the banking monopoly, but is not the first technological breakthrough to promise democratisation of the means of production or exchange.

William Morris, a famous 18th century UK-based artist explored similar issues, writing extensively on the opportunities (for reduction in manual labour) and threats posed (to original and creative artwork vs mass production) by the mechanised production of art.

Morris, as an upper-middle class artist in Victorian England became increasingly frustrated that rampant inequality amongst the working poor meant that common people could not share in his craft. This frustration lead increasingly to political activism, and to the embrace of socialism.

Unlike the machine-based revolution of the 1800s, the element of the crypto-currency revolution with the real potential to change our everyday lives is the decentralised payment systems, not the currencies themselves.

Until quite recently, almost all transactions, unless carried out with cash, required a bank or regulated operator to perform the exchange on behalf of customers.

Financial institutions are utilised as middlemen (known as intermediaries), ensuring the buyer has the necessary funds available, insuring the seller against payment default, and overseeing the security of the transaction.

One of the problems faced by new “challenger banks” in the UK is that currently, the big 5 high street banks monopolise the payments and clearing platforms, and charge excessively high rents to new entrants.

The new payment systems adopted by Bitcoin use a decentralised distributed ledger, which operates through a peer-to-peer network and cryptographic protocols, to cut out the middleman.
The net result is that the records of all transactions are not held centrally, but rather in a network of computers - which confirm the validity of new transactions using special encoding technology.

Bitcoin, by far the best known crypto-currency, is both a currency and a payment system. As a currency it’s simply a new medium through which to trade, operating under parameters such as the total number in circulation, the method by which they are created, and fluctuating exchange rate vs major global currencies.

The extent to which the potential of peer-to-peer lending platforms such as Bitcoin is developed will depend upon the decisions made by governments, legislators and corporate power-brokers, including the major banks.

As fast as the P2P innovations have been developing, businesses including JPMorgan, Facebook, and Google having signalled their intent to claim their stake of the P2P prize.

In the network society, distributed social networks hold immense social and economic power, and threaten to disrupt incumbent players. But, there are challenges in store for those who seek to democratise the means of exchange.

Just as the large banks monopolise the financial space, in the emergent alternative finance scene, most notably in the Bitcoin community, those with technical skills such as in coding and computer science are also at a distinct advantage to those without.

The initial phase of Bitcoin’s development has been characterised by early adopters speculating on the price of Bitcoin. There has been less focus on mainstreaming the use of the new technology, finding practical ways of introducing crypto as a practical technology for the daily use of and personal benefit to, ordinary citizens.

The result is that much like Wall Street and the City of London – the hegemonic financial centres which alternative finance seeks to disrupt, the Bitcoin community is currently dominated by men, and to the outsider - may appear focused on the attainment of wealth and power, not the horizontal distribution of wealth and technology by democratised means of exchange.

As financial activist and author Brett Scott noted in his must read post Crypto-Patriarchy: ‘The problem of Bitcoin’s male domination’

“It’s no secret that the directorships of large FTSE 100 or S&P 500 companies are overwhelmingly dominated by men, and white men at that. This is not just due to random chance, or men’s innate brilliance.

This is due to our society having a lingering, systematic male bias built upon hundreds of years in which men have had the most access to job opportunities, educational opportunities, political rights, and (perhaps most importantly) cultural encouragement to actually seek those positions.

This has helped men build capital, skills and to normalise the idea that they should dominate those industry sectors that command the highest market values (not to mention government positions and academia).”

It particularly disturbs me though, when I detect this domination seeping into areas that are supposed to be challenging traditional structures. Such as the Bitcoin community.”

Rather than disrupting existing structures of financial power, in its current guise, alternative finance appears to be replicating them, exchanging the quant geeks of the investment banks, with coders and tech specialists across the start up scene. Lui Smyth a researcher at UCL conducted a survey of the Bitcoin community and found 95% to be male.

In Brett Scott’s opinion: “Bitcoin is turning into a covert form of monetary partriarchy. It may define itself against a status quo, but if you’re going to challenge one power structure, don’t make it at the expense of accepting another. You don’t dig big government and big banks? Why then tolerate male domination?”

Crowdfunding platforms such as kickstarter and indiegogo promise to open up new opportunities for advancing the interests of marginalised social groups, but in reality, are a tool most easily exploited by those with established technical expertise and social networks, providing ready access to the media and to money.

Without a revolution in education, skills and training and in participatory democracy, advancements in technology and alternative finance will continue to benefit those with knowledge, wealth skills and power, to the detriment of those without.

Communities in the alternative finance space which seek to challenge the incumbent corporate power-brokers such as the Bitcoin community must be challenged to build inclusivity, diversity and gender balance into their movements.

Political reform mirrors financial reform – the need for decentralisation.

Few people in the UK are remotely aware that the UK has the most centralised form of Government in the western world, bar New Zealand.

But with the Scottish Independence vote looming in September 2014, the extent of Westminster, Whitehall and Treasury control over our everyday lives is becoming increasingly evident.

Not only does the UK have an unelected head of state (the Queen) and an unelected second chamber (The House of Lords) but UK local authorities, (the most devolved form of Government) also have their strings pulled, and finances controlled from Westminster and Whitehall, to a far greater extent than most developed nations.

Historically, there are few exceptions to Westminster’s continued central dominance.

In the 1980’s when Margaret Thatchers Government tried to impose a deeply unpopular “poll tax” - a regressive flat tax on households, my local council Lambeth along with others like Liverpool took the extraordinary step of a refusing to enforce the poll tax, or to set reduced council budgets.

Lambeth Council paid a high price for its act of political dissent, with council audits imposed, forcing the councillors who voted through the budget abstention to repay lost interest income.

Official records recently released dating back to the period of the miners strike show that the US and UK Governments’ at the time secretly conspired to prevent local democracy and council ‘republics’ from taking root in the UK.

Now more than ever, as social, environmental and democratic crises converge, we must find ways of empowering our weakened local institutions, to enable local democratic renewal to challenge a national political narrative utterly captured by centralised corporate and elite interests.

Local authorities must be freed to promote and advance local community and economic interests, not remain shackled to the pro-corporate agenda of Treasury and Westminster.

A recent poll for the Local Government Association found 76% of UK respondents trust their local councillor to manage local services, whilst only 9% trust their MP.

Who is going to deliver this revolution?

A critical look at our democratic system reveals it is in no better shape with regard to gender balance and diversity than the financial system it seeks to reform.

A recent poll conducted by the electoral reform society and Mumsnet found that 85% of women say going into politics is not a family-friendly career. 69% would not stand. 78% of those polled are looking for parties to address gender issues in political culture and increase the family-friendly nature of parliament in manifestos.

At the local government level more than two thirds of local elected representatives are men, and the higher up the tree you go the fewer women there are – almost 90 per cent of Council Leaders are men.

Local government accounts for almost a quarter of all public spending in the UK – but how and where this money is spent is being decided in town halls, where on average 7 in 10 councillors are male.

We know that spending cuts at the local level are having a skewed impact on services women rely on. Relative to other areas of public spending - the coalition Government have disproportionately targeted local government for austerity cuts and job losses, where 76% of all council staff are women.

Alternative finance and the co-operative/ sharing economy

Technological advancements offer us the tools with which to seek social progress and democratic renewal, but as a society, we must acknowledge that access to those tools is not equally distributed.

As inequality within developed economies continues to grow, failure to address engrained social privilege or to confront the drivers of financial exclusion threatens to confine the alternative finance movement to a white, male, middle class fad, before it even takes seed.

We must all take the time to build diversity of experience, background and thought into our movements.

To help map the path to local democratic and economic renewal, I leave you with 10 Ways to Democratise the Economy from one of the best thinkers on the collaborate economy, Gar Aplerovitz. Ideas which build social and economic capital, and can be easily employed by small local groups.

As Margaret Mead famously observed: “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.”

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